-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GtRTxQCwWrucyOhc6kwH83oK9Fe9ElXQuMVt9zMBt1S+zg8U8qZ4EYu7bPbtWVEk X+Za1tQzcNCyMQbiarilBQ== 0000950116-96-001019.txt : 19960930 0000950116-96-001019.hdr.sgml : 19960930 ACCESSION NUMBER: 0000950116-96-001019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960927 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FPA CORP /DE/ CENTRAL INDEX KEY: 0000038570 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 590874323 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06830 FILM NUMBER: 96635875 BUSINESS ADDRESS: STREET 1: 2507 PHILMONT AVE CITY: HUNTINGDON VALLEY STATE: PA ZIP: 19006 BUSINESS PHONE: 2159478900 MAIL ADDRESS: STREET 1: 2507 PHILMONT AVENUE CITY: HUNTINGDON STATE: PA ZIP: 19006 FORMER COMPANY: FORMER CONFORMED NAME: FLORIDA PALM AIRE CORP DATE OF NAME CHANGE: 19720106 FORMER COMPANY: FORMER CONFORMED NAME: FLORIDA PLAN AIRE CORP DATE OF NAME CHANGE: 19700217 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number 1-6830 FPA CORPORATION (Exact name of registrant as specified in its charter) Delaware 59-0874323 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3333 Street Road, Bensalem, PA 19020 (Address of principal executive offices) (Zip Code) (215) 947-8900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title which registered ----- ---------------- Common Stock, $.10 Par Value Per Share (also formerly registered under Section 12(g) of the Act)................ American 14 1/2% Subordinated Debentures due September 1, 2000........................ American Securities Registered Pursuant to Section 12(g) of the Act: None 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 twelve 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 ----------- ----------- Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ---------- The aggregate market value of voting stock held by nonaffiliates of the registrant as of September 23, 1996 was approximately $2,200,000 Number of shares of outstanding Common Stock as of September 23, 1996 was 11,356,018, shares (excluding 1,342,113 shares held in Treasury). Part III (except for information included under Part I relating to executive officers of the registrant) is incorporated by reference from the proxy statement for the annual meeting of Stockholders scheduled to be held in December, 1996. TABLE OF CONTENTS PART I ------ PAGE ITEM 1. Business. ---- General 1 ITEM 2. Properties Residential Community Development 3 Operating Policies 7 Government Regulation 11 Environmental Regulation and Litigation 13 Competition 13 Employees 14 Economic Conditions 14 Lease of Executive Offices 15 ITEM 3. Legal Proceedings 15 ITEM 4. Submission of Matters to a Vote of Security Holders 15 Executive Officers of the Registrant 16 PART II ------- ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters 18 ITEM 6. Selected Financial Data 19 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 ITEM 8. Financial Statements and Supplementary Data 34 -i- PAGE ---- ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 61 PART III -------- ITEM 10. Directors and Executive Officers of the Registrant 61 ITEM 11. Executive Compensation 61 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 61 ITEM 13. Certain Relationships and Related Transactions 61 PART IV ------- ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 62 -ii- Item l. Business. General The Registrant, FPA Corporation (the "Company"), develops residential communities in Pennsylvania and New Jersey. The Company's operations in Pennsylvania and New Jersey are in the Philadelphia metropolitan area, primarily in Bucks County in Pennsylvania and in Burlington, Camden and Gloucester counties in New Jersey. In fiscal 1997, the Company expects to acquire property in Chester and Delaware Counties in Pennsylvania and is further endeavoring to increase its scope of operations in these counties. The Company operates as both a developer and builder. The Company builds and sells condominiums, townhouses and single-family homes; and sells land and developed homesites. During the fiscal year ended June 30, 1996, the Company delivered 531 residential units as compared to 612 units in fiscal 1995. Revenues earned from residential property activities during fiscal 1996 were $86,061,000. During fiscal 1995 revenues earned from residential property activities were $102,384,000. At June 30, 1996, the Company's backlog was $40,206,000, representing 219 units, compared to $45,829,000 and 264 units, at June 30, 1995. In addition, as of 1 June 30, 1996, there were reservation deposits relating to 32 units at the Company's various developments which had an aggregate sales value of $5,286,000 as compared to 15 units aggregating $2,562,000 at June 30, 1995. The Company's predecessor, Florida Palm-Aire Corporation, was formed in 1959 and was merged into FPA Corporation, which had been incorporated in Delaware on September 4, 1969. Unless otherwise indicated, the terms the "Company" and "FPA" include FPA Corporation and all of its Subsidiaries. In 1965, the late Marvin Orleans and Orleans Construction Co., a general partnership substantially owned and controlled by Marvin Orleans and his late father, A.P. Orleans, acquired the controlling interest in the Company. Jeffrey P. Orleans, the son of Marvin Orleans and Chairman of the Board and Chief Executive Officer of the Company, beneficially owns, directly or indirectly, approximately 7,887,247 shares (including 1,179,501 shares held by the Trust of Selma Orleans, the mother of Jeffrey P. Orleans, of which Jeffrey P. Orleans, is a trustee) of Common Stock, par value $.10 per share ("Common Stock"), which represents approximately 69.5% of the outstanding shares, excluding treasury shares, as of September 23, 1996. 2 Item 2. Properties Residential Community Development The Company's activities in developing residential communities include the sale of residential properties and the sale of land and developed homesites to independent builders. The Company participates in joint ventures in certain of these activities. The following table sets forth certain information as of June 30, 1996 with respect to the active communities of the Company under development and those where construction is expected to commence in fiscal 1997. 3 RESIDENTIAL DEVELOPMENTS UNDER CONSTRUCTION
At June 30, 1996 -------------------------------------------------- Total units Year delivered Total Dwelling Name and construct- Total through units Reserva- unit Remaining Location of ion units June 30, under tion price approved development started approved 1996 contract deposits range(1) units(2) =================================================================================================================================== Saddlebrook $154,990 Washington Township, NJ 1980 1,002 840 21 2 $199,240 139 =================================================================================================================================== Newtown Grant $142,490 Newtown Township, PA 1985 1,750 1,620 12 0 $179,990 118 =================================================================================================================================== Players Place $ 85,490 Gloucester Township, NJ 1987 470 435 15 4 $103,490 16 =================================================================================================================================== The Hills at Northampton $299,990 Northampton Township, PA 1990 397 275(3) 12 1 $412,490 109 =================================================================================================================================== Versailles at Europa $142,990 Cherry Hill Township, NJ 1993 102 62 8 5 $186,990 27 =================================================================================================================================== Mill Ridge/Deer Run $ 90,990 Warwick Township, PA 1994 330 177 43 4 $211,990 106 =================================================================================================================================== Lakes at Alluvium $175,000 Voorhees Township, NJ 1994 32 18 5 1 $190,490 8 =================================================================================================================================== Estates at Newtown Farms $223,990 Newtown Township, PA 1995 63 22 10 1 $260,990 30 =================================================================================================================================== Larchmont $ 92,990 Mount Laurel Township, NJ 1974 5,985 5,380 33 5 $160,490 567 =================================================================================================================================== Stonegate $ 98,490 Mount Laurel Township, NJ 1989 782 570 18 4 $185,000 190 =================================================================================================================================== Hidden Lake $259,990 Mount Laurel Township, NJ 1995 33 7 13 3 $335,990 10 =================================================================================================================================== Bridlewood $254,990 Mount Laurel Township, NJ 1991 103 95 2 0 $335,990 6 =================================================================================================================================== Union Mill $129,990 Mount Laurel Township, NJ 1995 240 22 27 2 $193,990 189 ===================================================================================================================================
Continued... 4 RESIDENTIAL DEVELOPMENTS ANTICIPATED TO COMMENCE IN FISCAL 1997
At June 30, 1996 --------------------------------------------------- Total units Year delivered Total Dwelling Name and construct- Total through units Reserva- unit Remaining Location of ion units June 30, under tion price approved development started approved 1996 contract deposits range(1) units(2) =================================================================================================================================== Jones Farm Lumberton Township, NJ - 252 252 =================================================================================================================================== Newtown Ridge Newtown Township, PA - 12 12 =================================================================================================================================== Piarulli Tract Mount Laurel Township, NJ - 72 72 =================================================================================================================================== Weiland Farm Mount Laurel Township, NJ - 90 90 ===================================================================================================================================
1. Range of base prices of residential dwelling units currently being offered for sale by the Company. In addition, the Company sells homesites from time to time at its various developments to unaffiliated builders at prices substantially lower than its dwelling units. 2. Although zoning and certain preliminary master plan approvals have been received for these units, final plans are subject to substantial review and approval by appropriate governmental agencies. No assurance can be given that the Company will be able to obtain the required final approvals for the indicated units or will ultimately elect to develop the properties in accordance with presently anticipated development plans. 3. Includes fiscal 1996 lot sales. 5 The following table sets forth certain detail as to residential sales activity. The FPA Corporation information provided is for the twelve months ended June 30, 1996, 1995 and 1994 in the case of revenues earned and new orders, and as of June 30, 1996, 1995 and 1994 in the case of backlog. Year Ended June 30, -------------------------------- 1996 1995 1994 -------------------------------- (Dollars in thousands) Revenues earned $ 86,061 $102,384 $ 64,452 Units 531 612 378 Average price per unit $ 162 $ 167 $ 171 New orders* $ 80,438 $ 78,252 $104,104 Units 486 489 601 Average price per unit $ 166 $ 160 $ 173 Backlog $ 40,206 $ 45,829 $ 69,961 Units 219 264 387 Average price per unit $ 184 $ 174 $ 181 *FPA Corporation acquired Orleans Construction Corp.("OCC") on October 22, 1993. Included in new orders for the year ended June 30, 1994 are 192 units totaling $28,744,000 of OCC backlog units which existed as of October 22, 1993 which were obtained as a result of the acquisition. If the Companies were combined as of July 1, 1993, the combined proforma information would be as follows: Revenues earned of $73,552,000 on deliveries of 445 units, new orders of $85,191,000 on 477 units and backlog of $69,961,000 consisting of 387 units. 6 Operating Policies Construction The Company has historically designed its own products with the assistance of unaffiliated architectural firms as well as supervised the development and building of its projects. When the Company constructs units, it acts as a general contractor and employs subcontractors at specified prices for the installation of site improvements and construction of its residential units. Agreements with subcontractors provide for a fixed price for work performed or materials supplied and are generally short-term. The Company does not manufacture any of the materials or other items used in the development of its projects, nor does the Company maintain substantial inventories of materials. Standard building materials, appliances and other components are purchased in volume. The Company has not experienced significant delays in obtaining materials needed by it to date and has long-standing relationships with many of its major suppliers and contractors. None of the Company's suppliers accounted for more than 10% of the Company's total purchases in the fiscal year ended June 30, 1996. Sales and Customer Financing The Company conducts a marketing program that is directed to purchasers of primary residences. In Pennsylvania and New Jersey, 7 A.P. Orleans Inc., an affiliate of the Company controlled by Jeffrey P. Orleans, is the exclusive sales agent. The Company believes that the compensation arrangement with A.P. Orleans, Inc. is no less favorable to the Company that could be obtained from an unaffiliated sales agent. This compensation includes payment to A.P. Orleans, Inc. of $25.00 for each house settled in its Pennsylvania and New Jersey communities. Model homes and sales centers are constructed to promote sales. A variety of custom changes are permitted at the request of purchasers. The Company advertises extensively using newspapers, billboards and other types of media. The Company also uses brochures to describe each community. The Company's customers generally require mortgage financing to complete their purchases. During fiscal 1996, the Company established a mortgage department to assist its home buyers in obtaining financing from unaffiliated lenders. The Company receives a fee of 1% of the mortgage amount for its services. The Company applies for project financing approvals from the Federal Housing Administration, the Veterans Administration and the Federal National Mortgage Association for many of its moderately priced communities. These approvals assist customers in their ability to obtain competitive fixed and adjustable rate mortgages 8 with moderate down payments and liberal underwriting requirements. The Company has obtained approvals for most projects and anticipates additional approvals during fiscal 1997; however, there can be no assurance that additional approvals will be obtained. Land Policy The Company acquires land in order to provide an adequate and well-located supply for its residential building operations. In evaluating possible opportunities to acquire land, the Company considers such factors as the feasibility of development, proximity to developed areas, population growth patterns, customer preferences, estimated cost of development and availability and cost of financing. Subsequent to June 30, 1996, the Company purchased three (3) tracts of land (an aggregate of approximately 100 homesites) with an aggregate purchase price of $3,600,000. As of June 30, 1996, the Company was committed to purchasing an additional nine (9) tracts for an aggregate purchase price of $24,000,000. The Company anticipates completing a majority of these acquisitions in calendar 1998. The Company will continue to monitor economic and market conditions for residential units in each of its various communities in assessing the relative desirability of constructing units or 9 selling parcels to other builders. The Company engages in many phases of development activity, including land and site planning, obtaining environmental and other regulatory approvals, construction of roads, sewer, water and drainage facilities, recreation facilities and other amenities. Joint Ventures From time to time, the Company has developed and owned projects through joint ventures with other parties. As discussed in Note 1 to the Consolidated Financial Statements, the Company, through a wholly owned subsidiary, is the General Partner in Versailles Associates, L.P., a limited partnership with private investors to purchase and develop a 102 multi-family unit community in Cherry Hill, New Jersey. Construction of the development began in 1993. As also discussed in Note 1 to the Consolidated Financial Statements, Orleans Construction Corp. ("OCC") has entered into a joint venture with Bridlewood Associates, L.P. OCC is the managing general partner in this limited partnership formed to develop an 85 acre parcel of land in Mount Laurel, New Jersey. Determinations by the Company to enter into joint ventures have traditionally been based upon a number of factors, including principally an alternative source for land acquisition financing. 10 At the present time joint venture activities do not constitute a material portion of the Company's operations. Government Regulation The Company and its subcontractors are subject to continuing compliance requirements of various Federal, state and local statutes, ordinances, rules and regulations regarding zoning, plumbing, heating, air conditioning and electrical systems, building permits and similar matters. The intensity of development in recent years in areas in which the Company is actively developing real estate has resulted in increased restrictive regulation and moratoriums by governments with respect to density, sewer, water, ecological and similar matters. Further expansion and development will require prior approval of Federal, state and local authorities and may result in delay or curtailment of development activities and costly compliance programs. In January 1983, the New Jersey Supreme Court rendered a decision known as the "Mount Laurel II" decision, which has the effect of requiring certain municipalities in New Jersey to provide housing for persons of low and moderate income. In order to comply with such requirements, municipalities in that state may require the Company, in connection with its future residential communities, to contribute funds, on a per unit basis, or 11 otherwise assist in the achievement of a fair share of low or moderate housing in such municipalities. In recent years, regulation by Federal and state authorities relating to the sale and advertising of condominium interests and residential real estate has become more restrictive and intense. In order to advertise and sell condominiums and residential real estate in many jurisdictions, including Pennsylvania and New Jersey, the Company has been required to prepare a registration statement or other disclosure document and, in some cases, to file such materials with a designated regulatory agency. Despite the Company's past ability to obtain necessary permits and authorizations for its projects, more stringent requirements may be imposed on developers and home builders in the future. Although the Company cannot predict the effect of such requirements, they could result in time-consuming and expensive compliance programs and substantial expenditures for environmental controls which could have a material adverse effect on the results of operations of the Company. In addition, the continued effectiveness of permits already granted is subject to many factors, including changes in policies, rules and regulations and their interpretation and application, which are beyond the Company's control. 12 Environmental Regulation and Litigation Development and sale of real property creates a potential for environmental liability on the part of the developer, owner or any mortgage lender for its own acts or omissions as well as those of current or prior owners of the subject property or adjacent parcels. If hazardous substances are discovered on or emanating from any of the Company's properties, the owner or operator of the property (including the prior owners) may be held strictly liable for all costs and liabilities relating to such hazardous substances. Environmental studies are undertaken in connection with property acquisitions by the Company. Further governmental regulation on environmental matters affecting residential development could impose substantial additional expense to the Company, which could adversely affect the results of operations of the Company or the value of properties owned, or under contract to purchase by the Company. (See Note 14 of Notes to Consolidated Financial Statements for a discussion of specific litigation.) Competition The real estate industry is highly competitive. The Company competes on the basis of its reputation, location, design, price, financing programs, quality of product and related amenities, with regional and national home builders in its areas of development, 13 some of which have greater sales, financial resources and geographical diversity than the Company. Numerous local residential builders and individual resales of residential units and homesites provide additional competition. Employees The Company, as of June 30, 1996, employed 158 persons, 62 of whom were executive, administrative and clerical personnel, 33 were sales personnel, and 63 were construction supervisory personnel and laborers. The level of construction and sales employees varies throughout the year in relation to the level of activities at the Company's various developments. The Company has had no major work stoppages and considers its relations with employees to be good. Economic Conditions The Company's business is affected by general economic conditions in the United States and its related regions and particularly by the level of interest rates. The Company cannot predict whether interest rates will be at levels attractive to prospective home buyers or whether mortgage and construction financing will continue to be available. Further, the current economic climate and lack of consumer confidence within the Company's customer base have lessened the 14 demand for new housing. In response to these conditions, the Company has continued to offer incentives to increase sales activity. These actions have reduced gross profits and cash proceeds from residential sales. Lease of Executive Offices The Company is currently leasing office space comprising approximately 12,000 square feet at One Greenwood Square at 3333 Street Road, Bensalem, Pennsylvania. The annual rent is $213,000 with a lease expiring in March, 1997. The Company is currently negotiating a new five year lease agreement under similar terms with the lessor. Item 3. Legal Proceedings. The Company is a plaintiff or defendant in various cases arising out of its usual and customary business. The Company believes that it has adequate insurance or meritorious defenses in all pending cases in which it is a defendant and that adverse decisions in any or all of the cases would not have a material effect upon the Company. (See Note 14 of Notes to Consolidated Financial Statements for a discussion of specific litigation). Item 4. Submission of Matters to a Vote of Security Holders. There are no matters to be reported hereunder. 15 Item A. Executive Officers of the Registrant. The following list contains certain information relative to executive officers of the Company. There are no family relationships among any executive officers. The term of each executive officer expires at the next annual meeting of the Board of Directors following the annual meeting of Stockholders scheduled to be held in December, 1996 or until their successors are duly elected and qualified. Position Principal occupation and offices Name Age or office past 5 years - ----------- ----- ------------ ---------------------------------------- Jeffrey P. 50 Chairman of Served as Chairman of the Board Orleans the Board and Chief Executive Officer since and Chief September 1986. From September, Executive 1986 to May 1992 he also served as Officer President. In addition, Mr. Orleans served for five years as Chief Executive Officer of Orleans Construction Corporation. Benjamin D. 50 President, Elected President, Chief Operating Goldman Chief Operating Officer and a Director of the Officer and Company on May 27, 1992. From May, Director 1989 to May 27, 1992 served as Executive Vice President and Secretary of the Company. In addition, Mr. Goldman served as the President of Orleans Construction Corporation. Michael T. 37 Executive Vice Elected Executive Vice President on Vesey President- July 18, 1994. Since joining the Project Company in July, 1987, he has been Management responsible for project management of the Company's Pennsylvania communities. 16 Joseph A. 42 Chief Financial Elected Chief Financial Officer of the Santangelo Officer, Company on July 18, 1994. Mr. Santangelo Treasurer and was elected Secretary of the Company on Secretary May 27, 1992 and has been Treasurer since joining the Company in March 1987. Mr. Santangelo is a Certified Public Accountant. In addition, he served in an executive capacity for Orleans Construction Corporation. 17 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. The principal market on which the Company's Common Stock is traded is the American Stock Exchange, Inc. (Symbol: FPO) The high and low sales prices on the Exchange (based on reports by National Quotation Bureau, Inc.) for the periods indicated are as follows: Fiscal year ended June 30, High Low ---------------------- ------- ------- 1995 First Quarter $ 2.250 $ 1.625 Second Quarter 1.812 1.250 Third Quarter 1.688 1.062 Fourth Quarter 1.625 1.000 1996 First Quarter $ 2.000 $ 1.000 Second Quarter 2.063 1.000 Third Quarter 1.188 .938 Fourth Quarter 1.500 .875 The number of common stockholders of record of the Company as of September 23, 1996 was 346. The Company has not paid a cash dividend since December 1982. Payment of dividends will depend upon the earnings of the Company, its funds derived from operations, its working capital needs, its debt service requirements, its general financial condition and other factors, and no assurance can be given that the Company will pay dividends in the future. 18 Item 6. Selected Financial Data. The following table sets forth selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included under Item 8 of this Form 10-K. (In thousands except per share data) Year Ended June 30, ------------------------------------------- Operating Data 1996 1995 1994(2) 1993 1992 - -------------- ------ ------ -------- ------ ----- Earned revenues $94,359 $107,840 $66,618 $42,584 $38,346 Income (loss) from continuing operations 1,235 1,201 (766) (8,513) (2,634) Primary income (loss) per share from continuing operations .10 .10 (.07) (1.32) (.55) Fully-diluted income (loss) per share from continuing operations .10 .10 (.07) (1.27) (.34) June 30, -------------------------------------------- Balance Sheet Data(1) 1996 1995 1994(3) 1993 1992 - ------------------ ------ ------ -------- ------ ----- Residential properties $34,263 $ 35,757 $35,016 $12,863 $11,768 Land and improvements 46,654 52,921 46,681 32,389 42,087 Total assets 92,866 102,274 97,754 57,235 70,763 Mortgage and other note obligations 42,807 40,721 36,806 25,097 33,425 Senior notes - 371 664 6,376 5,695 Subordinated debentures 618 2,231 2,363 3,653 3,251 Other Notes Payable 9,473 9,455 10,509 2,761 2,559 Shareholders' equity (deficit) 13,949 12,146 10,945 (403) 7,931 - ------------ (1) The Company has not paid a cash dividend since December 1982. (2) Includes results of operations of OCC from October 22, 1993 (date of acquisition) through June 30, 1994. (3) Includes balance sheet data of OCC, acquired by the Company on October 22, 1993. 19 Item 7. 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 programs 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 June 30, 1996, the Company had approximately $47,500,000 available to be drawn under existing secured improvement 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. During the second half of fiscal 1996, the Company implemented a recapitalization plan to acquire land, to obtain more favorable pricing from the Company's contractors by reducing outstanding accounts payable balances and retire outstanding debt at a discount. Funding of this plan was obtained from additional secured borrowings, land sales and an investment from Jeffrey P. Orleans, aggregating approximately $18,000,000. The Company entered into an agreement with an unaffiliated third party to sell improved lots at its Northampton community for 20 an aggregate sales price of approximately $9,000,000. The sale was structured in two phases. The initial phase occurred in fiscal 1996 for a sales price of approximately $4,700,000. The remaining lots are scheduled to be sold in fiscal 1997. Mr. Orleans' investment is now evidenced by a $3,000,000 convertible Subordinated 7% Note dated August 8, 1996 due January 1, 2002 and an agreement to defer payments due him under the terms of FPA's Series A and Series B Notes of $1,350,000. Amounts outstanding as of June 30, 1996 under these agreements totaled approximately $2,800,000 and $750,000, respectively. In addition, Mr. Orleans has provided to the Company an additional source of capital via a $2,000,000 variable rate note due September 30, 2000. No amounts were outstanding under the variable rate note as of June 30, 1996. As of September 1, 1996, the Company had reduced accounts payable balances by approximately $9,200,000 compared to June 30, 1995, retired 14 1/2% Subordinated Debenture debt of approximately $1,500,000, retired notes payable of approximately $1,800,000 and acquired three new communities with an aggregate purchase price of $3,600,000. The favorable pricing obtained from our contractors increased gross profits by 1% in fiscal 1996 and is expected to benefit the company in fiscal 1997 and beyond. 21 During fiscal 1997, the Company expects to commence construction at three new communities located in Delaware and Chester Counties in Pennsylvania. This will mark the Company's entry into these counties south and west of Philadelphia which are experiencing steady economic and job growth. The Company is expanding its land acquisition efforts and is currently focusing on this area along with central New Jersey and its traditional marketing areas. As of June 30, 1996, the Company is committed to purchasing 9 additional tracts for an aggregate purchase price of approximately $24,000,000. These purchase agreements are subject to due diligence review and are contingent upon the receipt of governmental approvals. The Company expects to utilize purchase money mortgages to finance a majority of these acquisitions. The Company anticipates completing a majority of these acquisitions in calendar 1998. 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 through fiscal 1997. Economic Conditions The sluggish growth of the general economy in the Northeastern United States, contradictory economic data, and lack 22 of consumer confidence caused primarily by the uncertainty of future employment have continued to effect the homebuilding industry in the Company's marketing areas during fiscal 1996. The Company has continued to feel the effects of the increase in interest rates and lack of consumer confidence. In response to these economic conditions, the Company has continued to offer various incentives at certain communities to increase sales velocity. These actions continue to suppress gross profits and cash proceeds from residential property sales. Any significant further downturn in economic factors affecting the real estate industry may require additional incentives or reductions in net sales prices. The tables included in "Item 2 - Properties" summarize the Company's revenues, new orders and backlog data for the year ended June 30, 1996 with comparable data for fiscal 1995 and 1994. New orders for fiscal 1996 were 486 units totaling $80,438,000 compared with 489 units totaling $78,252,000 for 1995. At June 30, 1996, the Company had a backlog of 219 units with a sales value of $40,206,000 compared to 264 units totaling $45,829,000 at June 30, 1995. The Company anticipates delivering substantially all of its backlog units during fiscal 1997. The decline in backlog is due to the substantial completion of a 23 successful condominium community in Warwick Township, Bucks County, Pennsylvania and slow sales activity in May, 1996. In addition, the Company did not commence marketing at any new communities in fiscal 1996. The economic factors and the severe winter weather both discussed previously adversely affected new orders and revenues during fiscal 1996. While the company has maintained its market share during fiscal 1996, management is focusing its efforts on geographic diversification within the Pennsylvania and New Jersey markets to increase volume in fiscal 1997. 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 significant increases in lumber and other building products in recent years. However, there is no assurance the Company will be able to continue this practice in the future due to the current sluggish growth in the general economy in the Northeastern United States and the other factors discussed under economic conditions. Joint Ventures The Company is a general partner in two joint ventures with 24 private investors which are developing communities in Cherry Hill and Mt. Laurel, New Jersey. These activities have provided additional operating funds to the Company without the need for land acquisition funds. Tax Matters The Company adopted the accounting for income taxes prescribed by SFAS 109 effective July 1, 1993. The cumulative effect of this change in accounting principles was to increase net income by $3,970,000 in fiscal 1994. (See Note 12 to the Consolidated Financial Statements.) 1993 Recapitalization Transactions 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 include: (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 25 Flora Group and (v) a mortgage debt restructuring. See Note 2 to Consolidated Financial Statements for a complete discussion of these transactions. Other Matters In August, 1995, the Company's corporate offices were destroyed by fire. These premises were under a long term operating lease from a related party. The settlement of the claim with the insurance carrier is in negotiations. The Company does not expect to incur a loss in connection with the fire and the resolution of its insurance claim. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. The following important factors, among others, in some cases have affected, and in the future could affect, FPA's actual results and 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; 26 o building material price fluctuations; o changes in mortgage interest rates charged to buyers of the Company's units; 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. 27 Fiscal Years Ended June 30, 1996 and 1995 Results of Operations Operating Revenues Revenues for fiscal 1996 decreased $13,481,000 as compared to fiscal 1995. Revenues from the sale of residential units included 531 units totaling $86,061,000 compared to 612 units totaling $102,384,000 during fiscal 1995. The reduction in units delivered is due primarily to the economic conditions discussed previously and severe winter weather conditions experienced in 1996 and 1994 which hampered construction activity and delayed deliveries at all of the Company's communities. Revenues from land sales increased by $2,799,000 primarily due to the consummation of land sale transactions at the Company's Northampton, Pennsylvania community aggregating $4,700,000 during fiscal 1996. Costs and Expenses Costs and expenses for the fiscal year ended June 30, 1996 decreased $12,863,000 as compared to fiscal 1995. The decrease in costs and expenses is due primarily to decreases in the cost of real estate properties sold (including land) and selling, general and administrative expenses of $11,749,000 and $582,000, respectively. These decreases are consistent with the decrease in earned revenues from real estate properties discussed under 28 operating revenues. Overall gross profit on units sold during fiscal 1996 increased approximately 1% compared to fiscal 1995 due to more favorable pricing obtained from contractors. The other expense increase of $131,000 from 1995 is primarily an increase in snow removal costs of $240,000 due to severe weather conditions in fiscal 1996 partially offset by other reductions. The fiscal 1995 accrual for environmental litigation expenses of $750,000 also contributed to the overall decrease in costs and expenses. Extraordinary Items During the second quarter of fiscal 1996, the Company completed a transaction to fully satisfy a note payable with an outstanding balance of approximately $380,000 and reacquired 116,823 shares of Common Stock in exchange for a cash payment of $235,000. These shares have been retained by the Company as treasury stock. This transaction resulted in an extraordinary gain of $170,000, net of income tax expense of $30,000. In June, 1996, the Company satisfied $1,522,000 of its then outstanding Subordinated Debentures and related accrued interest for a cash payment of $907,000. This transaction resulted in an extraordinary gain of $523,000, net of income tax expense of $92,000. 29 Net Income (Loss) Net income for fiscal 1996 was $1,928,000 ($.16 primary and fully diluted earnings per share) compared to fiscal 1995 net income of $1,201,000 ($.10 primary and fully diluted earnings per share). This increase is due to the extraordinary items, a reduction in the deferred tax asset valuation account of $527,000 and the fiscal 1995 environmental litigation accrual of $750,000 and were offset by the reduction in real estate sold during fiscal 1996 compared to fiscal 1995. 30 Fiscal Years Ended June 30, 1995 and 1994 Results of Operations Earned Revenues The significant increase in revenues earned and units delivered from the sale of residential properties of $37,932,000 and 234 units, respectively, is due to the introduction of sales at the Company's Warwick Township, Bucks County, Pennsylvania condominium community and increases in deliveries at a majority of the Company's other communities coupled with the inclusion of Orleans Construction Corp. ("OCC") operations for a full year in fiscal 1995. In addition, the severe winter weather experienced during January through March, 1994, which hampered construction activity, resulted in reduced deliveries during the prior year. Revenue from land sales for the twelve months ended June 30, 1995 increased $3,380,000 due 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 an Option Agreement with Orleans Builders and Developers. Costs and Expenses Costs and expenses for the fiscal year ended June 30, 1995 31 increased $39,089,000 compared to fiscal 1994. The increase is primarily the result of increases in costs of residential properties sold, and selling, general and administrative expenses of $32,930,000 and $2,739,000, respectively. The increase in costs of residential properties is directly correlated with the increase in units sold. Overall gross profit on units sold during fiscal 1995 is consistent with fiscal 1994. The increases in selling, general and administrative expenses is consistent with both the increase in revenues from residential property sales and the inclusion of the former OCC operations for a full year in fiscal 1995. Moreover, the Company commenced marketing at six new communities during fiscal 1995 which also contributed to the aforementioned increase. Extraordinary Items As more fully discussed in Note 2 to Consolidated Financial Statements, the Company had several extraordinary items during fiscal 1994, each of which resulted from the early extinguishment of debt. These transactions are: (i) the retirement of mortgage note obligations secured by real estate which resulted in extraordinary gains of $3,622,000 net of related income tax expense of $1,821,000, (ii) the Flora transactions which resulted in the extraordinary gain on early extinguishment of the subordinated note 32 payable of $616,000, net of income tax expense of $377,000 and (iii) the extraordinary gain on the early extinguishment of 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 extraordinary gains aggregating $7,956,000 net of related income taxes for the twelve months ended June 30, 1994. Net Income (Loss) Net income for fiscal 1995 of $1,201,000 ($.10 primary earnings per share; $.10 fully diluted earnings per share) is a significant decrease from the fiscal 1994 net income of $11,160,000 ($1.08 primary income per share; $1.05 fully diluted income per share). This decrease is due largely to the previously discussed extraordinary gains of $7,956,000 ($.77 per primary share and $.75 per fully diluted share) and the cumulative effect of the change in accounting principle adjustment of $3,970,000 ($.38 per primary share and $.37 per fully diluted share). Income from operations during fiscal 1995 of $1,201,000 represents a substantial improvement over the fiscal 1994 loss from operations of $766,000. This improvement is directly attributable to the increase in revenues previously discussed. 33 Item 8. Financial Statements and Supplementary Data. FPA CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page ---- Report of independent accountants 35 Consolidated balance sheets at June 30, 1996 and June 30, 1995 36 Consolidated statements of operations and retained earnings for the years ended June 30, 1996, 1995 and 1994 37-38 Consolidated statements of cash flows for the years ended June 30, 1996, 1995 and 1994 39 Notes to consolidated financial statements 40-59 Financial statement schedule Valuation and qualifying accounts (Schedule II) 60 All other schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. The individual financial statements of the Registrant's subsidiaries have been omitted since the Registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements, in the aggregate, do not have minority equity interest and/or indebtedness to any person other than the Registrant or its consolidated subsidiaries in amounts which together exceed 5 percent of total consolidated assets at June 30, 1996, excepting indebtedness incurred in the ordinary course of business. 34 Report of Independent Accountants To the Board of Directors and Shareholders of FPA Corporation In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of FPA Corporation and its subsidiaries at June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP New York, New York September 23, 1996 35 FPA Corporation and Subsidiaries Consolidated Balance Sheets June 30, ---------------- 1996 1995 ---------------- Assets (In thousands) - ------ ---------------- Cash $ 2,617 $ 2,324 Receivables Trade accounts 3,622 3,636 Mortgage and other notes 554 1,674 Real estate held for development and sale Residential properties completed or under construction 34,263 35,757 Land held for development or sale and improvements 46,654 52,921 Property and equipment, at cost, less accumulated depreciation 468 523 Deferred charges and other assets 4,688 5,439 ------ ------- $92,866 $102,274 ====== ======= Liabilities and Shareholders' Equity Liabilities Accounts payable $12,251 $ 21,445 Accrued expenses 5,389 6,246 Amounts due to related parties 3,026 3,657 Customer deposits 2,591 2,739 Mortgage and other note obligations primarily secured by: Mortgage notes receivable 283 1,419 Residential properties 24,232 27,998 Land held for development or sale and improvements 18,292 11,304 Senior notes 371 Subordinated debentures 618 2,231 Other notes payable 9,473 9,455 Deferred income taxes 2,056 2,583 Minority interests 706 680 ------ ------- Total liabilities 78,917 90,128 ------ ------- 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 June 30, 1996 and 1995 1,270 1,270 Capital in excess of par value - common stock 17,726 17,726 Retained earnings (deficit) (4,176) (6,104) Treasury stock, at cost (1,158,936 and 1,002,513 shares at June 30, 1996 and 1995) (871) (746) ------ ------- Total shareholders' equity 13,949 12,146 ------ ------- Commitments and contingencies ------ ------- $92,866 $102,274 ====== ======= See notes to consolidated financial statements 36 FPA Corporation and Subsidiaries Consolidated Statements of Operations and Retained Earnings For the year ended June 30, ---------------------------- 1996 1995 1994 - --------------------------------------------------------------- (In thousands, except per share data) - --------------------------------------------------------------- Earned revenues Residential properties $ 86,061 $102,384 $ 64,452 Land sales 6,889 4,090 710 Other income 1,409 1,366 1,456 - --------------------------------------------------------------- 94,359 107,840 66,618 - --------------------------------------------------------------- Costs and expenses Residential properties 73,546 88,435 55,505 Land sales 6,520 3,380 570 Other 798 667 472 Selling, general and administrative 11,316 11,898 9,159 Interest Incurred 6,838 6,184 4,511 Less capitalized (5,538) (5,019) (3,503) Environmental litigation expenses 750 Minority interests 26 74 71 Recapitalization expenses 495 - --------------------------------------------------------------- 93,506 106,369 67,280 - --------------------------------------------------------------- Income (loss) before income taxes 853 1,471 (662) Income tax (expense) benefit 382 (270) (104) - --------------------------------------------------------------- Income (loss)from operations before extraordinary items and cumulative effect of change in accounting principle 1,235 1,201 (766) - --------------------------------------------------------------- Extraordinary items, net 693 7,956 Cumulative effect of change in accounting principle 3,970 - --------------------------------------------------------------- Net income 1,928 1,201 11,160 Retained earnings (deficit) at beginning of year (6,104) (7,305) (18,465) - --------------------------------------------------------------- Retained earnings (deficit) at end of year $ (4,176) $ (6,104) $ (7,305) - --------------------------------------------------------------- Continued... 37 FPA Corporation and Subsidiaries Consolidated Statements of Operations and Retained Earnings For the year ended June 30, --------------------------- 1996 1995 1994 - -------------------------------------------------------------- Primary earnings (loss) per share: Income (loss) before extraordinary items and cumulative effect of change in accounting principle $ .10 $ .10 $ (.07) Extraordinary gains .06 .77 Cumulative effect of change in accounting principle .38 - --------------------------------------------------------------- Total $ .16 $ .10 $ 1.08 - --------------------------------------------------------------- Fully diluted earnings (loss) per share: Income (loss) before extraordinary items and cumulative effect of change in accounting principle $ .10 $ .10 $ (.07) Extraordinary gains .06 .75 Cumulative effect of change in accounting principle .37 - --------------------------------------------------------------- Total $ .16 $ .10 $ 1.05 - --------------------------------------------------------------- See notes to consolidated financial statements 38 FPA Corporation and Subsidiaries Consolidated Statements of Cash Flows For the year ended June 30, --------------------------- 1996 1995 1994 - --------------------------------------------------------------------------- (In thousands) - --------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,928 $ 1,201 $ 11,160 Adjustments to reconcile net income to net cash used by operating activities: Extraordinary gains on early extinguishments of debt (693) (7,956) Reduction in deferred tax asset valuation allowance (527) Cumulative effect of change in accounting principle (3,970) Depreciation and amortization 128 205 116 Changes in operating assets and liabilities: Receivables 1,134 2,778 1,700 Real estate held for development and sale 7,761 (6,981) (7,981) Deferred charges and other assets 751 (497) 614 Accounts payable and other liabilities (10,656) 3,010 2,731 Customer deposits (148) (2,172) 819 Deferred income taxes 45 (75) - --------------------------------------------------------------------------- Net cash used by operating activities (322) (2,411) (2,842) - --------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (73) (207) (145) Cash acquired from business combination 265 - --------------------------------------------------------------------------- Net cash provided by (used in) investing activities (73) (207) 120 - --------------------------------------------------------------------------- Cash flows from financing activities: Borrowings from loans secured by real estate assets 78,567 81,709 60,205 Repayment of loans secured by real estate assets (75,345) (77,313) (58,283) Repayment of loans secured by mortgages receivable (1,136) (481) (3,164) Repayment of subordinated debentures and senior notes payable (1,461) (425) (326) Borrowings from other note obligations 5,597 1,127 6,144 Repayments of other note obligations (5,409) (2,181) (304) Purchase of treasury stock (125) - --------------------------------------------------------------------------- Net cash provided by financing activities 688 2,436 4,272 - --------------------------------------------------------------------------- Net increase (decrease) in cash 293 (182) 1,550 Cash at beginning of year 2,324 2,506 956 - --------------------------------------------------------------------------- Cash at end of year $ 2,617 $ 2,324 $ 2,506 =========================================================================== See notes to consolidated financial statements 39 FPA Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies FPA Corporation and its subsidiaries (the Company) are currently engaged in residential real estate development in Pennsylvania and New Jersey. A summary of the significant accounting principles and practices used in the preparation of the consolidated financial statements follows: Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. The financial statements include the consolidated financial position and results of operations of Versailles Associates, L.P., and Bridlewood Associates, L.P., joint ventures in which a subsidiary of the Company is the sole General Partner. The outside limited partners have been allocated their portion of the income or loss and equity. These amounts are presented as minority interests in the financial statements. All material intercompany transactions and accounts have been eliminated. Earned revenues from real estate transactions The Company recognizes revenues from sales of residential properties at the time of closing except as discussed below. The Company sells developed and undeveloped land in bulk and under option agreements. Revenues from sales of land and other real estate are recognized when the Company has received an adequate cash down payment and all other conditions necessary for profit recognition have been satisfied. To the extent that certain sales or portions thereof do not meet all conditions necessary for profit recognition, the Company uses other methods to recognize profit, including cost recovery and the deposit methods. These methods of profit recognition defer a portion or all of the profit and recognition of the profit is dependent upon the occurrence of future events. 40 Real estate capitalization and cost allocation Residential properties completed or under construction are stated at cost or estimated net realizable value, whichever is lower. Costs include land and land improvements, direct construction costs, construction overhead costs, interest on indebtedness and real estate taxes. Selling and advertising costs are expensed as incurred. Total estimated costs of multi-unit developments are allocated to individual units based upon specific identification methods. Land and improvement costs include land, land improvements, interest on indebtedness and real estate taxes. Appropriate costs are allocated to projects on the basis of acreage, dwelling units and relative sales value. Land held for development or sale and improvements are stated at cost or estimated net realizable value, whichever is lower. In March, 1995, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121). The provisions of SFAS No. 121 must be implemented by the Company in fiscal 1997. The Company believes that its current impairment policy is substantially similar to SFAS No. 121 and, accordingly, the adoption of SFAS No. 121 is not currently expected to have a significant effect on the Company's financial position or results of operations upon adoption. Land and land improvements applicable to condominiums, townhomes, single-family homes and other projects are transferred to construction in progress when construction commences. Interest costs included in Costs and Expenses for fiscal years 1996, 1995 and 1994 were $4,588,000, $5,236,000 and $4,473,000, respectively. Depreciation, amortization and maintenance expense Depreciation and amortization is primarily provided on the straight-line method at rates calculated to amortize the cost of the assets over their estimated useful lives. Expenditures for maintenance, repairs and minor renewals are expensed as incurred; major renewals and betterments are capitalized. At the time depreciable assets are retired or otherwise disposed of, the cost and the accumulated depreciation of the assets are eliminated from the accounts and any profit or loss is recognized. 41 Leases The Company's leasing arrangements as lessee include the leasing of certain office space, residential units and equipment. These leases have been classified as operating leases. Income taxes In February, 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". 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. The Company and its subsidiaries file a consolidated federal income tax return. See Note 12 for an additional discussion of income tax matters. Earnings per share Primary earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and common stock equivalents. The weighted average number of shares used to compute primary earnings (loss) per common share was 11,781,425 shares in 1996, 11,974,618 shares in 1995 and 10,355,805 shares in 1994. Fully diluted earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding and all potentially dilutive securities. There were 11,781,425 shares in 1996, 11,974,618 shares in 1995 and 10,644,693 shares in 1994. The fiscal 1994 shares for both primary and fully diluted assume the conversion of the Series C preferred stock effective October 22, 1993 and that the options (as described in Note 13) were outstanding as of July 1, 1993. On a proforma basis, if the $3,000,000 Convertible Subordinated Notes issued in August, 1996 (See Note 9) were converted into 2,000,000 shares of common stock, primary and fully diluted earnings per share have been $.16 and $.14 for the fiscal year ended June 30, 1996. 42 Disclosures About Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107), requires the Company to disclose the estimated fair market value of its financial instruments. The Company believes that the carrying value of its financial instruments (primarily mortgages receivable and mortgage notes payable) approximate fair market value and that any differences are not significant. This assessment is based upon substantially all of the Company's debt obligations being based upon the prime rate of interest which is a variable market rate. Reclassifications Certain amounts in the accompanying financial statements have been reclassified for comparative purposes. Management's Estimates and Assumptions The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidated Statements of Cash Flows For purposes of reporting cash flows, short-term investments with original maturities of ninety days or less are considered cash equivalents. Supplemental disclosures of cash flow information: (In thousands) 1996 1995 1994 ---------------------- Cash paid during the year for: Interest (net of amounts capitalized) $ 143 $ 205 $ 97 Income taxes 165 297 1,023 During the second quarter of fiscal 1996, the Company completed a transaction to fully satisfy a note payable with an outstanding balance of approximately $380,000 and reacquired 116,823 shares of Common Stock in exchange for a cash payment of $235,000. These shares have been retained by the Company as treasury stock. This transaction resulted in an extraordinary gain of approximately $170,000, net of income tax expense of approximately $30,000. 43 In June, 1996, the Company fully satisfied $1,522,000 of its then outstanding Subordinated Debentures and related accrued interest for a cash payment of $907,000. This transaction resulted in an extraordinary gain of $523,000, net of income tax expense of $92,000. The 1993 Recapitalization Transactions (Note 2) include significant non-cash components. The following schedule summarizes these items: Acquisition Other 1993 of OCC Recapitalization 10/22/93 Transactions -------- ------------ (in thousands) Cash $ 265 $ Receivables 1,814 (223) Real estate held for development and sale 29,843 (1,379) Property and equipment 447 Deferred charges and other assets 2,760 (10) ------ ------ $ 35,129 $ (1,612) ====== ====== Accounts payable and accrued liabilities $ 12,768 $ (356) Customer deposits 1,660 Mortgage and other note obligations primarily secured by: Real estate held for development or sale 18,475 (5,524) Senior notes (5,505) Subordinated debentures (1,192) Other notes payable 769 1,139 Deferred taxes 1,169 ------ ------ $ 34,841 $(11,438) ------ ------ Mandatorily redeemable series A preferred stock (2,000) Series C preferred stock 50 Capital in excess of par - preferred 238 Common stock Capital in excess of par - common 646 Retained earnings 11,926 Treasury stock (746) ------ ------ 288 9,826 ------ ------ $ 35,129 $ (1,612) ====== ====== 44 On October 22, 1993, the Company acquired Orleans Construction Corporation as more fully described in Note 2. The assets acquired, liabilities assumed and other noncash effects of this transaction have not been reflected in the Consolidated Statements of Cash Flows. As discussed in Note 2, on October 22, 1993, a transaction was completed between the Company and Jeffrey P. Orleans whereby the Company issued $1,800,000 of Series B Notes in exchange for $6,331,000 aggregate principal and accrued interest of 12 5/8% Senior Notes due August 15, 1996, and $1,371,000 aggregate principal and accrued interest of 1991 Subordinated Debentures due September 1, 2000 owned by Mr. Orleans. This transaction resulted in an extraordinary gain of $3,718,000, net of income taxes of $1,989,000. The Flora transactions described in Note 2 include certain non cash items which have not been reflected in the Consolidated Statements of Cash Flows. These items include approximately $1,500,000 of real estate assets given in exchange for the retirement of the Company's Subordinated Note payable with a principal balance of $2,559,380 plus accrued interest. Further, $2,100,000 of new notes payable were issued in exchange for 50,000 shares of Series A Preferred Stock, which has been canceled, and the reacquisition of 1,002,513 shares of the Company's Common Stock. As discussed in Note 2, in September, 1993 the Company consummated an agreement with the Federal Deposit Insurance Corporation ("FDIC") under which the Company was able to fully satisfy mortgage obligations at less than the carrying value of the debt. An extraordinary gain on early extinguishment of debt of $3,185,000 net of income tax expense of $1,821,000 is reflected in the fiscal 1994 financial statements. Also discussed in Note 2, during fiscal 1994, the Company entered into an agreement with one of its lenders to satisfy several mortgage obligations aggregating $4,272,000 at less than the carrying value of the debt. An extraordinary gain on early extinguishment of debt of $437,000, net of income tax expense has been reflected in the fiscal 1994 financial statements. During fiscal 1994, the Company issued payment-in-kind obligations to a majority of its Senior Note holders in lieu of scheduled cash 45 interest payments aggregating approximately $159,000. Note 2. 1993 Recapitalization Transactions 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 include: (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 converted into 6,000,000 shares of Common Stock in September, 1994. 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. The total assets and liabilities assumed at the date of the OCC acquisition were $35,129,000 and $34,841,000, respectively. If the Companies were combined as of July 1, 1993, the proforma results would have been as follows: Earned revenues $75,839,000, loss from continuing operations $1,090,000 and net income of $10,836,000. Primary and fully diluted earnings per share would have been $.75 and $.73, respectively. 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 and other executive officers, 46 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. Corporate Debt Restructuring. During the second quarter of fiscal 1994, the Company issued $1,800,000 of Series B Notes in exchange for $7,700,000 aggregate principal and accrued interest of Senior Notes and Subordinated Debentures owned by Mr. Orleans. This transaction resulted in a second quarter fiscal 1994 extraordinary gain of $3,718,000, net of 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 transactions included the exchange of cash and certain real estate assets owned by the Company for the retirement of subordinated notes, the retirement of the Series A mandatorily redeemable Preferred Stock in exchange for new debt securities and the repurchase of 1,002,513 shares of Common Stock in exchange for the issuance of new debt securities. The Company exchanged land in Florida with a carrying value of approximately $1,500,000 and a cash payment of $250,000 for the retirement of the Company's Subordinated Floating Rate Notes due April 1, 1997 with an aggregate unpaid principal balance of $2,559,380 plus accrued interest. This transaction resulted in an extraordinary gain of approximately $616,000, which is net of estimated tax effect of $377,000. The Company issued a Note to Flora in the original principal amount of $1,100,000 due August 31, 2023, which accrued interest at 5.5% per annum until December 31, 1995 and at 10% thereafter, in exchange for 50,000 shares of Series A Preferred Stock held by Flora. 47 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") 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. An extraordinary gain on early extinguishment of debt of $3,185,000, net of income tax expense of $1,821,000 has been reflected in the accompanying fiscal 1994 financial statements. The Company also recognized an extraordinary gain on early extinguishment of debt of $437,000, net of related income tax expense, during fiscal 1994, as a result of a similar transaction with an unrelated lender. Note 3. Joint Ventures 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 Corporation (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 48 presented as minority interest in the accompanying consolidated financial statements. Note 4. Certain Transactions with Related Parties Prior to October 22, 1993, OCC had advanced funds to, borrowed funds from, and paid expenses and debt obligations on behalf of Orleans Builders and Developers ("OB&D"), a limited partnership whose partners include Jeffrey P. Orleans and the Trust of Selma Orleans. At June 30, 1996 amounts owed by the Company to the partnership aggregated $3,026,000. These advances are payable on demand and bear interest at 7%. Interest incurred on these advances amounted to $236,000, $369,000 and $168,000 for the twelve months ended June 30, 1996 and 1995 and eight months ended June 30, 1994, respectively. The Company has exercised its option to purchase sections of land from OB&D under the terms of an existing option agreement. These parcels were subsequently sold to an unaffiliated third party for a purchase price of $1,901,000 and $3,336,000 during fiscal 1996 and 1995, respectively. These transactions resulted in a profit before income taxes of $301,000 and $548,000, respectively. The remaining real estate under the option agreement with OB&D is under an option agreement of sale for approximately its option price plus current carrying value with the above referenced buyer. Note 5. Receivables Trade accounts receivable result primarily from escrow deposits on residential units, accrued interest and net proceeds due from residential closings. Mortgage and other notes receivable, which are due in varying installments through 2017, bear interest at rates from 8% to 12%. Mortgage and other notes receivable consist of the following: 49 June 30, ------------------- 1996 1995 ------------------- (In thousands) - ---------------------------------------------------------------- Mortgage subsidiary receivables $ 290 $ 1,438 First mortgage notes, secured by residential and other properties 264 266 - ---------------------------------------------------------------- 554 1,704 Less: Deferred sales proceeds and allow- ance for uncollectible accounts - (30) - ----------------------------------------------------------------- $ 554 $ 1,674 - ---------------------------------------------------------------- Due within one year $ 147 $ 383 - ---------------------------------------------------------------- Note 6. Real Estate Held for Development and Sale Residential properties consist of the following: June 30, ------------------- 1996 1995 ------------------- (In thousands) - ---------------------------------------------------------------- Condominiums and townhomes $20,293 $22,368 Single-family homes 13,970 13,389 - ---------------------------------------------------------------- $34,263 $35,757 - ---------------------------------------------------------------- Residential properties completed or under construction consist of the following: June 30, ------------------- 1996 1995 ------------------- (In thousands) - ---------------------------------------------------------------- Under contract for sale $21,243 $23,242 Unsold 13,020 12,515 - ---------------------------------------------------------------- $34,263 $35,757 - ---------------------------------------------------------------- Note 7. Mortgage Subsidiaries The Company has a wholly-owned financing subsidiary which had been involved, through unaffiliated companies, in issuing mortgage-collateralized bonds. Condensed financial information for the finance subsidiary is as follows: 50 June 30, ------------------ 1996 1995 ------------------ (In thousands) - --------------------------------------------------------------- Total assets, principally mortgage notes receivable $ 351 $ 1,586 Total liabilities, principally bonds payable 283 1,444 - ---------------------------------------------------------------- Advances from parent company $ 68 $ 142 - ---------------------------------------------------------------- Net income for the year ended $ 32 $ 27 - ---------------------------------------------------------------- During fiscal 1996, the Company completed a transaction to sell approximately $1,000,000 of the mortgage receivables without recourse for assumption of the related bond liability and proceeds of approximately $100,000. Note 8. Property and Equipment Property and equipment consists of the following: June 30, ------------------ 1996 1995 ------------------ (In thousands) - --------------------------------------------------------------- Equipment and fixtures $ 815 $ 1,151 Less accumulated depreciation (347) (628) - ----------------------------------------------------------------- $ 468 $ 523 - ---------------------------------------------------------------- Depreciation expense was $128,000, $205,000 and $95,000 during fiscal 1996, 1995 and 1994, respectively. In August, 1995, the Company's corporate offices were destroyed by fire. These premises were under a long term operating lease from a related party. The claim with the insurance carrier is being negotiated. The Company does not expect to incur a loss in connection with the fire and the resolution of its insurance claim. Note 9. Mortgage and Other Note Obligations The maximum balance outstanding under construction and inventory loan agreements at any month end during fiscal 1996, 1995 and 1994 was $33,473,000, $27,998,000 and $19,835,000, respectively. The average month end balance during fiscal 1996, 1995 and 1994 was approximately $29,327,000, $22,940,000 and $12,100,000, respectively, bearing interest at an approximate average annual rate of 9.5%, 9.2% and 7.2%, respectively. Mortgage obligations 51 secured by land held for development or sale and improvements are due in varying installments through fiscal 1999 with interest primarily at 1% above the prime rate. Maturities of land and improvement mortgage obligations, other than residential property construction loans, during the next five fiscal years are: 1997 - $3,119,000; 1998 - $10,121,000; 1999 - $2,112,000 and 2000 - $2,940,000. Obligations under residential property and construction loans amounted to $24,232,000 at June 30, 1996 and are repaid at a predetermined percentage of the selling price of a unit when a sale is completed. Included in the Other Notes Payable balance of $9,473,000 at June 30, 1996 are cash advances made to the Company by Jeffrey P. Orleans aggregating approximately $2,800,000. Upon an additional advance in August, 1996 of $200,000, the Company issued Mr. Orleans a $3,000,000 Convertible Subordinated 7% Note dated August 8, 1996 which matures January 1, 2002. Pursuant to its terms, this Note subject to approval for listing by the American Stock Exchange of the underlying shares, would be convertible into FPA Corporation common stock at $1.50 per share with quarterly interest payments and principal due in annual installments of $1,000,000 beginning January 1, 2000. Also included in the aggregate Other Note Payable balance of $9,473,000 are Series A and Series B Notes Payable held by Mr. Orleans and other certain officers, directors and key personnel of the Company (Note 2) of approximately $3,525,000 which mature in fiscal 1999. Repayment of these obligations will be from proceeds from the sale of units at certain residential properties. During fiscal 1996, Mr. Orleans agreed to defer up to $1,350,000 of interest and principal payments due him pursuant to the repayment terms of the Series A and B Notes. As of June 30, 1996, the Company has deferred approximately $750,000 of these payments which are also included in Other Notes Payable. Promissory Notes issued in the Flora Group Transactions aggregated $1,649,000 at June 30, 1996 and were to be amortized over a 30 year term with a maturity date in fiscal 2024. As discussed in Note 1, the Company retired one of the Flora Group notes with an outstanding balance of $380,000 for a cash payment of $235,000 resulting in an extraordinary gain of $170,000 net of income tax expense of $30,000. In July, 1996, the Company retired the remainder of the Flora Group 52 notes for a cash payment of $1,061,000 resulting in a Fiscal 1997 extraordinary gain of $594,000 net of income tax expense of $100,000. The Company also reacquired 183,177 shares of its common stock in this transaction which will be held as treasury stock. In addition, the Company has various working capital and property and equipment note obligations which require various monthly repayment terms with maturity dates from 1996 through 1999. Note 10. Senior Notes The Company retired the remaining 125/8% Senior Notes pursuant to their terms on February 15, 1996. Note 11. Subordinated Debentures On September 8, 1980, the Company sold 25,000 Units, each consisting of a $1,000 debenture bearing interest at 14 l/2% per annum and 5 shares of Common Stock. The debentures, which are unsecured obligations and are subordinated to senior indebtedness, as defined, mature September l, 2000 and require semi-annual interest payments each September and March with the balance due on September 1, 2000. Optional prepayments may be made at 100% of the principal amount thereof. The debentures contains certain default provisions and imposes restrictions on the amount of dividends or distributions to shareholders. The debentures are presented net of unamortized debt discount, which is being amortized as additional interest over the life of the debentures. As of June 30, 1996, a total principal amount of $575,000 of original subordinated debentures remain outstanding. Note 12. Income Taxes The provision (benefit) for income taxes is summarized as follows: 53 For Year Ended June 30, -------------------------- 1996 1995 1994 -------------------------- (In Thousands) - -------------------------------------------------------------- Continuing operations Current $ 145 $ 270 $ 104 Deferred (527) - -------------------------------------------------------------- $ (382) $ 270 $ 104 - -------------------------------------------------------------- Extraordinary Item Current $ 117 $ 4,336 Deferred (149) - --------------------------------------------------------------- $ 117 $ $ 4,187 - -------------------------------------------------------------- The differences between taxes computed at federal income tax rates and amounts provided for continuing operations are as follows: For Year Ended June 30, ---------------------------- 1996 1995 1994 ---------------------------- (In thousands) - ---------------------------------------------------------------- Amount computed at statutory rate $ 290 $ 500 $ (225) State income taxes, net of federal tax benefit 21 17 75 Unrealized (realized) benefits from net operating loss carry forwards and other tax credits (693) (247) 254 - ----------------------------------------------------------------- $ (382) $ 270 $ 104 - ----------------------------------------------------------------- Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. These "temporary differences" are determined in accordance with Financial Accounting Standards Board Statement No. 109 ("SFAS 109") (Note 1). The principal component of the Company's deferred tax liability of $2,056,000 at June 30, 1996 are temporary differences arising from interest and real estate taxes incurred prior to commencing active construction being capitalized for book purposes while being expensed for tax purposes. In addition, temporary differences arise from net realizable value adjustments recognized for book purposes but not for tax purposes. These temporary differences reverse ratably as the communities sellout. The principal items making up the deferred income tax provisions from continuing operations are as follows: 54 For Year Ended June 30, --------------------------- 1996 1995 1994 --------------------------- (In thousands) - ---------------------------------------------------------------- Interest and real estate taxes $ 238 $ 424 $ 461 Difference in tax accounting for land and property sales (net) (29) 7 46 Unrealized (realized) tax net operating loss carryforwards (435) (370) 1,430 Reserves for book not tax 142 (144) (129) Gain (loss) from joint ventures 2 Deferred compensation 34 99 Depreciation and other 48 (16) 25 Debt redemption (1,919) Recapitalization expenses 86 Reduction to deferred tax asset valuation reserve (527) - --------------------------------------------------------------- $ (527) $ $ - --------------------------------------------------------------- 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 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 reflected the excess of the carryforwards over existing net deferred taxable items and expected taxable gains on certain of the 1993 Recapitalization Transactions. Temporary differences represent the cumulative taxable or deductible amounts recorded in the financial statements in different years than recognized in the tax returns. SFAS 109 requires the Company to record a valuation allowance when it is "more likely than not that some portion or all of the deferred tax assets will not be realized." It further states that "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years." The ultimate realization of certain tax assets depends on the Company's ability to generate sufficient taxable income in the future, including the effects of future anticipated arising/reversing temporary differences. The Company has undergone substantial capital and operational restructuring in recent years and currently anticipates acquiring additional projects at favorable prices. Further, the Company reported income from 55 continuing operations in fiscal 1996 and 1995. While the Company anticipates that total deferred tax assets will be fully realized by future operating results and future tax planning strategies, losses in recent years along with volatility in the real estate market make it appropriate to continue to record a valuation allowance. Accordingly, the Company has provided a valuation allowance equal to 50% and 100% of the total deferred income tax assets which are dependent upon future taxable income for realization in certain tax jurisdictions at June 30, 1996 and 1995, respectively. As of June 30, 1996, the Company has deferred tax assets aggregating $1,055,000 and an offsetting valuation reserve of approximately $528,000 included in its net deferred tax liability of $2,056,000. At June 30, 1996, the Company had alternative minimum tax credits of approximately $856,000 which may be used to reduce or eliminate ordinary federal income taxes. These alternate minimum tax credits, which do not have an expiration date, are part of the deferred tax assets discussed previously. Note 13. Stock Option Plan In December 1992, the Board of Directors adopted (i) the 1992 Stock Incentive 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. During fiscal 1996, 80,000 options were granted at an exercise price of $1.25 to $2.00 per share and 50,000 options were granted at an exercise price of $1.25 or the fair market value on the date of vesting, whichever is greater. In February, 1995, the Board of Directors adopted the 1995 Stock Option Plan for Non-Employee Directors which provides 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 option price per share under all plans was established at the 56 fair market value at the dates of each grant which was $.69 to $2.81 per share. Total outstanding options under all three plans aggregated 825,000 shares with expiration dates between fiscal 2004 and 2006. Note 14. Commitments and Contingencies At June 30, 1996, the Company had outstanding bank letters of credit amounting to $14,653,000 as surety for completion of improvements at various developments of the Company. At June 30, 1996 the Company had agreements to purchase land and approved homesites aggregating approximately 1,100 building lots with purchase prices totaling approximately $27,600,000. Purchase of the properties is contingent upon obtaining all governmental approvals and satisfaction of certain requirements by the Company and the Sellers. The Company expects to utilize purchase money mortgages to finance a majority of these acquisitions. The Company anticipates completing a majority of these acquisitions in calendar 1998. The Company has made deposits totaling approximately $1,100,000 under these agreements which are included in deferred charges and other assets. Development and sale of real property creates a potential for environmental liability on the part of the developer, owner or any mortgage lender for its own acts or omissions as well as those of current or prior owners of the subject property or adjacent parcels. If hazardous substances are discovered on or emanating from any of the Company's properties, the owner or operator of the property (including the prior owners) may be held strictly liable for all costs and liabilities relating to such hazardous substances. Environmental studies are undertaken in connection with property acquisitions by the Company. Pursuant to an Order dated February 6, 1996 issued by the New Jersey Department of Environmental Protection ("NJDEP"), the Company submitted a Closure/Post-Closure Plan ("Plan") and Classification Exception Area ("CEA") for certain affected portions of Colts Neck Estates, a single family residential development built by the Company in Washington Township, Gloucester County, New Jersey. The affected areas include those portions of Colts Neck where solid waste allegedly was deposited. NJDEP approved the Plan and CEA on July 22, 1996. The Plan, in part, requires the Company to (i) perform gas monitoring for methane on a quarterly basis for 57 a period of one year; (ii) vegetate and cover with clean fill affected areas; and (iii) deed restrict portions of the affected open space owned by it. NJDEP's approval of the CEA imposes restrictions on the use of ground water within the affected area. Neither the implementation of the Plan nor CEA is expected to have a material adverse effect on the Company's results of operations or its financial position although NJDEP as a standard condition of its approval of the Plan and CEA reserves the right to amend its approval to require additional remediation measures if warranted. Approximately 145 homeowners at Colts Neck instituted three lawsuits against the Company, which were separately filed in state and Federal courts between April and November, 1993. These suits were consolidated in the United States District Court for the District of New Jersey and were subject to court-sponsored mediation. Asserting a variety of state and federal claims, the plaintiffs in the consolidated action alleged that the Company and other defendants built and sold them homes which had been constructed on and adjacent to land which had been used as a municipal waste landfill and a pig farm. The complaints asserted 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 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 municipal waste allegedly disposed on the property. As a result of the court sponsored mediation, the Company and the plaintiffs in the consolidated litigation entered into a settlement agreement. Under that agreement, which has been approved by the Court, a $6,000,000 Judgment was entered against the Company in 58 favor of a class comprising most of the current and former homeowners. The Company, which has paid $650,000 on August 28, 1996 to the class, has no liability for the remainder of the Judgment. The remainder of the Judgment is to be paid solely from the proceeds of the state and federal court litigation against the Company's insurance companies. Although, under the settlement agreement the Company is obligated to prosecute and fund the litigation against its insurance companies, the Company is entitled to obtain some reimbursement of those expenses. Specifically, under the settlement agreement, the Company may obtain reimbursement of its aggregate litigation expenses in excess of $100,000 incurred in connection with its continued prosecution of the insurance claims to the extent that settlements are reached and to the extent that the portion of those settlement funds designated to fund the litigation are not exhausted. The Company's right to reimbursement may, under certain circumstances, be limited to a total of $300,000. 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. During fiscal 1995, the Company increased its recorded reserves to give effect to the net amounts to be paid under the settlement agreement, and the anticipated unreimbursed costs to the Company of the insurance litigation. The Company believes that neither the implementation of the settlement agreement nor the resolution of the insurance claims through further litigation will have a material effect on its results of operations or its financial position. The Company is not aware of any other environmental liabilities associated with any of its other projects. 59 FPA CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the year ended June 30, 1996, 1995 and 1994 ($000 omitted)
- ------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------------------------------------- Additions -------------------------------------- Balance at Charged to costs Charged to other Deduc- Balance at Description beginning of period and expenses accounts - describe tions end of period - -------------------------------------------------------------------------------------------------------------------- Provision for uncollectibility of receivables: Year ended June 30, 1996 $ 30 $ - $ 30 $ - ====== ====== ====== ===== Year ended June 30, 1995 $ 35 $ - $ 5 $ 30 ====== ====== ====== ====== Year ended June 30, 1994 $ 55 $ - $ 20 $ 35 ====== ====== ====== ======
60 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There are no matters required to be reported hereunder. PART III Item 10. Directors and Executive Officers of the Registrant. Incorporated herein by reference from the Company's definitive proxy statement for its annual meeting of Stockholders to be held in December, 1996. Information concerning the executive officers is included under the separate caption Item A. "Executive Officers of the Registrant" under Part I of this Form 10-K. Item 11. Executive Compensation. Incorporated herein by reference from the Company's definitive proxy statement for its annual meeting of Stockholders to be held in December, 1996. Item 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated herein by reference from the Company's definitive proxy statement for its annual meeting of Stockholders to be held in December, 1996. Item 13. Certain Relationships and Related Transactions. Incorporated herein by reference from the Company's definitive proxy statement for its annual meeting of Stockholders to be held in December, 1996. 61 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) l. Financial Statements The financial statements and schedule listed in the index on the first page under Item 8 are filed as part of this Form 10-K. (b) Reports on Form 8-K. The Company did not file a Form 8-K for the quarter ended June 30, 1996. (c) Exhibits Exhibit Number 3.l Certificate of Incorporation of the Company dated September 4, 1969 {incorporated by reference to Exhibit 2.l of the Company's Registration Statement on Form S-7, filed with the Securities and Exchange Commission (S.E.C. File No. 2-68662) (herein referred to as "Form S-7")}. 3.2 Amendment to Certificate of Incorporation of the Company filed July 25, 1983 {incorporated by reference to Exhibit 3.2 of Amendment No. 2 to the Company's Registration Statement on Form S-2 filed with the Securities and Exchange Commission (S.E.C. File No. 2-84724)}. 3.3 Amendment to Certificate of Incorporation of the Company filed May 27, 1992 (incorporated by reference to Exhibit 3.6 of Amendment No. 2 to the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission (S.E.C. File No. 33-43943) (the "Form S-1")). 3.4 Agreement and Plan of Merger dated as of October 22, 1993, by and among the Company, FPA Merger Subsidiary, Inc. a 62 Pennsylvania corporation; Orleans Construction Corp. ("OCC"); and Jeffrey P. Orleans, including the Certificate of Designation respecting the Series C Preferred Stock incorporated by reference to Exhibit 3.5 to the Company's Form 8-K dated October 22, 1993 filed with the Securities and Exchange Commission (the "1993 Form 8-K"). 3.5 Certificate of Designation filed by the Company on September 6, 1991 with the Secretary of State of Delaware respecting the Series A Preferred Stock and Series B Junior Preferred Stock (incorporated by reference to Exhibit 4.4 of the Company's Form 8-K dated September 11, 1991 ("1991 Form 8-K")). 3.6 Subsequent Certificate to Certificate of Designations, Preferences and Rights of Series A Preferred Stock and Series B Junior Preferred Stock of FPA Corporation adopted September 14, 1992 and filed with the Secretary of State of Delaware. (incorporated by reference to Exhibit 4.19 to Registrant's Form 10-K for the fiscal year ended June 30, 1994.) 3.7 Subsequent Certificate to Certificate of Designations, Preferences and Rights of Series A Preferred Stock and Series B Junior Preferred Stock of FPA Corporation filed on September 2, 1993 with the Secretary of State of Delaware. 3.8 Certificate of Designations, Preferences and Rights of Series C Preferred Stock filed by the Company on October 21, 1993 with the Secretary of State of Delaware respecting the Series C Preferred Stock. (incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated October 22, 1993). 3.9 By-Laws, as last amended March 16, 1990 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K dated April 11, 1990, filed with the Securities and Exchange Commission (the "1990 Form 8-K")). 4.l Form of the Company's 14 l/2% Subordinated Debentures due September l, 2000 (contained in, and beginning on page 12 of, Exhibit 4.2). 4.2 Form of Indenture dated September l, 1980, between the Company and The Fidelity Bank (the "Debenture Indenture"), relating to the Company's 14 l/2% Subordinated Debentures due September l, 2000 (incorporated by reference to Exhibit 2.3 of Amendment 63 No. 2 to the Company's Form S-7). 4.3 Form of Second Supplemental Indenture dated March 30, 1990 to the Debenture Indenture (incorporated by reference to Exhibit 4.3 to the 1990 Form 8-K). 4.4 Note Exchange Agreement, dated September 11, 1991, respecting the issuance of $5,032,935.38 aggregate principal amount of 12 5/8% Senior Notes due February 15, 1996, with the form of the Company's 12 5/8% Senior Notes due February 15, 1996 attached as Exhibit A thereto (incorporated by reference to Exhibit 4.5 to the 1991 Form 8-K). 4.5 Debenture Exchange Agreement, dated September 11, 1991, respecting the issuance of $2,356,282.50 aggregate principal amount of 1991 14 1/2% Subordinated Debentures due September 1, 2000 with the form of the Company's 1991 14 1/2% Subordinated Debentures due September 1, 2000 attached as Exhibit A thereto (incorporated by reference to Exhibit 4.6 to the 1991 Form 8-K). 4.6 Form of Note Purchase Agreement dated as of October 22, 1993, together with form of Series A Variable Rate Notes due September 15, 1998 issued by the Company attached thereto (incorporated by reference to Exhibit 4.2 to the 1993 Form 8- K). 4.7 Form of Note Purchase Agreement dated October 22, 1993, together with form of Series B Variable Rate Mortgage Notes due September 15, 1998 issued by the Company attached thereto (incorporated by reference to Exhibit 4.24 to the 1993 Form 8- K). 4.8 Form of Note Purchase Agreement, dated as of August 1, 1996, together with form of $2,000,000 Variable Rate Note due September 30, 2000. 4.9 Form of Note Purchase Agreement, dated as of August 1, 1996, together with form of $3,000,000 Convertible Subordinated 7% Note due January 1, 2002. 10.1 Form of Indemnity Agreement executed by the Company with Directors of the Company (incorporated by reference to Exhibit B to the Company's Proxy Statement respecting its 1986 Annual 64 Meeting of Stockholders). 10.2 Employment Agreement between the Company and Jeffrey P. Orleans, dated June 26, 1987 (incorporated by reference to Exhibit 10.2 to the Form S-1.) 10.3 Mortgage dated March 17, 1992 granted by the Company to Jeffrey P. Orleans, respecting property in Washington Township, Gloucester County, New Jersey (incorporated by reference to Exhibit 10.3 to the 1992 Form 8-K). 22. Subsidiaries of Registrant. 25. Power of Attorney (included on Signatures page). 27. Financial Data Schedule (included in electronic filing format only). 65 EX-4 2 EXHIBIT 4.8 Exhibit 4.8 ____________________________________ FPA CORPORATION ___________________ $2,000,000 Variable Rate Note due September 30, 2000 ___________________ NOTE PURCHASE AGREEMENT ___________________ Dated as of August 1, 1996 ____________________________________ TABLE OF CONTENTS Page 1. Authorization of Notes......................................... 1 2. Issuance of Notes.............................................. 2 3. Closing........................................................ 2 4. Conditions to Closing.......................................... 2 4.1 Representations and Warranties........................ 2 4.2 Performance; No Default............................... 2 4.3 Compliance Certificate................................ 2 4.4 Proceedings and Documents............................. 2 5. Representations and Warranties, etc............................ 3 5.1 Organization, Qualification Standing, etc............. 3 5.2 Authorization, Execution and Delivery................. 3 5.3 Tax Returns and Payments.............................. 4 5.4 Litigation, etc....................................... 4 5.5 Compliance with Other Instruments, etc................ 4 5.6 Governmental Consent.................................. 5 5.7 Offer of Notes........................................ 5 5.8 Federal Reserve Regulations........................... 5 5.9 Investment Company Act................................ 5 5.10 Public Utility Holding Company Act.................... 5 5.11 Authorization of Sale................................. 6 5.12 ERISA................................................. 6 6. Representations and Warranties of Purchaser.................... 6 6.1 Investment Representations............................ 6 6.2 No Contrary Knowledge................................. 6 7. Accounting, Financial Statements and Other Information......... 7 8. Inspection..................................................... 8 9. Payment and Prepayment of Notes................................ 8 9.1 Optional and Required Prepayments..................... 8 9.2 Maturity; Surrender, etc.............................. 8 10. Business and Financial Covenants............................... 9 10.1 Payment of Principal and Interest..................... 9 10.2 Maintenance of Office or Agency....................... 9 10.3 Corporate Existence................................... 9 10.4 Payment of Taxes and Other Claims..................... 9 10.5 Maintenance of Properties; Insurance.................. 10 10.6 Waiver of Covenants................................... 10 10.7 Company May Consolidate, etc., Only on Certain Terms................................................. 10 -i- 10.8 Effect of Consolidation, etc.......................... 11 11. Registration, Transfer and Substitution of Notes............... 11 11.1 Note Register; Ownership of Registered Notes.......... 11 11.2 Transfer and Exchange of Notes........................ 12 11.3 Replacement of Notes.................................. 12 12. Payments on Notes.............................................. 12 12.1 Place of Payment...................................... 12 12.2 Home Office Payment................................... 13 13. Events of Default: Acceleration................................ 13 13.1 Events of Default..................................... 13 13.2 Remedies Upon Default................................. 14 14. Enforcement.................................................... 15 15. Definitions.................................................... 16 16. Expenses, etc.................................................. 20 17. Survival of Representations and Warranties..................... 20 18. Amendments and Waivers......................................... 21 19. Notices, etc................................................... 21 20. Effectiveness.................................................. 22 21. Miscellaneous.................................................. 22 Exhibits I. Form of $2,000,000 Variable Rate Note due September 30, 2000 -ii- FPA CORPORATION One Greenwood Square 3333 West Street Road Suite 101 Bensalem, PA 19020 __________________________________ Note Purchase Agreement __________________________________ $2,000,000 Variable Rate Note due September 30, 2000 As of August 1, 1996 Jeffrey P. Orleans Chairman and Chief Executive Officer FPA Corporation One Greenwood Square 3333 West Street Road Suite 101 Bensalem, PA 19020 Dear Sir: FPA Corporation, a Delaware corporation (the "Company"), agrees with you as follows: 1. Authorization of Notes. The Company will authorize the issue and delivery of its $2,000,000 Variable Rate Note due September 30, 2000 (the "VR Note," the "Note" or the "Notes," such term to include any such Notes issued in substitution therefor pursuant to Section 11 hereof). The VR Note shall be in substantially the form of Exhibit I hereto, with such changes therein, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Section 15. References to an "Exhibit" are, unless otherwise specified, to one of the Exhibits attached to this Agreement. 2. Issuance of Notes. In exchange for the payment of cash in the amount of $2,000,000 (the "Cash Consideration"), the Company will issue and deliver to you and, subject to the terms and conditions of this Agreement, you will acquire from the Company, the VR Note. 3. Closing. The delivery and issue of Notes by the Company to you shall take place at the offices of the Company, at the address noted above, at 10:00 a.m., local time, September 3, 1996 or on such other business day as may be agreed upon by the Company and you, but in no event later than December 31, 1996 (the "Closing"). Subject to and upon the terms and conditions set forth herein, at the Closing the Company will deliver to you the VR Note, dated the date of such Closing and registered in your name, against delivery by you to the Company or its order of the Cash Consideration in the amount specified in Section 2 hereof. If, at the Closing, the Company shall fail to tender the VR Note to you as provided above in this Section 3, or any of the conditions to be performed by the Company specified in Section 4 shall not have been fulfilled to your reasonable satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. Conditions to Closing. (A) Your obligation to deliver the Cash Consideration for the VR Note to be issued and delivered to you at the Closing, and to complete the Closing, is subject to the fulfillment to your reasonable satisfaction, prior to or at such Closing, of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be correct in all material respects when made and at the time of such Closing. 4.2 Performance; No Default. The Company shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at such Closing and at the time of such Closing no Event of Default shall have occurred and be continuing. 4.3 Compliance Certificate. The Company shall have delivered to you or your Counsel an Officers' Certificate, dated the date of such Closing, certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to you, and you shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. -2- (B) The Company's obligation to deliver the VR Note at the Closing and to complete the Closing is subject to your performance and compliance in all material respects with the agreements and conditions contained in this Agreement required to be performed by you prior to or at such Closing. 5. Representations and Warranties, etc. The Company represents and warrants that: 5.1 Organization, Qualification Standing, etc. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and the Company has all requisite corporate power and authority to enter into this Agreement, to issue and deliver the Notes in exchange for the Note Consideration and the Cash Consideration, and to carry out the terms of this Agreement and the Notes. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction (other than the jurisdiction of its incorporation) in which the nature of its activities or the character of the properties it owns, leases or operates makes such qualification necessary and in which the failure so to qualify would have a materially adverse effect on the business of the Company and its Subsidiaries taken as a whole. The current capitalization of the Company is as follows: Preferred Stock, par value $1.00 per share; 500,000 shares authorized; 100,000 shares of Series C Preferred Stock authorized. Common Stock, par value $.10 per share; 20,000,000 shares authorized; 12,698,131 shares issued; 11,695,618 shares outstanding and 1,002,513 held as treasury stock. 5.2 Authorization, Execution and Delivery. The execution and delivery of this Agreement and the VR Note by the Company has been duly authorized by all necessary corporate action on behalf of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement, the Notes, and the transactions contemplated hereby and thereby and this Agreement is (and, upon issuance, the VR Note will be) enforceable against the Company in accordance with its terms except as limited by bankruptcy, insolvency, reorganization and similar laws affecting creditors generally and by equitable principles of general applicability. -3- 5.3 Tax Returns and Payments. The Company and each of its Subsidiaries have filed all tax returns required by law to be filed by them and have paid all taxes, assessments and other governmental charges levied upon them and any of their respective properties, assets, income or franchises which are due and payable, other than those presently payable without penalty or interest. The charges, accruals and reserves on the books of the Company and set forth on the regularly-prepared balance sheets of the Company in respect of Federal and state income and business and occupation taxes for all fiscal periods are adequate in the opinion of the Company, and the Company knows, after making due inquiry and reasonable investigation, of no unpaid assessment for additional Federal or state income or business and occupation taxes for any period or any basis for any such assessment for which adequate provision has not been made in its accounts or in such balance sheet. 5.4 Litigation, etc. Except as described in the Company's 1995 Report on Form 10-K or as set forth on Schedule 5.4 hereto, there is no action, investigation or proceeding pending or threatened (or any basis therefor known to the Company) which questions the validity of this Agreement or the VR Note or any action taken or to be taken pursuant to this Agreement or the VR Note, or which might result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs, condition, properties or assets of the Company and its Subsidiaries taken as a whole or in any material liability on the part of the Company and such Subsidiaries taken as a whole. 5.5 Compliance with Other Instruments, etc. Except as set forth on Schedule 5.5 hereto, (i) neither the Company nor any of its Subsidiaries is in violation of any term of its certificate or articles of incorporation or by-laws, (ii) neither the Company nor any of its Subsidiaries is in material violation of any term of any material agreement or instrument respecting indebtedness for borrowed money to which it is a party or by which it is bound, and (iii) neither the Company nor any of its Subsidiaries is in violation of any term of any applicable law, statute, ordinance, license, franchise, rule or regulation of any governmental authority or any term of any applicable order, judgment or decree of any court, arbitrator or governmental authority (including, without limitation, any law, ordinance, rule, regulation or order relating to environmental or occupational health or safety standards and controls, consumer protection or equal employment practices) applicable to the Company or any Subsidiary, the consequences of which violation described in (iii) above might have a material adverse effect on the business, operations, affairs, condition, properties or assets of the Company and its Subsidiaries -4- taken as a whole; and the execution, delivery and performance of this Agreement and the Notes will not result in any violation of or be in conflict with or constitute a default under any term of any item referred to in this Section 5.5 or result in the creation of (or impose any obligation on the Company or any Subsidiary to create) any lien, pledge, security interest or other encumbrance upon any of the properties or assets of the Company or any Subsidiary pursuant to any such term. 5.6 Governmental Consent. No consent, approval or authorization of, or declaration or filing with, any governmental authority on the part of the Company or any Subsidiary is required for the valid execution, delivery or performance of this Agreement and the Notes, or the continued conduct by the Company or any Subsidiary of its businesses as now conducted or as proposed to be conducted as described in the 1995 Form 10-K. 5.7 Offer of Notes. The Company has not directly or indirectly offered the VR Note or any part thereof for sale to, or solicited any offer to buy, any of the same from, or otherwise approached or negotiated in respect thereof with, anyone other than you. 5.8 Federal Reserve Regulations. Neither the Company nor any Subsidiary will, directly or indirectly, use any of the proceeds of the issuance of the VR Note for the purpose of purchasing or carrying any "margin security" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. 207, as amended), or otherwise take or permit to be taken any action which would result in the issuance and delivery of the VR Note or the carrying out of any of the other transactions contemplated hereby, being violative of such Regulation G or of Regulation T (12 C.F.R. 220, as amended) or of Regulation X (12 C.F.R. 224, as amended) or any other regulation of such Board. To your knowledge, no Indebtedness being reduced or retired out of the proceeds of the issuance of the Notes was incurred for the purpose of purchasing or carrying any "margin security" within the meaning of such Regulation G, and the Company does not own and does not have any present intention of acquiring any such margin security. 5.9 Investment Company Act. Neither the Company nor any Subsidiary is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.10 Public Utility Holding Company Act. Neither the Company nor any Subsidiary is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. -5- 5.11 Authorization of Sale. The sale of the VR Note and compliance by the Company with all of the provisions of this Agreement and the VR Note are within the corporate powers of the Company and have been duly authorized by all requisite corporate action on the part of the Company. 5.12 ERISA. The consummation of the transactions provided for in this Agreement and compliance by the Company with the provisions hereof and of the VR Note issued hereunder will not involve any prohibited transaction within the meaning of the Employee Retirement Income Security Act of 1974 ("ERISA") or Section 4975 of the Internal Revenue Code. No "employee pension benefit plans," as defined in ERISA ("Plans"), maintained by the Company or any Person which is under common control with the Company within the meaning of Section 4001(b) of ERISA, nor any trusts created thereunder, have incurred any "accumulated funding deficiency" as defined in Section 302 of ERISA. 6. Representations and Warranties of Purchaser. You hereby represent and warrant to the Company as follows: 6.1 Investment Representations. You acknowledge that the VR Note has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and that the VR Note is being issued to you pursuant to an exemption from registration contained in the Securities Act based in part upon your representations and covenants contained in this Section. You are acquiring the VR Note solely for your own account and with no intention of distributing or reselling said securities or any part thereof, or interest therein, in any transaction which would be in violation of the securities laws of the United States or any state thereof. You are an "accredited investor" (as such term is defined in Rule 501 of Regulation D under the Securities Act). You acknowledge and agree that (i) the VR Note is subject to limitations on transferability under the Securities Act and applicable state securities laws, (ii) the Company has no obligation to effect registration of the VR Note under the Securities Act or any applicable state securities laws or otherwise to comply with any requirements necessary for transfer or assignment of the VR Note to be exempt from such registration, and (iii) no transfer of the Notes shall be effected unless an Opinion of Counsel acceptable to the Company shall be delivered to the Company to the effect that such contemplated transfer may be effected without registration under the Securities Act and any applicable state securities laws. 6.2 No Contrary Knowledge. You are the Chief Executive Officer of the Company and have no knowledge that any of the representations and warranties of the Company set forth in Section 5 hereof are not correct. -6- 7. Accounting, Financial Statements and Other Information. The Company will maintain and cause its Subsidiaries to maintain, a system of accounting established and administered in accordance with generally accepted accounting principles, and will set aside on its books, and will cause each of its Subsidiaries to set aside on its books, all such proper reserves as shall be required by generally accepted accounting principles. At any time the Company is not required to file reports with the Commission pursuant to Section 13 of the Exchange Act, the Company will deliver to you, so long as you shall be the holder of the VR Note: (a) within 60 days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, consolidated balance sheets of the Company and its Subsidiaries as at the end of such period and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such period and (in the case of the second and third quarterly periods) for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the previous fiscal year (except for the comparative balance sheet which is as of the end of the immediately preceding fiscal year), all in reasonable detail and certified as complete by a principal financial officer of the Company; it being understood that delivery to Purchaser of a copy of the Form 10-Q for the respective fiscal period as filed with the Commission shall fulfill the obligations of the Company with respect to this subdivision (a); (b) within 120 days after the end of each fiscal year of the Company, consolidated balance sheets of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by a report thereon of Price Waterhouse or other independent certified public accountants of recognized national standing selected by the Company, so long as you or your nominee shall be the holder of any of the Notes, and to the Other Purchasers; it being understood that delivery to the Purchaser of a copy of the Company's Form 10-K as filed with the Commission respecting such fiscal year shall fulfill the obligations of the Company with respect to this subdivision (b); -7- (c) promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Company to its public security holders, if any, of all regular and periodic reports and all registration statements and prospectuses, if any, filed by the Company or any Subsidiary with any securities exchange or with the Commission or any governmental authority succeeding to any of its functions; and (d) with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries as from time to time may be reasonably requested. 8. Inspection. The Company will permit any authorized representatives designated by the holders of a majority in aggregate principal amount outstanding of the VR Note, without expense to the Company, to visit and inspect any of the properties of the Company or any of its Subsidiaries, including its and their books of account, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all at such reasonable times during regular business hours and upon reasonable notice and as often as may be reasonably requested. 9. Payment and Prepayment of Notes. 9.1 Optional and Required Prepayments. The Company may, at its option, upon not less than 30 days prior written notice to you, prepay at any time all, or from time to time any part of, the VR Note, without premium, at a price equal to the principal amount to be so prepaid; provided, however, for purposes of this Section 9.1, any prepayment of less than all of the outstanding VR Note shall be deemed to be applied first to the payment of accrued but unpaid interest and then to the payment of the installments of principal in the order in which such installments are due. 9.2 Maturity; Surrender, etc. In the case of each prepayment, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. -8- 10. Business and Financial Covenants. The Company covenants that from the date of this Agreement through the Closing and thereafter so long as any of the Notes are outstanding: 10.1 Payment of Principal and Interest. The Company will duly and punctually pay the principal of and interest on the VR Note in accordance with the terms of the VR Note and this Agreement. Interest on the VR Note may be paid by mailing checks for such interest payable to or upon the written order of the Person entitled thereto, at the address of such Person as it appears on the Note Register. 10.2 Maintenance of Office or Agency. The Company will maintain in the Commonwealth of Pennsylvania, an office or agency where VR Notes may be presented or surrendered for payment, where VR Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Agreement may be served. The Company will give prompt written notice to each holder of any change in the location of such office or agency. The initial office maintained by the Company for such purpose shall be the executive offices of the Company set forth on page 1 hereof. 10.3 Corporate Existence. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and that of each Material Subsidiary and the rights (charter and statutory) and franchises of the Company and its Material Subsidiaries; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine, before or following the termination thereof, that the preservation thereof is no longer desirable in the conduct of the business of the Company or any Material Subsidiary or that the loss thereof is not disadvantageous in any material respect to the holders of the Notes. 10.4 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Material Subsidiary or upon the income, profits or property of the Company or any Material Subsidiary, and (2) all lawful claims or indebtedness for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Material Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and the Company shall have set aside on its books adequate reserves, if appropriate, with respect thereto (segregated to the extent required by generally accepted accounting principles), and failure to pay is not prejudicial in any material respect to the holders of the VR Notes. -9- 10.5 Maintenance of Properties; Insurance. The Company will cause all properties used or useful in the conduct of its business or the business of the Company or any Material Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 10.5 shall prevent the Company from discontinuing the operation or maintenance of any of such properties, or disposing of any of them. The Company will insure and keep insured, and will cause each Material Subsidiary to insure and keep insured, with reputable insurance companies, so much of their respective properties, to such an extent and against such risks (including fire), as companies engaged in similar businesses customarily insure properties of a similar character; or, in lieu thereof, in the case of itself or of any one or more of its Material Subsidiaries, the Company will maintain or cause to be maintained a system or systems of self-insurance which will accord with the approved practices of companies owning or operating properties of similar character and maintaining such systems, and, in such cases of self-insurance, will maintain or cause to be maintained an insurance reserve or reserves in adequate amounts. 10.6 Waiver of Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 10.2 through and including Section 10.7 hereof with respect to the VR Notes, if before or after the time for such compliance, the holders of a majority in aggregate principal amount of the VR Notes outstanding, as the case may be, shall either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of such covenant or condition shall remain in full force and effect. 10.7 Company May Consolidate, etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (1) either the Company shall be the continuing corporation, or the corporation (if other than the Company) formed by such -10- consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, the due and punctual payment of the principal of and interest on all the Notes and the performance of every covenant of this Agreement and the Notes on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Event of Default which has not been waived shall have occurred and be continuing; and (3) the Company has delivered to the holder an Officers' Certificate and an Opinion of Counsel, each stating (the Opinion of Counsel to rely on the Officer's Certificate for factual matters) that such consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 10.7 and that all conditions precedent herein provided for relating to such transaction have been complied with. 10.8 Effect of Consolidation, etc. Upon any consolidation or merger or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Section 10.7, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor corporation had been named as the Company herein, and thereafter the predecessor corporation shall be relieved of all obligations and covenants under the Agreement and the VR Notes and in the event of such conveyance or transfer any such predecessor corporation may be dissolved and liquidated. 11. Registration, Transfer and Substitution of Notes. 11.1 Note Register; Ownership of Registered Notes. The Company will keep at the office of its legal department a register (the "Note Register") in which the Company will provide for the registration of VR Notes and the registration of transfers of VR Notes. The Company may treat the Person in whose name any VR Note is registered on such Note Register as the owner thereof for the purpose of receiving payment of the principal of and interest on such Note and for all other purposes, whether or not such Note shall be overdue, and the Company shall not be affected by any notice to the contrary. All references in this Agreement to a "holder" of any VR Note shall mean the Person in whose name such VR Note is at the time registered on such register. -11- 11.2 Transfer and Exchange of Notes. Upon surrender of any Note for registration of transfer or for exchange to the Company at the office of its legal department, the Company at its expense will execute and deliver in exchange therefor a new Note or Notes of the same class in denominations of at least $1,000,000 (except one Note may be issued in a lesser principal amount if the unpaid principal amount of the surrendered Note is not evenly divisible by, or is less than, $1,000,000), as requested by the holder or transferee, which aggregate the unpaid principal amount of such surrendered Note. Each such new Note shall be dated so that there will be no loss of interest on such surrendered Note and otherwise of like tenor, and shall be registered in the name or names of such Person or Persons as such holder or transferee may request. Any Note in lieu of which any such new Note has been so executed and delivered shall not be deemed to be an outstanding Note for any purpose of this Agreement. 11.3 Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction of any Note, upon delivery of an indemnity bond in such reasonable amount as the Company may determine (or, in the case of any Note held by you or another institutional holder or you or its nominee, of an indemnity agreement from you or such other holder reasonably satisfactory to the Company), or, in the case of any such mutilation, upon the surrender of such Note for cancellation to the Company at its principal office, the Company at its expense will execute and deliver, in lieu thereof, a new Note of the same class of like tenor, dated so that there will be no loss of interest on such lost, stolen, destroyed or mutilated Note. Any Note in lieu of which any such new Note of the same class has been so executed and delivered by the Company shall not be deemed to be an outstanding Note for any purpose of this Agreement. 12. Payments on Notes. 12.1 Place of Payment. Payments of principal, and interest becoming due and payable on the Notes shall be made at the principal office of the Company in Bensalem, Bucks County, Commonwealth of Pennsylvania, unless the Company, by written notice to each holder of any Notes, shall designate another address as its principal office in the Commonwealth of Pennsylvania, as such place of payment, in which case such principal office shall thereafter be such place of payment. -12- 12.2 Home Office Payment. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 12.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, and interest by the method and at the address specified for such purpose in the Note Register, or by such other method or at such other address as the holder shall have from, time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that any Note paid or prepaid in full shall be surrendered to the Company at its principal office or at the place of payment maintained by the Company pursuant to Section 12.1 for cancellation. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 11.2. 13. Events of Default: Acceleration. 13.1 Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest upon any Note on the Extension Date, and continuance of such default for a period of 10 days after notice of default has been provided by any holder of outstanding Notes; or (b) default in the payment of any installment of the principal of any Note on the Extension Date; or (c) default in the performance, or breach, of any covenant of the Company in this Agreement (other than a covenant a default in the performance of which or the breach of which is elsewhere in this Section 13.1 specifically addressed) or the Notes and continuance of such default or breach for a period of 60 days after there has been given to the Company a written notice by the holder of any of the Notes specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder and, if such default or breach is curable, such additional period of time during which the Company shall be endeavoring diligently to cure the same; or (d) if an event of default, as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Company or of any Subsidiary -13- in excess of $1,000,000, whether such Indebtedness now exists or shall hereafter be created, shall happen and shall result in such Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, unless (i) such acceleration shall have been rescinded or annulled pursuant to the terms of such instrument or (ii) such Indebtedness shall have been discharged within a period of 30 days after such acceleration; provided, however, the term "Indebtedness," as used in this Section 13.1(e), shall not include Non-Recourse Indebtedness; or (e) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Material Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or such Material Subsidiary under the Bankruptcy Law or any other applicable Federal or State law, or appointing a receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Material Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (f) the institution by the Company or any Material Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by any of the foregoing to the institution of bankruptcy or insolvency proceedings against it, or the filing by any of the foregoing of a petition or answer or consent seeking reorganization or relief under the Bankruptcy Law or any other applicable Federal or State law, or the consent by any of the foregoing to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or other similar official of any of the foregoing or of any substantial part of its property, or the making by any of the foregoing of an assignment for the benefit of creditors, or the admission by any of the foregoing in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by any of the foregoing in furtherance of any such action. 13.2 Remedies Upon Default. Upon the occurrence of any Event of Default described in subdivisions (e) and (f) of Section 13.1 the unpaid principal amount of and accrued interest on the Notes shall automatically become due and payable. Upon the occurrence, and during the continuance, of any other Event of Default, any holder or holders (other than the Company or any of its Subsidiaries) of a majority in aggregate principal amount of any VR Notes at the time outstanding may at any time (unless all defaults shall theretofore have been remedied) at its or their option, by written notice or notices to the -14- Company, declare all the VR Notes, to be due and payable, whereupon the same shall forthwith mature and become due and payable, together with interest accrued thereon, in either case without presentment, demand, protest or notice, all of which are hereby waived provided that during the continuance of an Event of Default described in subdivision (a) or (b) of Section 13.1, then, irrespective of whether the holder or holders of a majority in aggregate principal amount of the VR Notes then outstanding shall have declared all of the VR Notes of such class to be due and payable pursuant to this Section 13.2, any holder of the Notes may, at its option, by notice in writing to the Company, declare the Notes then held by such holder to be due and payable, whereupon the Notes then held by such holder shall forthwith mature and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived. At any time after the principal of, and interest accrued on, all the Notes are declared due and payable, the holders of not less than a majority in aggregate principal amount of the Notes of such class then outstanding (excluding any Notes owned by the Company or any of its Subsidiaries), by written notice to the Company may rescind and annul any such declaration and its consequences if (x) the Company has paid all overdue interest on such Notes, the principal of any Notes which have become due otherwise than by reason of such declaration, and interest on such overdue principal and (to the extent permitted by applicable law) any overdue interest in respect of such Notes at the rate of interest provided in such Notes in respect of overdue interest, (y) all Events of Default, other than non-payment of amounts which have become due solely by reason of such declaration, and all conditions and events which constitute Events of Default have been cured or waived, pursuant to Section 18, and (z) no judgment or decree has been entered for the payment of any monies due or foreclosure pursuant to the Notes or this Agreement; but no such rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. 14. Enforcement. In case any one or more Events of Default shall occur and be continuing, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in such Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. In case of a default in the payment of any principal of, or interest on any Note, the Company will pay to the holder thereof such further amount as shall be sufficient to cover the cost and expenses of collection, including, without limitation, -15- reasonable attorneys' fees, expenses and disbursements. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. 15. Definitions. As used herein the following terms have the following respective meanings: "Agreement" means this instrument as originally executed or as it may from time to time be supplemented or amended. "Applicable Grace Date" means the tenth calendar day following each Interest Target Date and VR Principal Target Date. "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State law for the relief of debtors. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Closing" has the meaning specified in Section 3. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or any successor body perform the same or similar functions. "Common Stock" or "common stock" means, when used with reference to stock of the Company, the Common Stock of the Company presently authorized, par value $.10 per share, and any other stock into which such presently authorized stock may hereafter have been changed. "Company" means the Person named as the "Company" in the first paragraph of this Agreement and its assigns until a successor corporation shall have become such pursuant to the applicable provisions of this Agreement, and thereafter "Company" shall mean such successor corporation. -16- "Cash Consideration" has the meaning specified in Section 2. "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. "Event of Default" has the meaning specified in Section 13.1. "Extension Date" means the one hundred, eightieth (180th) day following each Interest Target Date and VR Principal Target Date. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exhibit" has the meaning specified in Section 1. "Holder" or "holder' means a Person in whose name a Note is registered. "Indebtedness" means all indebtedness of the Company, a corporate Subsidiary or, to the extent set forth below, a partnership or joint venture whether outstanding on the date of the Agreement or thereafter created or incurred (a) for money borrowed, whether evidenced by bonds, notes or other written obligations or debentures or evidenced by a loan agreement or an indenture or similar agreement; (b) for money borrowed by others and assumed or guaranteed, directly or indirectly, by the Company, a corporate Subsidiary or a partnership or joint venture; (c) for deferrals, renewals, extensions or refundings of, and amendments to, any such Indebtedness; and (d) for purchase money obligations and obligations to public authorities as a result of their involvement in mortgage financing. Indebtedness of a partnership or joint venture shall be included, without duplication, for this purpose only to the extent of the Pro Rata Interest of the Company or a Subsidiary (other than such partnership or joint venture) therein. "Interest Target Date" means the last day of each calendar quarter, commencing on the first such date following the issuance of the VR Note. "Material Subsidiary" has the meaning specified in the definition of Subsidiary. "Maturity" when used with respect to any Note means the date on which all or a portion of the principal amount of such Note becomes due -17- and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Non-Recourse Indebtedness" means Indebtedness secured by a lien on property to the extent that the liability for such Indebtedness is limited to the security of the property without liability of the Company or any Subsidiary for any deficiency. "Note Consideration" has the meaning specified in Section 2. "Notes" has the meaning specified in Section 1. "Note Register" has the meaning specified in Section 11.1. "Notice of Default" has the meaning specified in Section 13.1(d). "Officer's Certificate" means a certificate signed by the Chairman of the Board, the President or any Vice President, and by the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company. "Opinion of Counsel" means a written opinion of counsel, who may (except as otherwise expressly provided in this Agreement) be counsel for the Company or who may be other counsel acceptable to (i) in the case of Section 10.7, the holders of a majority in principal amount of Notes then outstanding, and (ii) in the case of Section 6.1, the Company. "Outstanding" or "outstanding" when used with respect to Notes means, as of the date of determination, all Notes theretofore delivered under this Agreement, except: (i) Notes theretofore cancelled by the Company or delivered to the Company for cancellation; (ii) Notes or portions thereof for the payment or redemption of which money in the necessary amount has been theretofore segregated in trust by the Company for the Holders of such Notes; provided that, if such Notes or portions thereof are to be prepaid, notice of such prepayment has been duly given pursuant to this Agreement; and (iii) Notes in exchange for or in lieu of which other Notes have been issued and delivered pursuant to this Agreement; -18- provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Notes owned by the Company or any Subsidiary shall be disregarded and deemed not to be Outstanding. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any subsidiary. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plans" has the meaning specified in Section 5.12. "Preferred Stock" or "preferred stock" as applied to any corporation, means shares of such corporation which shall be entitled to preference or priority over any other shares of such corporation in respect of either the payment of dividends or the distribution of assets upon liquidation. "Registered Form" has the meaning specified in Section 11.1. "Securities Act" has the meaning specified in Section 6.2. "Stated Maturity" when used with respect to any Note or any installment of interest thereon means the date specified in such Note as the fixed date on which all or a portion of the principal amount of such Note or such installment of interest is payable. "Subsidiary" means (i) any corporation of which at least a majority in interest of the outstanding stock having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, is at the time, directly or indirectly, owned or controlled by the Company, or by one or more other corporations a majority in interest of such stock of which is similarly owned or controlled, or by the Company and one or more other corporations a majority in interest of such stock of which is similarly owned or controlled, and (ii) any Person (other than a corporation) in which the Company or any Subsidiary, directly or indirectly, has an interest entitling the Company or any Subsidiary to receive at least 50% of such person's income or an interest in at least 50% of such person's capital, or both. "Material Subsidiary," as of the date of determination thereof, -19- means any Subsidiary having total assets on such date in excess of $15,000,000; provided, however, that Material Subsidiary shall include a Subsidiary if the Company or any Material Subsidiary guarantees, assumes or otherwise is or becomes liable for Indebtedness of such Subsidiary in excess of $15,000,000. "VR Principal Target Date" means the last day of each calendar quarter, commencing December 31, 1996. "VR Note" has the meaning specified in Section 1. 16. Expenses, etc. The Company will pay all its expenses in connection with the consummation of the transactions under the Agreement and in connection with any amendments or waivers (whether or not the same become effective) under or in respect of this Agreement or the Notes, including, without limitation: (a) the cost and expenses of preparing and reproducing this Agreement, the Notes, of furnishing all opinions by counsel for the Company and all certificates on behalf of the Company, and of the Company's performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with; (b) the cost of delivering to your principal office, insured to your reasonable satisfaction, the Notes hereunder and any Notes delivered to you upon any substitution of Notes and of your delivering any Notes, insured to your reasonable satisfaction, upon any such substitution; and (c) the reasonable out-of-pocket expenses incurred by you, exclusive of counsel fees, in connection with such transactions and any such amendments or waivers. The Company also will pay, and will save you and each holder of any Notes harmless from, all claims in respect of the fees, if any, of brokers and finders and any and all liabilities with respect to any taxes (including interest and penalties) (other than your taxes on income, personal property or revenues) which may be payable in respect of the execution and delivery of this Agreement, the issue of the Notes and any amendment or waiver under or in respect of this Agreement or the Notes. 17. Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Company or you in connection with the transactions contemplated by this Agreement shall survive the execution and delivery of this Agreement, any investigation at any time made by the Company or you or on its or your behalf, the acquisition of the Notes by you under this Agreement and any disposition or payment of the Notes. All statements contained in any certificate or -20- other instrument delivered by or on behalf of the Company pursuant to this Agreement or in connection with the transactions contemplated by this Agreement shall be deemed representations and warranties of the Company under this Agreement. 18. Amendments and Waivers. Any term of this Agreement or of the Notes may be amended and the observance of any term of this Agreement or of the Notes may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of at least a majority in principal amount of the Notes at the time outstanding (excluding any Notes directly or indirectly owned by the Company or any of its Subsidiaries), provided, however, that, without the prior written consent of the holders of all of the Notes at the time outstanding (excluding any Notes owned by the Company or any of its Subsidiaries), no such amendment or waiver shall (a) change the fixed maturity or the principal amount of, or reduce the rate or extend payment of interest on, or change the amount or the time of payment of any principal payable on any prepayment of, any Note, (b) reduce the aforesaid percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, (c) increase the percentage of the principal amount of the Notes the holders of which may declare the Notes to be due and payable as provided in Section 13, (d) decrease the percentage of the principal amount of the Notes the holders of which may rescind and annul any such declaration as provided in Section 13.2, or (e) amend the terms and conditions of this Section 18 or Section 10.6 hereof. Any amendment or waiver effected in accordance with this Section 18 shall be binding upon each holder of any Note at the time outstanding, each future holder of any Note and the Company. 19. Notices, etc. Except as otherwise provided in this Agreement, notices and other communications under this Agreement shall be in writing and shall be mailed by registered or certified mail, return receipt requested, or delivered by nationally recognized overnight air carrier that requires a receipt against delivery or facsimile transmission addressed, (a) if to you, at the address set forth in the Note Register or at such other address as you shall have furnished to the Company in -21- writing, except as otherwise provided in Section 12.2 with respect to payments on Notes held by you or your nominee, or (b) if to any other holder of any Note, at such address as such other holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Note who has furnished an address to the Company as set forth in the Note Register, or (c) if to the Company, at its address set forth at the beginning of this Agreement, to the attention of its President or Treasurer, or with respect to matters arising under Section 12, at its address set forth at the beginning of this Agreement, to the attention of its General Counsel, or at such other address, or to the attention of such other officer, as the Company shall have furnished to you and each such other holder in writing. Any notice so addressed and sent by such registered or certified mail, overnight air carrier or facsimile transmission shall be deemed to be given when so sent. 20. Effectiveness. This Agreement shall become a binding agreement between you and the Company upon the execution and delivery hereof by you and the Company. 21. Miscellaneous. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, personal representatives, successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by any holder or holders at the time of the Notes or any part thereof. This Agreement and the Notes collectively embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. This Agreement and the Notes shall be construed and enforced in accordance with and governed by the law of the Commonwealth of Pennsylvania. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterparts of this letter and return one of the -22- same to the Company, whereupon this letter shall become a binding agreement between you and the Company as provided in Section 20. Very truly yours, FPA CORPORATION ----------------------------------------- By: Benjamin D. Goldman, President The foregoing Agreement is hereby agreed to as of the date hereof. - -------------------------------- Jeffrey P. Orleans -23- THIS NOTE HAS BEEN ISSUED PURSUANT TO A NOTE PURCHASE AGREEMENT DATED AS OF AUGUST 1, 1996 (THE "AGREEMENT"), BETWEEN FPA CORPORATION AND THE ORIGINAL PURCHASER OF THE NOTE CONTAINING SUBSTANTIAL RESTRICTIONS ON TRANSFER AND ASSIGNMENT. IT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND CANNOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. FPA CORPORATION Variable Rate Note Due September 30, 2000 Bensalem, Pennsylvania $2,000,000.00 , 1996 FOR VALUE RECEIVED, and intending to be legally bound hereby, FPA CORPORATION, a Delaware corporation (hereinafter referred to as the "Company") hereby promises to pay in lawful money of the United States to the order of JEFFREY P. ORLEANS (hereinafter referred to as "Holder"), the principal sum of TWO MILLION DOLLARS ($2,000,000), together with interest on the daily outstanding principal balance from time to time at a variable rate equal to two percent (2%) in excess of the "prime rate" as announced from time to time by CoreStates Bank, N.A. (the "Bank"). Each change in the interest rate applicable to this Note will take place on the same date as the change in the Bank's announced prime rate of interest becomes effective. Interest shall be computed on the basis of a 365/366 day year and the actual number of days elapsed. Accrued interest shall be payable not later than each Extension Date with respect to each Interest Target Date during the term of this Note until the obligation of the Company with respect to payment hereunder shall be discharged. To the extent not prohibited by law, if interest in respect of any Interest Target Date shall remain unpaid on the Applicable Grace Date, then interest shall thereafter accrue on such unpaid interest from the Applicable Grace Date until such interest is paid at a rate equal to three and one-half percent (3.5%) in excess of the "prime rate" announced from time to time by the Bank. Principal shall be payable in equal quarterly installments of $125,000 each not later than each Extension Date with respect to each VR Principal Target Date, commencing December 31, 1996. The entire unpaid principal balance, plus all accrued and unpaid interest and other sums payable hereunder, shall be due and payable not later than the Extension Date with respect to the VR Principal Target Date of September 15, 2000. To the extent not prohibited by law, if any principal payment due on any VR Principal Target Date shall remain unpaid on the Applicable Grace Date, then interest shall thereafter accrue on such unpaid principal payment until paid at a rate equal to three and one-half percent (3.5%) in excess of the "prime rate" announced from time to time by the Bank. Payments of principal and interest shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debt by check mailed and addressed to the registered holder hereof at the address shown in the registrar maintained by the Company for such purpose, or, at the option of the holder hereof, in such manner and at such other place in the United States of America the holder hereof shall have designated to the Company in writing pursuant to the provisions of Section 19 of the Agreement (as hereinafter defined). Unless this Note has been executed by officers of the Company thereunto duly authorized by manual signature, this Note shall not be entitled to any benefit under the Agreement, or to be valid or obligatory for any purpose. This Note is the VR Note issued by the Company under that certain Note Purchase Agreement (the "Agreement"), dated as of August 1, 1996, between the Company and the original purchaser hereof. Reference is hereby made to the Agreement for a statement of the respective Events of Default, rights, limitations of rights, obligations, duties and immunities thereunder of the Company and the Holders of this Note. All terms used in this Note which are defined in the Agreement shall have the meanings assigned to them in the Agreement. This Note is subject to prepayment at the option of the Company at any time on the terms and conditions and in the amounts as set forth in the Agreement. In the event of prepayment of this Note in part only, a new Note or Notes for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the cancellation hereof. The Agreement permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the holders of the VR Notes under the Agreement at any time by the Company with the consent of the holders of a majority in aggregate principal amount of the VR Notes at the time outstanding. The Agreement also contains provisions permitting the holders of specified percentages in aggregate principal amount of the VR Notes at the time outstanding, on behalf of the holders of all -2- the VR Notes, to waive compliance by the Company with certain provisions of the Agreement and certain past defaults under the Agreement and their consequences. Any such consent or waiver by the holder of this Note shall be conclusive and binding upon such holder and upon all future holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Agreement and no provision of this Note or of the Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal and interest on this Note at the times, place and rate, and in the coin or currency, herein prescribed. Prior to due presentment for registration of transfer, the Company, and any agent of the Company, may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the Company has caused this Note to be duly executed under its corporate seal by the manual signatures, of its officers thereunto duly authorized all on the date first written above. FPA CORPORATION By:_____________________________________________ President Attest: - --------------------- Secretary (SEAL) -3- EX-4 3 EXHIBIT 4.9 Exhibit 4.9 ______________________________________________ FPA CORPORATION __________________________ $3,000,000 Convertible Subordinated 7% Note due January 1, 2002 __________________________ NOTE PURCHASE AGREEMENT __________________________ Dated as of August 1, 1996 ______________________________________________ TABLE OF CONTENTS Page 1. Authorization of Note........................................... 1 2. Issuance of Notes............................................... 2 3. Closing......................................................... 2 4. Conditions to Closing........................................... 2 4.1 Representations and Warranties......................... 2 4.2 Performance; No Default................................ 2 4.3 Compliance Certificate................................. 2 4.4 Proceedings and Documents.............................. 3 4.5 Subordination Agreement................................ 3 4.6 Registration Rights Agreement.......................... 3 5. Representations and Warranties, etc............................. 3 5.1 Organization, Qualification Standing, etc.............. 3 5.2 Authorization, Execution and Delivery.................. 4 5.3 Tax Returns and Payments............................... 4 5.4 Litigation, etc........................................ 4 5.5 Compliance with Other Instruments, etc................. 5 5.6 Governmental Consent................................... 5 5.7 Offer of Notes......................................... 5 5.8 Federal Reserve Regulations............................ 5 5.9 Investment Company Act................................. 6 5.10 Public Utility Holding Company Act..................... 6 5.11 Authorization of Sale.................................. 6 5.12 ERISA.................................................. 6 6. Representations and Warranties of Purchaser..................... 6 6.1 Investment Representations............................. 6 6.2 No Contrary Knowledge.................................. 7 7. Accounting, Financial Statements and Other Information.......... 7 8. Inspection...................................................... 8 9. Payment and Prepayment of Notes................................. 9 9.1 Optional and Required Prepayments...................... 9 9.2 Maturity; Surrender, etc............................... 9 10. Business and Financial Covenants................................ 9 10.1 Payment of Principal and Interest...................... 9 10.2 Maintenance of Office or Agency........................ 9 10.3 Corporate Existence.................................... 9 10.4 Payment of Taxes and Other Claims...................... 10 10.5 Maintenance of Properties; Insurance................... 10 10.6 Waiver of Covenants.................................... 11 -i- Page 10.7 Company May Consolidate, etc., Only on Certain Terms.... 11 10.8 Effect of Consolidation, etc............................ 12 11. Registration, Transfer and Substitution of Notes................. 12 11.1 Note Register; Ownership of Registered Notes............ 12 11.2 Transfer and Exchange of Notes.......................... 12 11.3 Replacement of Notes.................................... 12 12. Payments on Notes................................................ 13 12.1 Place of Payment........................................ 13 12.2 Home Office Payment..................................... 13 13. Events of Default: Acceleration.................................. 13 13.1 Events of Default....................................... 13 13.2 Remedies Upon Default................................... 15 14. Enforcement...................................................... 16 15. Definitions...................................................... 16 16. Expenses, etc.................................................... 21 17. Survival of Representations and Warranties....................... 21 18. Amendments and Waivers........................................... 21 19. Notices, etc..................................................... 22 20. Concerning Conversion of the CS Notes............................ 23 20.1 Conversion Privilege.................................... 23 20.2 Manner of Exercise of Conversion Privilege.............. 23 20.3 Cash Adjustment Upon Conversion......................... 24 20.4 Adjustment of Conversion Price.......................... 24 20.5 Effect of Reclassification, Consolidations, Mergers or Sales on Conversion Privilege................ 27 20.6 Taxes on Conversions.................................... 28 20.7 Company to Reserve Capital Stock........................ 29 20.8 Company to Give Notice of Certain Events................ 29 20.9 Effectiveness of Section 20............................. 30 21. Effectiveness.................................................... 30 22. Miscellaneous.................................................... 30 -ii- Exhibits I. Form of $3,000,000 Convertible Subordinated 7% Note due January 1, 2002 II. Form of Supplemental Subordination Agreement between Jeffrey P. Orleans and CoreStates Bank, N.A., acknowledged and consented to by FPA Corporation III. Form of Piggyback Registration Rights Agreement between FPA Corporation and Jeffrey P. Orleans IV. Form of Conversion Notice -iii- FPA CORPORATION One Greenwood Square 3333 West Street Road Suite 101 Bensalem, PA 19020 _____________________________________ Note Purchase Agreement _____________________________________ $3,000,000 Convertible Subordinated 7% Note due January 1, 2002 As of August 1, 1996 Jeffrey P. Orleans Chairman and Chief Executive Officer FPA Corporation One Greenwood Square 3333 West Street Road Suite 101 Bensalem, PA 19020 Dear Sir: FPA Corporation, a Delaware corporation (the "Company"), agrees with you as follows: 1. Authorization of Note. The Company will authorize the issue and delivery of its $3,000,000 Convertible Subordinated 7% Note, due January 1, 2002 (the "CS Note", the "Note" or the "Notes"), such term to include any such Notes issued in substitution therefor pursuant to Section 11 hereof). The CS Note shall be substantially in the form of Exhibit I hereto, with such changes therein, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Section 15. References to an "Exhibit" are, unless otherwise specified, to one of the Exhibits attached to this Agreement. 2. Issuance of Notes. In exchange for the delivery by you for cancellation of a note or notes of the Company in the aggregate principal amount of $3,000,000 (the "Note Consideration"), the Company will issue and deliver to you and, subject to the terms and conditions of this Agreement, you will acquire from the Company, the CS Note. 3. Closing. The delivery and issue of CS Note by the Company to you shall take place at the offices of the Company, at the address noted above, at 10:00 a.m., local time, August 19, 1996 or on such other business day as may be agreed upon by the Company and you, but in no event later than August 31, 1996 (the "Closing"). Subject to and upon the terms and conditions set forth herein, at the Closing the Company will deliver to you the CS Note, dated the date of such Closing and registered in your name, against delivery by you to the Company of the Note Consideration in the amount specified in Section 2 hereof. If, at the Closing, the Company shall fail to tender the CS Note to you as provided above in this Section 3, or any of the conditions to be performed by the Company specified in Section 4 shall not have been fulfilled to your reasonable satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. Conditions to Closing. (A) Your obligation to deliver the Note Consideration for the CS Note to be issued and delivered to you at the Closing, and to complete the Closing, is subject to the fulfillment to your reasonable satisfaction, prior to or at such Closing, of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be correct in all material respects when made and at the time of such Closing. 4.2 Performance; No Default. The Company shall have performed and complied in all material respects with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at such Closing and at the time of such Closing no Event of Default shall have occurred and be continuing. 4.3 Compliance Certificate. The Company shall have delivered to you or your Counsel an Officers' Certificate, dated the date of such Closing, certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. -2- 4.4 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be reasonably satisfactory to you, and you shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 4.5 Subordination Agreement. The parties thereto shall have executed and delivered the Supplemental Subordination Agreement. 4.6 Registration Rights Agreement. The parties thereto shall have executed and delivered the Registration Rights Agreement. (B) The Company's obligation to deliver the CS Note at the Closing and to complete the Closing is subject to your performance and compliance in all material respects with the agreements and conditions contained in this Agreement required to be performed by you prior to or at such Closing and is also subject to the condition set forth in Section 4.5 hereof. 5. Representations and Warranties, etc. The Company represents and warrants that: 5.1 Organization, Qualification Standing, etc. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and the Company has all requisite corporate power and authority to enter into this Agreement, to issue and deliver the CS Note in exchange for the Note Consideration, and to carry out the terms of this Agreement, the CS Note, and the Registration Rights Agreement. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction (other than the jurisdiction of its incorporation) in which the nature of its activities or the character of the properties it owns, leases or operates makes such qualification necessary and in which the failure so to qualify would have a materially adverse effect on the business of the Company and its Subsidiaries taken as a whole. The current capitalization of the Company is as follows: PreferredStock, par value $1.00 per share; 500,000 shares authorized; 100,000 shares of Series C Preferred Stock authorized. Common Stock, par value $.10 per share; 20,000,000 shares authorized; -3- 12,698,131 shares issued; 11,695,618 shares outstanding and 1,002,513 held as treasury stock. 5.2 Authorization, Execution and Delivery. The execution and delivery of this Agreement, the CS Note, and the Registration Rights Agreement by the Company has been duly authorized by all necessary corporate action on behalf of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement, the CS Note, and the transactions contemplated hereby and thereby and this Agreement is (and, upon issuance, each of the CS Note will be) enforceable against the Company in accordance with its terms except as limited by bankruptcy, insolvency, reorganization and similar laws affecting creditors generally and by equitable principles of general applicability. The shares of the Company's Common Stock issuable upon conversion of the CS Note (the "Conversion Shares") have been duly authorized and reserved for issuance and, upon issuance by the Company in accordance with the provisions of the CS Note, will have been validly issued, fully paid, and non-assessable shares of Common Stock of the Company. 5.3 Tax Returns and Payments. The Company and each of its Subsidiaries have filed all tax returns required by law to be filed by them and have paid all taxes, assessments and other governmental charges levied upon them and any of their respective properties, assets, income or franchises which are due and payable, other than those presently payable without penalty or interest. The charges, accruals and reserves on the books of the Company and set forth on the regularly-prepared balance sheets of the Company in respect of Federal and state income and business and occupation taxes for all fiscal periods are adequate in the opinion of the Company, and the Company knows, after making due inquiry and reasonable investigation, of no unpaid assessment for additional Federal or state income or business and occupation taxes for any period or any basis for any such assessment for which adequate provision has not been made in its accounts or in such balance sheet. 5.4 Litigation, etc. Except as described in the Company's 1995 Report on Form 10-K or as set forth on Schedule 5.4 hereto, there is no action, investigation or proceeding pending or threatened (or any basis therefor known to the Company) which questions the validity of this Agreement or the CS Note or any action taken or to be taken pursuant to this Agreement or the CS Note, or which might result, either in any case or in the aggregate, in any material adverse change in the business, operations, affairs, condition, properties or assets of the Company and its Subsidiaries taken as a whole or in any material liability on the part of the Company and such Subsidiaries taken as a whole. -4- 5.5 Compliance with Other Instruments, etc. Except as set forth on Schedule 5.5 hereto, (i) neither the Company nor any of its Subsidiaries is in violation of any term of its certificate or articles of incorporation or by-laws, (ii) neither the Company nor any of its Subsidiaries is in material violation of any term of any material agreement or instrument respecting indebtedness for borrowed money to which it is a party or by which it is bound, and (iii) neither the Company nor any of its Subsidiaries is in violation of any term of any applicable law, statute, ordinance, license, franchise, rule or regulation of any governmental authority or any term of any applicable order, judgment or decree of any court, arbitrator or governmental authority (including, without limitation, any law, ordinance, rule, regulation or order relating to environmental or occupational health or safety standards and controls, consumer protection or equal employment practices) applicable to the Company or any Subsidiary, the consequences of which violation described in (iii) above might have a material adverse effect on the business, operations, affairs, condition, properties or assets of the Company and its Subsidiaries taken as a whole; and the execution, delivery and performance of this Agreement, the Notes and the Registration Rights Agreement will not result in any violation of or be in conflict with or constitute a default under any term of any item referred to in this Section 5.5 or result in the creation of (or impose any obligation on the Company or any Subsidiary to create) any lien, pledge, security interest or other encumbrance upon any of the properties or assets of the Company or any Subsidiary pursuant to any such term. 5.6 Governmental Consent. No consent, approval or authorization of, or declaration or filing with, any governmental authority on the part of the Company or any Subsidiary is required for the valid execution, delivery or performance of this Agreement, the CS Note and the Registration Rights Agreement, or the continued conduct by the Company or any Subsidiary of its businesses as now conducted or as proposed to be conducted as described in the 1995 Form 10-K. 5.7 Offer of Notes. The Company has not directly or indirectly offered the CS Note or any part thereof for sale to, or solicited any offer to buy, any of the same from, or otherwise approached or negotiated in respect thereof with, anyone other than you. 5.8 Federal Reserve Regulations. Neither the Company nor any Subsidiary will, directly or indirectly, use any of the proceeds of the issuance of the CS Note for the purpose of purchasing or carrying any "margin security" within the meaning of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R. 207, as amended), or otherwise take or permit -5- to be taken any action which would result in the issuance and delivery of the CS Note or the carrying out of any of the other transactions contemplated hereby, being violative of such Regulation G or of Regulation T (12 C.F.R. 220, as amended) or of Regulation X (12 C.F.R. 224, as amended) or any other regulation of such Board. To your knowledge, no Indebtedness being reduced or retired out of the proceeds of the issuance of the CS Note was incurred for the purpose of purchasing or carrying any "margin security" within the meaning of such Regulation G, and the Company does not own and does not have any present intention of acquiring any such margin security. 5.9 Investment Company Act. Neither the Company nor any Subsidiary is an "investment company", or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.10 Public Utility Holding Company Act. Neither the Company nor any Subsidiary is a "holding company", or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 5.11 Authorization of Sale. The sale of the CS Note and compliance by the Company with all of the provisions of this Agreement and the CS Note are within the corporate powers of the Company and have been duly authorized by all requisite corporate action on the part of the Company. 5.12 ERISA. The consummation of the transactions provided for in this Agreement and compliance by the Company with the provisions hereof and of the CS Note issued hereunder will not involve any prohibited transaction within the meaning of the Employee Retirement Income Security Act of 1974 ("ERISA") or Section 4975 of the Internal Revenue Code. No "employee pension benefit plans," as defined in ERISA ("Plans"), maintained by the Company or any Person which is under common control with the Company within the meaning of Section 4001(b) of ERISA, nor any trusts created thereunder, have incurred any "accumulated funding deficiency" as defined in Section 302 of ERISA. 6. Representations and Warranties of Purchaser. You hereby represent and warrant to the Company as follows: 6.1 Investment Representations. You acknowledge that neither the CS Note nor the Conversion Shares have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and that the Notes are being issued to you and, if the CS Note is converted in whole or any part, the Conversion Shares will be issued to you, pursuant to an exemption from registration contained in the Securities Act based in part upon your representations and covenants -6- contained in this section. You are acquiring the CS Note and any Conversion Shares solely for your own account and with no intention of distributing or reselling said securities or any part thereof, or interest therein, in any transaction which would be in violation of the securities laws of the United States or any state thereof. You are an "accredited investor" (as such term is defined in Rule 501 of Regulation D under the Securities Act). You acknowledge and agree that (i) the CS Note and the Conversion Shares are subject to limitations on transferability under the Securities Act and applicable state securities laws, (ii) except or set forth in the Registration Rights Agreement, the Company has no obligation to effect registration of the CS Note or the Conversion Shares under the Securities Act or any applicable state securities laws or otherwise to comply with any requirements necessary for transfer or assignment of the CS Note or the Conversion Shares to be exempt from such registration, and (iii) no transfer of the CS Note or the Conversion Shares shall be effected unless an Opinion of Counsel acceptable to the Company shall be delivered to the Company to the effect that such contemplated transfer may be effected without registration under the Securities Act and any applicable state securities laws. 6.2 No Contrary Knowledge. You are the Chief Executive Officer of the Company and have no knowledge that any of the representations and warranties of the Company set forth in Section 5 hereof are not correct. 7. Accounting, Financial Statements and Other Information. The Company will maintain and cause its Subsidiaries to maintain, a system of accounting established and administered in accordance with generally accepted accounting principles, and will set aside on its books, and will cause each of its Subsidiaries to set aside on its books, all such proper reserves as shall be required by generally accepted accounting principles. At any time the Company is not required to file reports with the Commission pursuant to Section 13 of the Exchange Act, the Company will deliver to you, so long as you shall be the holder of the CS Note or the Conversion Shares: (a) within 60 days after the end of each of the first three quarterly fiscal periods in each fiscal year of the Company, consolidated balance sheets of the Company and its Subsidiaries as at the end of such period and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such period and (in the case of the second and third quarterly periods) for the period from the beginning of the current fiscal year to the end of such quarterly period, setting forth in each case in comparative form the consolidated figures for the corresponding periods of the previous fiscal year (except for the comparative balance sheet which is as of the end of the immediately preceding fiscal year), -7- all in reasonable detail and certified as complete by a principal financial officer of the Company; it being understood that delivery to Purchaser of a copy of the Form 10-Q for the respective fiscal period as filed with the Commission shall fulfill the obligations of the Company with respect to this subdivision (a); (b) within 120 days after the end of each fiscal year of the Company, consolidated balance sheets of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by a report thereon of Price Waterhouse or other independent certified public accountants of recognized national standing selected by the Company, so long as you or your nominee shall be the holder of any of the Notes, and to the Other Purchasers; it being understood that delivery to the Purchaser of a copy of the Company's Form 10-K as filed with the Commission respecting such fiscal year shall fulfill the obligations of the Company with respect to this subdivision (b); (c) promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Company to its public security holders, if any, of all regular and periodic reports and all registration statements and prospectuses, if any, filed by the Company or any Subsidiary with any securities exchange or with the Commission or any governmental authority succeeding to any of its functions; and (d) with reasonable promptness, such other information and data with respect to the Company or any of its Subsidiaries as from time to time may be reasonably requested. 8. Inspection. The Company will permit any authorized representatives designated by the holders of a majority in aggregate principal amount outstanding of the CS Note, without expense to the Company, to visit and inspect any of the properties of the Company or any of its Subsidiaries, including its and their books of account, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants, all at such reasonable times during regular business hours and upon reasonable notice and as often as may be reasonably requested. -8- 9. Payment and Prepayment of Notes. 9.1 Optional and Required Prepayments. The Company may, at its option, upon not less than 30 days prior written notice to you, prepay at any time all, or from time to time any part of, the CS Note, without premium, at a price equal to the principal amount to be so prepaid; provided, however, for purposes of this Section 9.1, any prepayment of less than all of the outstanding CS Notes shall be deemed to be applied first to the payment of accrued but unpaid interest and then to the payment of the installments of principal in the order in which such installments are due. 9.2 Maturity; Surrender, etc. In the case of each prepayment, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 10. Business and Financial Covenants. The Company covenants that from the date of this Agreement through the Closing and thereafter so long as any of the Notes are outstanding: 10.1 Payment of Principal and Interest. The Company will duly and punctually pay the principal of and interest on the CS Note in accordance with the terms of the CS Note and this Agreement. Interest on the CS Note may be paid by mailing checks for such interest payable to or upon the written order of the Person entitled thereto, at the address of such Person as it appears on the Note Register. 10.2 Maintenance of Office or Agency. The Company will maintain in the Commonwealth of Pennsylvania, an office or agency where CS Notes may be presented or surrendered for payment, where CS Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Agreement may be served. The Company will give prompt written notice to each holder of any change in the location of such office or agency. The initial office maintained by the Company for such purpose shall be the executive offices of the Company set forth on page 1 hereof. 10.3 Corporate Existence. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and that of each Material Subsidiary and the rights (charter and -9- statutory) and franchises of the Company and its Material Subsidiaries; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine, before or following the termination thereof, that the preservation thereof is no longer desirable in the conduct of the business of the Company or any Material Subsidiary or that the loss thereof is not disadvantageous in any material respect to the holders of the Notes. 10.4 Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Material Subsidiary or upon the income, profits or property of the Company or any Material Subsidiary, and (2) all lawful claims or indebtedness for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Material Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and the Company shall have set aside on its books adequate reserves, if appropriate, with respect thereto (segregated to the extent required by generally accepted accounting principles), and failure to pay is not prejudicial in any material respect to the holders of the CS Notes. 10.5 Maintenance of Properties; Insurance. The Company will cause all properties used or useful in the conduct of its business or the business of the Company or any Material Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 10.5 shall prevent the Company from discontinuing the operation or maintenance of any of such properties, or disposing of any of them. The Company will insure and keep insured, and will cause each Material Subsidiary to insure and keep insured, with reputable insurance companies, so much of their respective properties, to such an extent and against such risks (including fire), as companies engaged in similar businesses customarily insure properties of a similar character; or, in lieu thereof, in the case of itself or of any one or more of its Material Subsidiaries, the Company will maintain or cause to be maintained a system or systems of self-insurance which will accord with the approved practices of companies -10- owning or operating properties of similar character and maintaining such systems, and, in such cases of self-insurance, will maintain or cause to be maintained an insurance reserve or reserves in adequate amounts. 10.6 Waiver of Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 10.2 through and including Section 10.7 hereof with respect to the CS Notes, if before or after the time for such compliance, the holders of a majority in aggregate principal amount of the CS Notes outstanding, as the case may be, shall either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of such covenant or condition shall remain in full force and effect. 10.7 Company May Consolidate, etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (1) either the Company shall be the continuing corporation, or the corporation (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, the due and punctual payment of the principal of and interest on all the Notes and the performance of every covenant of this Agreement and the Notes on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Event of Default which has not been waived shall have occurred and be continuing; and (3) the Company has delivered to the holder an Officers' Certificate and an Opinion of Counsel, each stating (the Opinion of Counsel to rely on the Officer's Certificate for factual matters) that such consolidation, merger, conveyance or transfer and such supplemental agreement comply with this Section 10.7 and that all conditions precedent herein provided for relating to such transaction have been complied with. -11- 10.8 Effect of Consolidation, etc. Upon any consolidation or merger or any conveyance or transfer of the properties and assets of the Company substantially as an entirety in accordance with Section 10.7, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement with the same effect as if such successor corporation had been named as the Company herein, and thereafter the predecessor corporation shall be relieved of all obligations and covenants under the Agreement and the CS Notes and in the event of such conveyance or transfer any such predecessor corporation may be dissolved and liquidated. 11. Registration, Transfer and Substitution of Notes. 11.1 Note Register; Ownership of Registered Notes. The Company will keep at the office of its legal department a register (the "Note Register") in which the Company will provide for the registration of CS Notes and the registration of transfers of CS Notes. The Company may treat the Person in whose name any CS Note is registered on such Note Register as the owner thereof for the purpose of receiving payment of the principal of and interest on such Note and for all other purposes, whether or not such Note shall be overdue, and the Company shall not be affected by any notice to the contrary. All references in this Agreement to a "holder" of any CS Note shall mean the Person in whose name such CS Note is at the time registered on such register. 11.2 Transfer and Exchange of Notes. Upon surrender of any Note for registration of transfer or for exchange to the Company at the office of its legal department, the Company at its expense will execute and deliver in exchange therefor a new Note or Notes of the same class in denominations of at least $1,000,000 (except one Note may be issued in a lesser principal amount if the unpaid principal amount of the surrendered Note is not evenly divisible by, or is less than, $1,000,000), as requested by the holder or transferee, which aggregate the unpaid principal amount of such surrendered Note. Each such new Note shall be dated so that there will be no loss of interest on such surrendered Note and otherwise of like tenor, and shall be registered in the name or names of such Person or Persons as such holder or transferee may request. Any Note in lieu of which any such new Note has been so executed and delivered shall not be deemed to be an outstanding Note for any purpose of this Agreement. 11.3 Replacement of Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Note and, in the case of any such loss, theft or destruction of any Note, upon delivery of an -12- indemnity bond in such reasonable amount as the Company may determine (or, in the case of any Note held by you or another institutional holder or you or its nominee, of an indemnity agreement from you or such other holder reasonably satisfactory to the Company), or, in the case of any such mutilation, upon the surrender of such Note for cancellation to the Company at its principal office, the Company at its expense will execute and deliver, in lieu thereof, a new Note of the same class of like tenor, dated so that there will be no loss of interest on such lost, stolen, destroyed or mutilated Note. Any Note in lieu of which any such new Note of the same class has been so executed and delivered by the Company shall not be deemed to be an outstanding Note for any purpose of this Agreement. 12. Payments on Notes. 12.1 Place of Payment. Payments of principal, and interest becoming due and payable on the Notes shall be made at the principal office of the Company in Bensalem, Bucks County, Commonwealth of Pennsylvania, unless the Company, by written notice to each holder of any Notes, shall designate another address as its principal office in the Commonwealth of Pennsylvania, as such place of payment, in which case such principal office shall thereafter be such place of payment. 12.2 Home Office Payment. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 12.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, and interest by the method and at the address specified for such purpose in the Note Register, or by such other method or at such other address as the holder shall have from, time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that any Note paid or prepaid in full shall be surrendered to the Company at its principal office or at the place of payment maintained by the Company pursuant to Section 12.1 for cancellation. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 11.2. 13. Events of Default: Acceleration. 13.1 Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): -13- (a) default in the payment of any interest upon any Note on the Extension Date, and continuance of such default for a period of 10 days after notice of default has been provided by any holder of outstanding Notes; or (b) default in the payment of any installment of the principal of any Note on the Extension Date; or (c) default in the performance, or breach, of any covenant of the Company in this Agreement (other than a covenant a default in the performance of which or the breach of which is elsewhere in this Section 13.1 specifically addressed) or the Notes and continuance of such default or breach for a period of 60 days after there has been given to the Company a written notice by the holder of any of the Notes specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder and, if such default or breach is curable, such additional period of time during which the Company shall be endeavoring diligently to cure the same; or (d) if an event of default, as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Company or of any Subsidiary in excess of $1,000,000, whether such Indebtedness now exists or shall hereafter be created, shall happen and shall result in such Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, unless (i) such acceleration shall have been rescinded or annulled pursuant to the terms of such instrument or (ii) such Indebtedness shall have been discharged within a period of 30 days after such acceleration; provided, however, the term "Indebtedness," as used in this Section 13.1(e), shall not include Non-Recourse Indebtedness; or (e) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Material Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or such Material Subsidiary under the Bankruptcy Law or any other applicable Federal or State law, or appointing a receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or any Material Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or -14- (f) the institution by the Company or any Material Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by any of the foregoing to the institution of bankruptcy or insolvency proceedings against it, or the filing by any of the foregoing of a petition or answer or consent seeking reorganization or relief under the Bankruptcy Law or any other applicable Federal or State law, or the consent by any of the foregoing to the filing of such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or other similar official of any of the foregoing or of any substantial part of its property, or the making by any of the foregoing of an assignment for the benefit of creditors, or the admission by any of the foregoing in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by any of the foregoing in furtherance of any such action. 13.2 Remedies Upon Default. Upon the occurrence of any Event of Default described in subdivisions (e) and (f) of Section 13.1 the unpaid principal amount of and accrued interest on the Notes shall automatically become due and payable. Upon the occurrence, and during the continuance, of any other Event of Default, any holder or holders (other than the Company or any of its Subsidiaries) of a majority in aggregate principal amount of any CS Notes at the time outstanding may at any time (unless all defaults shall theretofore have been remedied) at its or their option, by written notice or notices to the Company, declare all the CS Notes to be due and payable, whereupon the same shall forthwith mature and become due and payable, together with interest accrued thereon, in either case without presentment, demand, protest or notice, all of which are hereby waived provided that during the continuance of an Event of Default described in subdivision (a) or (b) of Section 13.1, then, irrespective of whether the holder or holders of a majority in aggregate principal amount of the CS Notes then outstanding shall have declared all the CS Notes to be due and payable pursuant to this Section 13.2, any holder of the Notes may, at its option, by notice in writing to the Company, declare the Notes then held by such holder to be due and payable, whereupon the Notes then held by such holder shall forthwith mature and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived. At any time after the principal of, and interest accrued on, all the Notes are declared due and payable, the holders of not less than a majority in aggregate principal amount of the Notes then outstanding (excluding any Notes owned by the Company or any of its Subsidiaries), by written notice to the Company may rescind and annul any such declaration and its consequences if (x) the Company has paid all overdue interest on such Notes, the principal of any Notes which have become due otherwise than by reason of such declaration, and interest on such overdue principal and (to the extent permitted by -15- applicable law) any overdue interest in respect of such Notes at the rate of interest provided in such Notes in respect of overdue interest, (y) all Events of Default, other than non-payment of amounts which have become due solely by reason of such declaration, and all conditions and events which constitute Events of Default have been cured or waived, pursuant to Section 18, and (z) no judgment or decree has been entered for the payment of any monies due or foreclosure pursuant to the Notes or this Agreement; but no such rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right consequent thereon. 14. Enforcement. In case any one or more Events of Default shall occur and be continuing, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in such Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. In case of a default in the payment of any principal of, or interest on any Note, the Company will pay to the holder thereof such further amount as shall be sufficient to cover the cost and expenses of collection, including, without limitation, reasonable attorneys' fees, expenses and disbursements. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. 15. Definitions. As used herein the following terms have the following respective meanings: "Agreement" means this instrument as originally executed or as it may from time to time be supplemented or amended. "Applicable Grace Date" means the tenth calendar day following each Interest Target Date and CS Principal Target Date. "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or State law for the relief of debtors. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. -16- "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Closing" has the meaning specified in Section 3. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or any successor body perform the same or similar functions. "Common Stock" or "common stock" means, when used with reference to stock of the Company, the Common Stock of the Company presently authorized, par value $.10 per share, and any other stock into which such presently authorized stock may hereafter have been changed. "Company" means the Person named as the "Company" in the first paragraph of this Agreement and its assigns until a successor corporation shall have become such pursuant to the applicable provisions of this Agreement, and thereafter "Company" shall mean such successor corporation. "Conversion Price" means, initially, $1.50 per share, subject to adjustment from time to time as and to the extent set forth in Section 20 hereof. "Conversion Shares" have the meaning specified in Section 5.2. "CS Principal Target Date" means the first day of each calendar year, commencing January 1, 2000. "CS Note" has the meaning specified in Section 1. "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. "Date of Conversion" means the date on which any CS Note shall be surrendered for conversion and notice given as set forth in Section 20 hereof. "Event of Default" has the meaning specified in Section 13.1. -17- "Extension Date" means the one hundred, eightieth (180th) day following each Interest Target Date and CS Principal Target Date. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exhibit" has the meaning specified in Section 1. "Holder" or "holder' means a Person in whose name a Note is registered. "Indebtedness" means all indebtedness of the Company, a corporate Subsidiary or, to the extent set forth below, a partnership or joint venture whether outstanding on the date of the Agreement or thereafter created or incurred (a) for money borrowed, whether evidenced by bonds, notes or other written obligations or debentures or evidenced by a loan agreement or an indenture or similar agreement; (b) for money borrowed by others and assumed or guaranteed, directly or indirectly, by the Company, a corporate Subsidiary or a partnership or joint venture; (c) for deferrals, renewals, extensions or refundings of, and amendments to, any such Indebtedness; and (d) for purchase money obligations and obligations to public authorities as a result of their involvement in mortgage financing. Indebtedness of a partnership or joint venture shall be included, without duplication, for this purpose only to the extent of the Pro Rata Interest of the Company or a Subsidiary (other than such partnership or joint venture) therein. "Interest Target Date" means the last day of each calendar quarter, commencing September 30, 1996. "Material Subsidiary" has the meaning specified in the definition of Subsidiary. "Maturity" when used with respect to any Note means the date on which all or a portion of the principal amount of such Note becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Non-Recourse Indebtedness" means Indebtedness secured by a lien on property to the extent that the liability for such Indebtedness is limited to the security of the property without liability of the Company or any Subsidiary for any deficiency. "Note Consideration" has the meaning specified in Section 2. "Notes" has the meaning specified in Section 1. -18- "Note Register" has the meaning specified in Section 11.1. "Notice of Default" has the meaning specified in Section 13.1(d). "Officer's Certificate" means a certificate signed by the Chairman of the Board, the President or any Vice President, and by the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company. "Opinion of Counsel" means a written opinion of counsel, who may (except as otherwise expressly provided in this Agreement) be counsel for the Company or who may be other counsel acceptable to (i) in the case of Section 10.7, the holders of a majority in principal amount of Notes then outstanding, and (ii) in the case of Section 6.1, the Company. "Outstanding" or "outstanding" when used with respect to Notes means, as of the date of determination, all Notes theretofore delivered under this Agreement, except: (i) Notes theretofore cancelled by the Company or delivered to the Company for cancellation; (ii) Notes or portions thereof for the payment or redemption of which money in the necessary amount has been theretofore segregated in trust by the Company for the Holders of such Notes; provided that, if such Notes or portions thereof are to be prepaid, notice of such prepayment has been duly given pursuant to this Agreement; and (iii) Notes in exchange for or in lieu of which other Notes have been issued and delivered pursuant to this Agreement; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver or taken any other action hereunder, Notes owned by the Company or any Subsidiary shall be disregarded and deemed not to be Outstanding. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any subsidiary. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. -19- "Plans" has the meaning specified in Section 5.12. "Preferred Stock" or "preferred stock" as applied to any corporation, means shares of such corporation which shall be entitled to preference or priority over any other shares of such corporation in respect of either the payment of dividends or the distribution of assets upon liquidation. "Registered Form" has the meaning specified in Section 11.1. "Registration Rights Agreement" means that certain Piggyback Registration Rights Agreement between FPA Corporation and Jeffrey P. Orleans in the form annexed hereto as Exhibit III. "Securities Act" has the meaning specified in Section 6.2. "Stated Maturity" when used with respect to any Note or any installment of interest thereon means the date specified in such Note as the fixed date on which all or a portion of the principal amount of such Note or such installment of interest is payable. "Supplemental Subordination Agreement" means that certain Supplemental Subordination Agreement between Jeffrey P. Orleans and CoreStates Bank, N.A. in form annexed hereto as Exhibit II. "Subsidiary" means (i) any corporation of which at least a majority in interest of the outstanding stock having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, is at the time, directly or indirectly, owned or controlled by the Company, or by one or more other corporations a majority in interest of such stock of which is similarly owned or controlled, or by the Company and one or more other corporations a majority in interest of such stock of which is similarly owned or controlled, and (ii) any Person (other than a corporation) in which the Company or any Subsidiary, directly or indirectly, has an interest entitling the Company or any Subsidiary to receive at least 50% of such person's income or an interest in at least 50% of such person's capital, or both. "Material Subsidiary," as of the date of determination thereof, means any Subsidiary having total assets on such date in excess of $15,000,000; provided, however, that Material Subsidiary shall include a Subsidiary if the Company or any Material Subsidiary guarantees, assumes or otherwise is or becomes liable for Indebtedness of such Subsidiary in excess of $15,000,000. -20- 16. Expenses, etc. The Company will pay all its expenses in connection with the consummation of the transactions under the Agreement and in connection with any amendments or waivers (whether or not the same become effective) under or in respect of this Agreement or the Notes, including, without limitation: (a) the cost and expenses of preparing and reproducing this Agreement, the Notes, of furnishing all opinions by counsel for the Company and all certificates on behalf of the Company, and of the Company's performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with; (b) the cost of delivering to your principal office, insured to your reasonable satisfaction, the Notes hereunder and any Notes delivered to you upon any substitution of Notes and of your delivering any Notes, insured to your reasonable satisfaction, upon any such substitution; and (c) the reasonable out-of-pocket expenses incurred by you, exclusive of counsel fees, in connection with such transactions and any such amendments or waivers. The Company also will pay, and will save you and each holder of any Notes harmless from, all claims in respect of the fees, if any, of brokers and finders and any and all liabilities with respect to any taxes (including interest and penalties) (other than your taxes on income, personal property or revenues) which may be payable in respect of the execution and delivery of this Agreement, the issue of the Notes and any amendment or waiver under or in respect of this Agreement or the Notes. 17. Survival of Representations and Warranties. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Company or you in connection with the transactions contemplated by this Agreement shall survive the execution and delivery of this Agreement, any investigation at any time made by the Company or you or on its or your behalf, the acquisition of the Notes by you under this Agreement and any disposition or payment of the Notes. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement or in connection with the transactions contemplated by this Agreement shall be deemed representations and warranties of the Company under this Agreement. 18. Amendments and Waivers. Any term of this Agreement or of the Notes may be amended and the observance of any term of this Agreement or of the Notes may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the holders of at least a majority in principal amount of the -21- Notes at the time outstanding (excluding any Notes directly or indirectly owned by the Company or any of its Subsidiaries), provided, however, that, without the prior written consent of the holders of all of the Notes at the time outstanding (excluding any Notes owned by the Company or any of its Subsidiaries), no such amendment or waiver shall (a) change the fixed maturity or the principal amount of, or reduce the rate or extend payment of interest on, or change the amount or the time of payment of any principal payable on any prepayment of, any Note, (b) reduce the aforesaid percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, (c) increase the percentage of the principal amount of the Notes the holders of which may declare the Notes to be due and payable as provided in Section 13, (d) decrease the percentage of the principal amount of the Notes the holders of which may rescind and annul any such declaration as provided in Section 13.2, or (e) amend the terms and conditions of this Section 18 or Section 10.6 hereof. Any amendment or waiver effected in accordance with this Section 18 shall be binding upon each holder of any Note at the time outstanding, each future holder of any Note and the Company. 19. Notices, etc. Except as otherwise provided in this Agreement, notices and other communications under this Agreement shall be in writing and shall be mailed by registered or certified mail, return receipt requested, or delivered by nationally recognized overnight air carrier that requires a receipt against delivery or facsimile transmission addressed, (a) if to you, at the address set forth in the Note Register or at such other address as you shall have furnished to the Company in writing, except as otherwise provided in Section 12.2 with respect to payments on Notes held by you or your nominee, or (b) if to any other holder of any Note, at such address as such other holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Note who has furnished an address to the Company as set forth in the Note Register, or -22- (c) if to the Company, at its address set forth at the beginning of this Agreement, to the attention of its President or Treasurer, or with respect to matters arising under Section 12, at its address set forth at the beginning of this Agreement, to the attention of its General Counsel, or at such other address, or to the attention of such other officer, as the Company shall have furnished to you and each such other holder in writing. Any notice so addressed and sent by such registered or certified mail, overnight air carrier or facsimile transmission shall be deemed to be given when so sent. 20. Concerning Conversion of the CS Notes. 20.1 Conversion Privilege. Subject to and upon compliance with the provisions of this Section 20, including, without limitation, the conditions on effectiveness of this Section 20 set forth in Section 20.9 hereof, at the option of the Holder, the unpaid principal amount of any CS Note or any portion of the unpaid principal amount thereof which is $1,000,000 or an integral multiple thereof, may, at any time on or before the close of business on December 31, 2001, or in case the Company shall have given notice of its intent to optionally prepay such CS Note or some portion thereof prior to such date then, with respect to such portion to be so prepaid, at any time prior to the date scheduled for prepayment, be converted at the principal amount thereof into shares of Common Stock of the Company, as said shares shall be constituted at the Date of Conversion, at the Conversion Price in effect at the Date of Conversion. 20.2 Manner of Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any CS Note to be converted shall surrender such CS Note to the Company at its office located at the address set forth on the first page hereof or at such other office or agency of the Company as may be maintained for such purpose, together with the conversion notice in the form set forth on Exhibit IV hereto (or separate written notice) duly executed, and, if so required by the Company, accompanied by instruments of transfer, in form satisfactory to the Company, duly executed by the Holder or by his duly authorized attorney in writing. No adjustment shall be made for interest accrued on any CS Note that shall be converted or for dividends on any shares of Common Stock of the Company that shall be delivered upon the conversion of such CS Note. As promptly as practicable after the surrender of any such CS Note for conversion as aforesaid, the Company shall deliver at said office or agency to such Holder, or on his written order, a certificate or certificates for the number of full shares deliverable upon the conversion of such CS Note or portion thereof and a check or cash in respect of any fraction of a share of Common Stock otherwise deliverable upon such conversion, all as provided in this Section 20, together with a CS Note in principal amount -23- equal to the unconverted portion, if any, of the CS Note so converted. Such conversion shall be deemed to have been effected on the date on which such notice shall have been received at said office or agency and such CS Note shall have been surrendered, and any required payment made, as aforesaid, and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be deliverable upon such conversion shall be deemed to have become on said date the Holder or Holders of record of the shares represented thereby; provided, however, that any such conversion on any date when the stock transfer books of the Company shall be closed shall constitute the Person or Persons in whose name or names the certificates are to be delivered as the record Holder or Holders thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date of such conversion. 20.3 Cash Adjustment Upon Conversion. The Company shall not be required to deliver fractions of shares of Common Stock upon conversion of a CS Note. If more than one CS Note shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be deliverable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the CS Notes so surrendered. If any fractional interest in a share of Common Stock of the Company would be deliverable upon the conversion of any CS Note or CS Notes, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to the amount of the principal amount tendered for conversion which could not be applied to a full share of Common Stock. 20.4 Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time as follows: (a) In case the Company shall, at any time or from time to time while any of the CS Notes are outstanding, (i) pay a dividend on its Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior thereto shall be adjusted so that the Holder of any CS Note thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other securities of the Company which he would have owned or have been entitled to receive after the effectiveness of any of the events described above, had such CS Note been converted immediately prior to the effectiveness of such event. An adjustment made pursuant to this subdivision (a) shall become effective, in the case of a dividend, on the payment date retroactively to immediately after the opening of business on the day following the -24- record date for the determination of shareholders entitled to receive such dividend, subject to the provisions of paragraph (f) of this Section 20.4, and shall become effective in the case of a subdivision or combination immediately after the opening of business on the day following the day when such subdivision or combination, as the case may be, becomes effective. (b) In case the Company shall, at any time or from time to time while any of the CS Notes are outstanding, issue rights or warrants to all holders of its shares of Common Stock entitling them (for a period expiring within 180 days of the record date mentioned below) to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share of Common Stock (as defined in paragraph (d) below) on such record date, the Conversion Price in effect immediately prior to the issuance of such rights or warrants shall be adjusted as follows: the number of shares of Common Stock into which $1,000,000 principal amount of CS Notes was theretofore convertible shall be multiplied by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to such record date plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding immediately prior to such record date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price; and the Conversion Price shall be adjusted so that the same shall equal $1,000,000 divided by the new number of shares into which $1,000,000 principal amount of CS Notes shall be convertible as aforesaid. Such adjustment shall become effective on the date of such issuance retroactively to immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such rights or warrants, subject to the provisions of paragraph (f) of this Section 20.4. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such current market price, and in determining the aggregate offering price of such shares, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be conclusively determined by the Board of Directors. For purposes of this paragraph (b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company will not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Company. -25- (c) In case the Company shall, at any time or from time to time while any of the CS Notes are outstanding, distribute to all holders of shares of its Common Stock evidences of its indebtedness or securities or assets (excluding cash dividends or cash distributions payable out of consolidated net earnings or retained earnings, or dividends payable in shares of Common Stock) or rights or warrants to subscribe for shares of Common Stock at a price per share less than the current market price per share of Common Stock (as defined in paragraph (d) below), but excluding rights or warrants referred to in paragraph (b) above, the Conversion Price in effect immediately prior to such distribution shall be adjusted by multiplying the number of shares of Common Stock into which $1,000,000 principal amount of Debentures was theretofore convertible by a fraction, of which the numerator shall be the current market price per share of Common Stock (as defined in paragraph (d) below) on the record date for such distribution, and of which the denominator shall be such current market price per share of the Common Stock, less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of such evidences of indebtedness, securities or assets or of such subscription rights or warrants so distributed applicable to one share of Common Stock; and the Conversion Price shall be adjusted so that the same shall equal $1,000,000 divided by the new number of shares into which $1,000,000 principal amount of CS Notes shall be convertible as aforesaid. Such adjustment shall become effective on the date of such distribution retroactively to immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such distribution, subject to the provisions of paragraph (f) of this Section 20.4. For the purposes of this paragraph (c) consolidated net earnings or retained earnings shall be computed by adding thereto all charges against retained earnings on account of dividends paid in shares of Common Stock in respect of which the Conversion Price has been adjusted, all as determined by the independent public accountants then regularly auditing the accounts of the Company, whose determination shall be conclusive. Reference in this Section 20.4(c) or elsewhere in Section 20.4 to $1,000,000 principal amount of Debentures shall not limit the conversion right to such amount in total, but is intended to reflect only that, except as contemplated in Section 20.1 hereof, no less than $1,000,000 in principal amount may be converted at any time. -26- (d) For the purpose of any computation under paragraphs (b) and (c) above, the current market price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices of the Common Stock on the principal exchange or in the principal market at which it is trading then for the ten consecutive trading days immediately preceding the day in question (irrespective of whether the Common Stock actually traded on such days). (e) Except as in this Agreement otherwise provided, no adjustment in the Conversion Price shall be made by reason of the issuance, in exchange for cash, property or services, of shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, or carrying the right to purchase any of the foregoing. (f) If the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive any dividend or any subscription or purchase rights or any distribution and shall, thereafter and before the distribution to shareholders of any such dividend, subscription or purchase rights or distribution, legally abandon its plan to pay or deliver such dividend, subscription or purchase fights or distribution, then no adjustment of the Conversion Price shall be required by reason of the taking of such record. (g) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however. that any adjustments which by reason of this paragraph (g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 20 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (h) Whenever the Conversion Price is adjusted as herein provided, the Company shall cause a notice stating that such adjustment has been effected and the adjusted Conversion Price to be mailed to the holders of CS Notes at their last addresses as they shall appear on the Note Register. 20.5 Effect of Reclassification, Consolidations, Mergers or Sales on Conversion Privilege. In case of any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the CS Notes (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger or consolidation of the Company with one or more other corporations (other than a merger or consolidation in which the Company is the -27- continuing corporation and which does not result in any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the CS Notes), or in case of the merger of the Company into another corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the holder of each CS Note then outstanding shall have the right to convert such CS Note into the kind and amount of shares of capital stock or other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock into which such CS Note might have been converted immediately-prior to such reclassification, change, consolidation, merger, sale or conveyance, assuming such holder of Common Stock of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale or conveyance (provided that if the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale or conveyance is not the same for each share of Common Stock of the Company in respect of which such rights of election shall not have been exercised ("non-electing shares"), then for the purpose of this section the kind and amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). In any such case the Company, or such successor or purchasing corporation as the case may be, shall execute with the holders of the CS Notes on the effective date of such transaction a supplement agreement to this Agreement containing provisions to the effect set forth above in this Section 20.5 and providing further for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 20; and any such adjustment which shall be approved by the Board of Directors and set forth in such supplemental agreement shall be conclusive for all purposes of this section. The above provisions of this Section 20.5 shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and conveyances. 20.6 Taxes on Conversions. Unless otherwise required by law, the issue of stock certificates on conversions of CS Notes shall be made without charge to the converting Noteholder for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares in any name other than that of the Holder of any CS Note converted, and the Company shall not be required to issue or deliver any such stock certificate unless -28- and until the Person or Persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 20.7 Company to Reserve Capital Stock. The Company shall at all times reserve and keep available out of the aggregate of its authorized but unissued shares or its issued shares held in its treasury, or both, for the purpose of effecting the conversion of the CS Notes, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding CS Notes. The Company covenants that all shares of Common Stock which may be delivered upon conversion of CS Notes, shall, upon delivery in accordance with the terms of this Agreement, be fully paid and nonassessable by the Company and free from all taxes, liens and charges with respect to the issue or delivery thereof. 20.8 Company to Give Notice of Certain Events. In the event (1) that the Company shall pay any dividend or make any distribution to the holders of shares of Common Stock otherwise than in cash charged against consolidated net earnings or retained earnings of the Company and its consolidated subsidiaries or in Common Stock; or (2) that the Company shall offer for subscription or purchase, pro rata, to the holders of shares of Common Stock any additional shares of stock of any class of the Company or any securities convertible into or exchangeable for stock of any such class; or (3) of any reclassification or change of outstanding shares of the class of Common Stock issuable upon the conversion of the CS Notes (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or of any merger or consolidation of the Company with, or merger of the Company into, another corporation (other than a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Debentures), or of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety; then, and in any one or more of such events, the Company shall mail written notice thereof to the Holders of CS Notes at their last addresses as they shall appear upon the Note Register, at least fifteen days prior to (i) the record -29- date fixed with any of the events specified on (1) and (2) above, and (ii) the effective date of any of the events specified in (3) above. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. 20.9 Effectiveness of Section 20. The provisions of this Section 20, including, without limitation, the privilege to convert the CS Notes into the Common Stock of the Company, shall not take effect, and no holder of the CS Notes shall have any rights under Section 20, until approval by the American Stock Exchange, Inc. of the Conversion Shares for listing on the American Stock Exchange upon official notice of issuance. If the foregoing condition shall not have been satisfied by June 30, 1997, this Section 20 shall have no further force or effect. 21. Effectiveness. This Agreement shall become a binding agreement between you and the Company upon the execution and delivery hereof by you and the Company. 22. Miscellaneous. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, personal representatives, successors and assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the benefit of and be enforceable by any holder or holders at the time of the Notes or any part thereof. This Agreement and the Notes collectively embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. This Agreement and the Notes shall be construed and enforced in accordance with and governed by the law of the Commonwealth of Pennsylvania. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterparts of this letter and return one of the -30- same to the Company, whereupon this letter shall become a binding agreement between you and the Company as provided in Section 21. Very truly yours, FPA CORPORATION ---------------------------------------- By: Benjamin D. Goldman, President The foregoing Agreement is hereby agreed to as of the date hereof. - --------------------------------- Jeffrey P. Orleans -31- THE PAYMENT OF PRINCIPAL HEREUNDER IS EXPRESSLY SUBORDINATED TO THE CLAIMS OF CORESTATES BANK, N.A. PURSUANT TO A SUBORDINATION AGREEMENT DATED APRIL 4, 1996 AND A SUPPLEMENTAL SUBORDINATION AGREEMENT OF EVEN DATE HEREWITH, EACH BY AND BETWEEN JEFFREY P. ORLEANS AND CORESTATES BANK, N.A. THIS NOTE HAS BEEN ISSUED PURSUANT TO A NOTE PURCHASE AGREEMENT DATED AS OF AUGUST 1, 1996 (THE "AGREEMENT"), BETWEEN FPA CORPORATION AND THE ORIGINAL PURCHASER OF THE NOTE CONTAINING SUBSTANTIAL RESTRICTIONS ON TRANSFER AND ASSIGNMENT. IT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND CANNOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. FPA CORPORATION Convertible Subordinated 7% Note Due January 1, 2002 Bensalem, Pennsylvania $3,000,000.00 August 19, 1996 FOR VALUE RECEIVED, and intending to be legally bound hereby, FPA CORPORATION, a Delaware corporation (hereinafter referred to as the "Company") hereby promises to pay in lawful money of the United States to the order of JEFFREY P. ORLEANS (hereinafter referred to as "Holder"), the principal sum of THREE MILLION DOLLARS ($3,000,000), together with interest on the daily outstanding principal balance from time to time at a rate equal to seven percent (7%) per annum. Interest shall be computed on the basis of a 365/366 day year and the actual number of days elapsed. Accrued interest shall be payable not later than each Extension Date with respect to each Interest Target Date during the term of this Note until the obligation of the Company with respect to payment hereunder shall be discharged. To the extent not prohibited by law, if any installment of interest in respect of any Interest Target Date shall remain unpaid on the Applicable Grace Date, then interest shall thereafter accrue on the unpaid installment of interest from the Applicable Grace Date until paid at a rate equal to eight and one-half percent (8.5%) per annum. Principal shall be payable in equal annual installments of $1,000,000 each not later than each Extension Date with respect to each CS Principal Target Date. The entire unpaid principal balance, plus all accrued and unpaid interest and other sums payable hereunder, shall be due and payable not later than the Extension Date with respect to the CS Principal Target Date of January 1, 2002. To the extent not prohibited by law, if any principal payment due on any CS Principal Target Date shall remain unpaid on the Applicable Grace Date, then interest shall thereafter accrue on such unpaid principal payment until paid at a rate equal to eight and one-half percent (8.5%) per annum. Payments of principal and interest shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debt by check mailed and addressed to the registered holder hereof at the address shown in the registrar maintained by the Company for such purpose, or, at the option of the holder hereof, in such manner and at such other place in the United States of America the holder hereof shall have designated to the Company in writing pursuant to the provisions of Section 19 of the Agreement (as hereinafter defined). Unless this Note has been executed by officers of the Company thereunto duly authorized by manual signature, this Note shall not be entitled to any benefit under the Agreement, or to be valid or obligatory for any purpose. This Note is the CS Note issued by the Company under that certain Note Purchase Agreement (the "Agreement"), dated as of August 1, 1996, between the Company and the original purchaser hereof. Reference is hereby made to the Agreement for a statement of the respective Events of Default, rights, limitations of rights, obligations, duties and immunities thereunder of the Company and the Holders of this Note. All terms used in this Note which are defined in the Agreement shall have the meanings assigned to them in the Agreement. This Note is convertible into the Common Stock of the Company to the extent set forth in, and subject to the provisions of the Agreement. This Note is subject to prepayment at the option of the Company at any time on the terms and conditions and in the amounts as set forth in the Agreement. In the event of prepayment of this Note in part only, a new Note or Notes for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the cancellation hereof. The Agreement permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the holders of the CS Notes under the Agreement at any time by the Company with the consent of the holders of a majority in aggregate principal amount of the CS Notes at the time outstanding. The Agreement also contains provisions permitting the holders of specified percentages in aggregate principal amount of the CS -2- Notes at the time outstanding, on behalf of the holders of all the CS Notes, to waive compliance by the Company with certain provisions of the Agreement and certain past defaults under the Agreement and their consequences. Any such consent or waiver by the holder of this Note shall be conclusive and binding upon such holder and upon all future holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. No reference herein to the Agreement and no provision of this Note or of the Agreement shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal and interest on this Note at the times, place and rate, and in the coin or currency, herein prescribed. Prior to due presentment for registration of transfer, the Company, and any agent of the Company, may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. This Note shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the Company has caused this Note to be duly executed under its corporate seal by the manual signatures, of its officers thereunto duly authorized all on the date first written above. FPA CORPORATION By:______________________________________ President Attest: - --------------------- Secretary (SEAL) -3- EX-22 4 EXHIBIT 22 Exhibit 22 Subsidiaries of Registrant The Company owns all of the outstanding stock of the subsidiaries listed below, each of which is included in the Consolidated Financial Statements of the Company. All other former subsidiaries of the Company were either merged with and into the Company or a subsidiary of the Company listed below. Name State of Incorporation ---- ---------------------- Fawn Hollow, Inc. Pennsylvania FPA Mortgage Corporation Florida FPA Mortgage Investments, Inc. Florida FPA Voorhees, Inc. New Jersey Orleans Construction Corporation Pennsylvania Orleans Corporation Pennsylvania Orleans Corporation of New Jersey New Jersey Orleans Property Management Services Corp. Pennsylvania Timber Glen, Inc. New Jersey Versailles at Europa, Inc. New Jersey 66 EX-25 5 EXHIBIT 25 Exhibit 25 SIGNATURES and POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey P. Orleans, Benjamin D. Goldman and Joseph A. Santangelo and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or each of them, of their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /s/ JEFFREY P. ORLEANS September 23, 1996 - ------------------------------ Jeffrey P. Orleans Chairman of the Board and Chief Executive Officer /s/ BENJAMIN D. GOLDMAN September 23, 1996 - ------------------------------ Benjamin D. Goldman President, Chief Operating Officer and Director /s/ SYLVAN M. COHEN September 23, 1996 - ------------------------------ Sylvan M. Cohen Director 67 /s/ ROBERT N. GOODMAN September 23, 1996 - ------------------------------ Robert N. Goodman, Director /s/ ANDREW N. HEINE September 23, 1996 - ------------------------------ Andrew N. Heine Director /s/ DAVID KAPLAN September 23, 1996 - ------------------------------ David Kaplan Director /s/ LEWIS KATZ September 23, 1996 - ------------------------------ Lewis Katz Director /s/ JOSEPH A. SANTANGELO September 23, 1996 - ----------------------------- Joseph A. Santangelo Chief Financial Officer, Treasurer and Secretary 68 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 2,617 0 4,176 0 80,917 0 468 0 92,866 0 52,898 0 0 1,270 12,679 92,866 92,950 94,359 80,066 93,506 824 0 1,300 853 (382) 1,235 0 693 0 1,928 .16 .16
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