U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the fiscal year ended October 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from .............. to .................
Commission file number 0-18055
SEVEN FIELDS DEVELOPMENT COMPANY
(Name of small business issuer in its charter)
Pennsylvania 25-1561828
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 GARDEN DRIVE, SUITE 200, MARS, PA 16046-7846
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (412) 776-5070
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Beneficial Interest, par value $1.00 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will
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-KSB or any amendment to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $10,288,781.
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The aggregate market value of the issuer's voting stock held by non-
affiliates as of January 24, 1997, is indeterminable. There is no known
market for the issuer's Beneficial Interests, and the terms of any private
sales of such Beneficial Interests which did occur are not known to the
issuer.
As of January 24, 1997, there were 3,484,560 shares of the issuer's
Beneficial Interests outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format (check one):
Yes ; No X
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PART I
Item 1. Description of Business
Background and Reorganization
Seven Fields Development Company (the "Company") is a Pennsylvania business
trust engaged in the business of managing multi-family residential rental
units and developing and selling real estate in the western Pennsylvania
area. The Company was organized in 1994 and is the surviving company in a
merger (the "Merger") effected on April 30, 1995 with Seven Fields
Development Corporation (the "Corporation").
The Merger was part of a comprehensive plan (the "Reorganization Plan") to
reorganize the Corporation from a Pennsylvania business corporation into a
Pennsylvania business trust (the "1995 Reorganization"). Pursuant to the
Reorganization Plan, the following actions were taken:
(1) The Corporation formed Seven Fields Development (PA), Inc.
("Seven Fields PA"), which made an offer (The "Exchange Offer") to
acquire all of the outstanding shares of common stock of the
Corporation ("Corporation Stock") and all outstanding general
unsecured subordinated debt of the Corporation ("Corporation Debt")
in exchange for shares of common stock of Seven Fields PA, on the
basis of one share of Seven Fields PA common stock for each unit
consisting of a combination of one share of Corporation Stock plus
$19 original principal amount of Corporation Debt.
(2) The Corporation formed Seven Fields (DEL), Inc. ("Seven Fields DEL")
as a wholly owned subsidiary of Seven Fields PA and formed the
Company as a Pennsylvania business trust.
(3) The Corporation formed Seven Fields Management, Inc. as a wholly-
owned subsidiary of Seven Fields PA to be the sole trustee of the
Company.
(4) The Corporation and the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which the Corporation
merged with and into the Company and each shareholder of the
Corporation received one share of beneficial interest in the Company
(a "Company Share") in exchange for each share of Corporation Stock
held of record.
(5) Each of the Company, Seven Fields PA, Seven Fields DEL and Seven
Fields Management adopted plans of liquidation.
In accordance with the Reorganization Plan, shareholders of the Corporation
were asked to approve the proposed Merger and to accept the Exchange Offer.
Holders of approximately 83% of the outstanding Corporation Stock and
Corporation Debt accepted the Exchange Offer and received shares of Seven
Fields PA Stock in exchange thereof. The Merger was approved by the
shareholders of the Corporation at the Corporation's annual meeting held on
March 31, 1995, and on April 30, 1995, the Exchange Offer and the Merger were
consummated. In the Merger, those holders of Corporation Stock and
Corporation Debt who did not accept the Exchange Offer, together with Seven
Fields PA as the holder of all Corporation Stock tendered in the Exchange
Offer, received Company Shares in exchange for their Corporation Stock.
Such persons also continue to hold their Corporation Debt which became an
obligation of the Company as a result of the Merger (hereinafter referred
to as "Company Debt").
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The purpose of the 1995 Reorganization was to consolidate the economic and
voting interests of those Corporation shareholders who accepted the Exchange
Offer into a single equity security, and to eliminate, on a consolidated
entity basis, the large shareholders' deficit which was created as a result
of the Corporation's reorganization under Chapter 11 of the Federal
Bankruptcy Code on November 7, 1987.
Seven Fields Development Corporation (November 7, 1987, through April 30,
1995)
The Corporation was the surviving corporation in the merger of four
predecessor corporations (the "Predecessors") pursuant to an Amended Plan
of Reorganization dated January 15, 1987 (the "Bankruptcy Plan"), which was
approved and confirmed by order of the United States Bankruptcy Court for
the Western District of Pennsylvania (the "Bankruptcy Court") entered
October 21, 1987 (the "Confirmation Date").
The Predecessors had marketed and sold investments in multi-family
residential housing developments in Western Pennsylvania. From 1976 to 1986,
the Predecessors received approximately $57,000,000 of investment funds from
over 2,600 investors (the "Investors"). Investors' investment balances,
including reinvestment of returns, exceeded $69,000,000 when the
Predecessors filed petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in 1986.
Pursuant to the Bankruptcy Plan, the stock and interests of the
Predecessor's shareholders were canceled and the approximately 2,600
Investors received shares of Corporation Stock with a par value equal to 5%
of their claims (approximately $3.5 million). The remaining 95% of the
Investors' claims (approximately $66.6 million) were deemed to be general
unsecured debt of the Corporation, subordinated to existing liens
and priorities and any future secured debt of the Corporation. Furthermore,
the Bankruptcy Plan prohibited the holders of the Corporation Debt from
filing any suit, taking any judgment or undertaking, continuing or
completing any collection activities. Payment on the Corporation Debt would
be determined and made from time to time by the Board of Directors of the
Corporation as and when funds were available.
The Bankruptcy Plan further provided that the Corporation, as may be
authorized by its Board of Directors, would periodically distribute
available funds, without interest, in pro rata repayment of the claims
of the Investors and that all activities of the Corporation would seek to
achieve the goal of full payment of all claims of the Investors (the holders
of Corporation Stock and Corporation Debt). The Company, as survivor to the
Merger, remains subject to the Bankruptcy Plan.
Operating Activities (November 7, 1987 through October 31, 1996)
Since it commenced business on November 7, 1987, the Company ("Company", as
used hereinafter refers to the entity existing since November 7, 1987), has
focused its attention primarily on the following activities:
1. Managing, leasing and selling its rental properties.
2. Developing an organizational structure and recruiting personnel to
manage the diverse business activities of the Company.
3. Providing extensive information to federal agencies for litigation
against certain former shareholders of the Predecessors and others.
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4. Negotiating with the Pennsylvania Department of Environmental
Resources ("DER") and other governmental agencies and with the Seven
Fields Borough to permit development of its Butler County, Pennsylvania
property known as Seven Fields.
5. Developing and implementing a master development plan for the
Seven Fields property.
6. Developing and selling its undeveloped property as individual
residential and commercial lots.
7. Constructing and selling homes.
The ultimate goal of the Company is to enhance the liquidation value of its
assets so as to return to the holders of Company Stock and Company Debt the
maximum amount at the earliest possible time. In all probability, total
repayment of the Company Debt will not be possible and no payment on the
Company Stock will occur because the Company Debt must be paid in full
before any distribution on Company Stock can be made. For this reason, in
the 1995 Reorganization the Company retained the Corporation's prior debt/
equity structure so as to maintain proportionality of all future
distributions. See Item 6. Management's Discussion and Analysis or Plan of
Operations Business Plan and Objectives.
In furtherance of its plan to liquidate, the Company is in the process of
developing the unimproved land at Seven Fields for the purpose of building
and selling residential and commercial units. In March 1991, the Company
completed a Master Plan for development of Seven Fields. Seven Fields
Borough agreed in concept with the Master Plan and on December 9, 1991
adopted a zoning ordinance which effectively implemented the Master Plan.
The Master Plan consists of 18 separately identifiable parcels, of which
seven are designated single family containing 260 acres, five are designated
multifamily containing 59 acres, five are designated commercial containing
86 acres and one is designated high density containing five acres. In
1992, the Company acquired forty adjacent acres located in Cranberry Township
that are designated for single family use.
In August 1990, the Company began construction of its first single family
home at Seven Fields under the trade name "Hawthorne Construction Company".
During fiscal 1995, the Company began construction of nine homes and 21
multi-family units, sold 13 homes and 21 multi-family units and at October
31, 1995 had an inventory of nine homes and 21 multi-family units. And in
fiscal 1996, the Company began construction of 18 additional homes and 23
multi-family units, sold 13 homes and 18 multi-family units and at October
31, 1996, had 14 houses and 26 multi-family units either completed or under
construction.
The Company's home construction activities have proceeded by subdivisions
and phases. In the Brandywine Woods Subdivision, the Company is constructing
single family homes having sales prices between $150,000 and $180,000. The
Colonial Heights Subdivision is divided into three phases with single
family homes ranging in price from $190,000 to $250,000. In the Company's
Brandywine Commons Subdivision, the Company is constructing fourplex units
which are being offered at prices ranging between $115,000 and $160,000.
During 1995, the Company commenced development of the Northridge Manor
Subdivision, a 45 lot single family home subdivision located on 17 acres
north of Rt. 228, and the Georgetowne Manor Subdivision, a 77 unit townhouse
subdivision located on 10 acres near the Company's existing townhouses.
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In 1996 development commenced in the Hawthorne Commons Subdivision of
96 fourplex units and in the Northridge Estates Subdivision of 56 single
family lots. Homes in the Northridge Manor Subdivision are being sold for
prices ranging from $175,000 to $210,000 and townhouse units in the
Georgetowne Manor Subdivision are being sold for $90,000 to $120,000. Homes
in the Hawthorne Commons and Northridge Estates are expected to range in
price between $140,000 and $170,000 and between $200,000 and $230,000
respectively. The Company is also offering its existing townhouses for sale
at prices ranging between $70,500 and $80,900. The Company is doing all of
the construction of the fourplexes and townhouses as well as 100% of the
construction in its Northridge Manor Subdivision, 75% of the construction
in the Brandywine Woods Subdivision and 20% of the construction in the
Colonial Heights Subdivision and 10% in the Northridge Estates Subdivision.
Approximately eight other builders are currently constructing homes at Seven
Fields.
During fiscal 1994, the Company completed construction of a community
swimming pool and bath house which was donated to the Borough of Seven Fields
(the "Borough"). The Company also has developed and donated to Seven Fields
Borough a playground and community center. In 1996 the Company completed
development of baseball and soccer fields and sold them to the borough. The
cost of the town park, the swimming pool and other assets which are
developed for the entire project and donated to the Borough, are treated as
costs of the entire development and a proportionate part of each such cost
is included in the cost of each lot sold.
In fiscal 1995, the Company completed construction of a two-story office
building at Seven Fields (the "Office Building"), began development of areas
north of Rt. 228 for the first time, and developed and sold its first
commercial lot. The Office Building, which consists of 9,434 usable square
feet plus a garage-basement, is used as the Company's offices and maintenance
facility. The Company leases one floor of the Office Building to the Borough
as its municipal offices. The Company has granted the Borough an option
to purchase the Office Building at fair market value at the end of its five
year lease. The Company, so as to facilitate its plans to develop its
property north of Rt. 228, is expending significant amounts to make utility
service available to such property. This cost is being allocated to the
subdivisions north of Rt. 228.
During fiscal 1996, improvements to the Mars-Crider Road, an important
access road in Cranberry Township and Seven Fields Borough to the Company's
subdivisions north of Route 228, were begun at a projected cost of $700,000.
In addition, the Company has commenced negotiations with several interested,
prospective buyers for five separate parcels of its commercial property and
is in discussions with the Pennsylvania Department of Transportation
("PennDot") regarding possible required upgrades to Route 228 so as to
facilitate planned development of the Company's commercial property north
of Route 228. Any cost associated with any required upgrading of Route 228,
will be allocated to the commercial properties north of Route 228.
The Company, under the name "Castle Creek Water Company", provides and
charges the residents of Seven Fields Borough and parts of Cranberry and
Adams Townships for water services under authority granted it by the
Pennsylvania Public Utilities Commission ("PUC") on November 29, 1991.
The area in which Seven Fields is located has seen increasing residential and
commercial development in the past few years due to its proximity to
Pittsburgh, which is enhanced by Interstate 279 which directly connects the
area to downtown Pittsburgh.
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During fiscal 1995, demand for the Company's single family homes declined in
response to the general imbalance of supply and demand of single family homes
in the northern suburbs of Pittsburgh. In fiscal 1996 demand improved
significantly, however, sales were slowed as a result of the severe winter and
wet spring weather in 1996. Demand remained strong for the Company's
townhouses and the Brandywine Commons fourplex units. A general decline in
interest rates has been beneficial to the Company in its development, however
competition also continues to intensify. The Company's stature was enhanced
by winning the 1995 "Top Community" award presented jointly by the Pittsburgh
Builder's Association and the Realtor's Association of Metropolitan Pittsburgh.
The real estate development business has substantial inherent risks, any of
which might have a serious effect on the Company's future development plans.
Most notably, these risks include possible new governmental regulations, or
revised interpretation or application of existing regulations. Changes in
the economy which might tend to reduce the demand for the Company's developed
lots and houses are possible. Increased competition could occur from other
developers or builders. Presently there are numerous other developments
which are under construction and will provide substantial competition to the
Company. A substantial increase in home mortgage interest rates historically
has caused an almost immediate decline in demand for new housing, which could
have a dramatic negative impact on the Company's plans.
The Company's prime property was carved from Cranberry Township, which has
continued to be one of the higher growth areas and better real estate markets
in Pennsylvania. The Company, via rental rate increases and the imposition
of water charges, has been able to raise rental rates at its Seven Fields
property. Future economic stagnation, if it affects the southern Butler
County area, could inhibit the Company's ability to sell its lots and houses
in a timely manner. However, the Company believes it is well positioned to
respond accordingly because of the phased nature of its development activities.
At this time, the business of the Company is not seasonal in nature, nor is
it dependent upon any patents or trademarks. However, the ability of the
Company to carry on the development of its most important property, Seven
Fields, depends upon its success in procuring the necessary governmental
approvals, licenses and permits and in generating internally, or obtaining
from outside sources, sufficient capital to facilitate this development
activity. The Company presently employs 34 full-time and 5 part-time
employees.
Sources of materials required by the Company for its development and
construction activities are ample. The Company purchases its materials
from suppliers which sell primarily to the home construction industry
in western Pennsylvania, and the Company is not dependent on any one
supplier for its materials. The cost of materials in the home construction
industry has historically fluctuated significantly on a national basis
as a result of changes in supply and demand for particular materials.
The Company incurs significant cost so as to comply with various
environmental laws. Such costs are considered a normal cost of operations
and have not historically caused the Company's selling prices for lots and
houses to be uncompetitive.
The Company has again indefinitely deferred construction of its planned
garden apartments and except for approximately $500,000 to be spent in fiscal
1997 for general development purposes, its plans do not include any material
capital expenditures except those planned costs related to the creation of
lots and buildings to be sold in the near term. The estimated costs to
be incurred during the period fiscal 1997-2001 for the development of
residential and commercial lots and construction of residential and
commercial building units is summarized on page 9.
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The following schedules summarize the Company's capitalized development costs
and its development plans for the five years ending October 31, 2001.
Capitalized Development And Construction
Land Development October 31, 1996
<TABLE>
<CAPTION>
Net Unsold Capitalized
Acres Lots Units Costs
<S> <C> <C> <C> <C>
Single Family
Colonial Heights Phases I, II and III 82 158 9 $ 188,156
Brandywine Woods 34 75 8 157,600
Northridge Manor 17 45 38 709,665
Northridge Estates 31 56 46 1,228,115
Multi Family
Brandywine Commons 9 44 2 32,947
Georgetowne Manor 10 77 69 785,994
Hawthorne Commons 24 96 96 1,302,336
Commercial
Phase P 18 6 5 394,705
Phase Q 5 3 1 202,935
Future Phases
(Single, Multi Family & Commercial) 245 N/A N/A 2,150,075
Total Development 475 N/A N/A $ 7,152,528
Other
Moon Township and Capitalized
Townhouse Costs 40 N/A N/A $ 658,894
House Construction
Houses Completed
(Including One Model Home) 5 $ 663,705
Houses Under Construction-
Single Family 9 756,704
Fourplex and Townhouse
Units Completed 4 368,545
Fourplex and Townhouse
Units Under Construction 22 666,196
Additional Housing Starts
(Nominal Costs Incurred) 297,393
Garden Apartment Development Costs 125,699
Total House Construction 2,878,242
Less Valuation Reserve (36,039)
Net Capitalized House
Construction Costs $ 2,842,203
Commercial Office and Multifamily
Construction and Water
Authority Assets
Office 1,263,208
Water Authority 352,240
1,615,448
Total Capitalized Development
and Construction Costs $12,269,073
</TABLE>
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Estimated Additional Costs
To be Incurred Fiscal 1997-2001 (000's)
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
<S> <C> <C> <C> <C> <C>
Total Development
Costs $ 852 $ 2,052 $ 640 $ 336 $ 1,400
Building Costs 5,564 7,948 6,876 5,352 4,552
Total Development
and Building
Costs $ 6,416 $ 10,000 $ 7,516 $ 5,688 $ 5,952
<CAPTION>
Financial Information Relating to Industry Segments
and Classes of Products
Year Ended October 31, (000's)
1996 1995
<S> <C> <C>
Sales to Unaffiliated Customers
Rental and General Operations $ 801 $ 1,080
Land Development, House Construction and
PUC Regulated Services 9,488 9,205
Total Sales $ 10,289 $ 10,285
Operating Income
Rental and General Operations $ (253) $ (224)
Land Development, House Construction and
PUC Regulated Services 1,984 1,510
Total Operating Income $ 1,731 $ 1,286
Identifiable Assets
Rental and General Operations $ 7,861 $ 8,704
Land Development, House Construction and PUC
Regulated Services (Including Land Held
for Future Development) 11,569 10,332
Total Identifiable Assets $ 19,430 $ 19,036
<FN>
See Item 7. Financial Statements.
</TABLE>
Item 2. Description of Property
The Company's principal asset is a real estate development known as Seven
Fields, located mainly in the Borough of Seven Fields and partially in
Adams and Cranberry Townships, Butler County, Pennsylvania. The development
consists of 540.2 acres including required open space, of which 24.5 acres
are in Adams Township, and 40 are in Cranberry Township.
When the Company commenced business in 1987, Seven Fields consisted of a
townhouse development on approximately 27 acres and approximately 513 acres
of mostly undeveloped land. The townhouse complex originally had a total of
237 rental units owned by the Company, 39 units owned by individual
homeowners, a swimming pool, tennis courts, playground and sewage disposal
plant.
In 1989, the Company began offering its townhouse units for sale and as of
October 31, 1996, had sold a total of 146 units. The Company estimates it
will take at least two years to sell the remaining units.
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Rent for the units owned by the Company averages approximately $700 per month,
excluding gas, electric, and water charges. The occupancy rate of the
available rental units exceeds 95%. The Company has been withholding vacant
units from rental so as to facilitate their sale. See Note 3 to Financial
Statements.
The Company's remaining property located in the Borough, Cranberry Township
and Adams Township consists of approximately 20 separate, partially developed
and undeveloped residential and commercial parcels. The areas south of
Rt. 228 have been subdivided and improved with roads, sidewalks and
underground utility lines and are substantially developed. The areas north
of Rt. 228 are currently being improved and substantial development there
will continue in 1997. See Item 1. Description of Business and Note 12 to
the Financial Statements.
The property in Adams Township includes a horse stable and a house trailer
which the Company currently leases to a third party for $1,650 per month.
Subsequent to October 31, 1996, the Company entered into an agreement to sell
this property consisting of 15 acres for $495,000.
The Company constructed a 9,434 square foot office building in 1995, part of
which is used for its operations and the remainder is leased to Seven
Fields Borough.
The Company also owns approximately 40 acres of unimproved commercial and
residential property located in Moon Township, Allegheny County, Pennsylvania
(the "Moon Township Property"). In connection with the settlement of certain
litigation in November 1995, the Company acquired clear title to the 50%
interest in this property which it did not previously hold. See Item 3.
Legal Proceedings.
The Company also holds certain mortgage notes receivable. See Item 6.
Management's Discussion and Analysis or Plan of Operation Financial
Condition and Note 4 to Financial Statements.
The mortgages and other outstanding liens on the Company's Seven Fields
property are discussed in Item 6. Management's Discussion and Analysis or
Plan of Operation Financial Condition.
In management's opinion, the Company's properties are adequately covered
by insurance.
Item 3. Legal Proceedings
The Company is not a party to any currently pending legal proceedings. On
November 15, 1995, the Company settled all outstanding litigation with Thomas
and Barbara Reilly (The "Reillys"), East Pointe Construction Company, TWBJT
Realty Enterprises, Inc. and certain members of the Reilly family.
The significant terms of such settlement are as follows:
1. All outstanding litigation, including a shareholders derivative action
against the Board of Directors and management of the Corporation was
discontinued and withdrawn.
2. The Moon Township Property was transferred to the Company free and clear
of all claims of the Reilly's, their family and related corporations. Prior
to this settlement, the Company had been granted a 50% interest in the Moon
Township Property as a result of a settlement reached in 1988 with Edward
Krall, a former shareholder of the Predecessors.
3. The Company paid $175,000 to the Reillys out of certain escrowed
proceeds of the Company's sale, at auction in 1988, of 69 Arabian horses.
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4. The parties agreed to submit to the United States District Court for the
Western District of Pennsylvania (the "Court") the question of ownership of
45 acres of land adjacent to Seven Fields in Adams Township, Butler County,
Pennsylvania, including the Reilly residence. In November 1996, the Court
determined that the Reilly's should retain ownership of this property. No
amounts had been reflected in the Company's balance sheets for this claim.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holders for a vote during the
fourth quarter of the Company's fiscal year ended October 31, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information. There is no established public trading market
for the Company Shares and the Company is not aware of the terms of any
transactions in Company Shares.
(b) Holders. As of October 31, 1996, there were 753 holders of Company
Shares, which is the only outstanding class of equity of the Company.
(c) Dividends. No cash dividends on the Company Shares were declared by
the Company during its last two fiscal years and there can be no
assurance that any cash dividends will ever be declared.
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Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion is an analysis of the Company's financial condition
and results of operations for the fiscal years ended October 31, 1996 and
1995. This discussion should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere herein. All
references herein to a fiscal year refer to the Company's fiscal year ended
on October 31 of such year.
Business Plan and Objectives
The Company's primary business objective is to repay, to the fullest extent
possible as soon as possible, the claims of the Investors. Based upon the
combined total of appraised market values of the Company's properties, the
Company does not believe it will be able to repay the entire amount of the
Company Debt. Nevertheless, as required by the Bankruptcy Plan, the Company
plans to pursue this objective by continuing to develop and sell its existing
properties. See Item 1. Description of Business. The Company has no present
plans to acquire and develop any other properties except minor acquisitions
which might enhance the development of existing properties.
The Company, since the bankruptcy reorganization, has expended substantial
effort and resources in resolving many of the hurdles necessary to carry out
its plans. A master plan for development of its existing properties has been
prepared, zoning approval for the plan has been obtained, municipal sewerage
service has become available, and all known necessary governmental
requirements can be met in order to facilitate the continued timely and
economic development of its property. See Item 1. Description of Business.
Financial Condition
The Company's liabilities exceed its assets because of the $66.6 million of
Company Debt which was not discharged by the Bankruptcy Plan. Upon
commencement of its operations in 1987, the Company had $6.4 million of
additional liabilities, $5.3 million of which was indebtedness secured by
mortgages on the Company's real estate holdings and $694,000 of which were
administrative costs incurred in the Bankruptcy Court proceedings. The
Company's assets upon commencement of operations totaled $18.1 million, and
its opening shareholders' deficit was $54.8 million. As of October 31, 1996,
such deficit had decreased to $43.1 million, principally because of profits
generated from operations and the Company's recognition of a $4.1 million
deferred tax asset in fiscal 1994 as a result of the Company's adoption of
FAS 109.
The Company, in 1987, recorded its principal assets land, buildings,
equipment and furnishings at their appraised value as determined by
appraisals performed in 1986 in connection with the Bankruptcy Court
proceedings.
Because of the many unresolved questions regarding the operation of the
Predecessors and the resulting legal complexities involved in the
reorganization of the Predecessors into the Company pursuant to the
Bankruptcy Plan, the Company has calculated its income (loss) for purposes
of preparing its post-bankruptcy reorganization federal and state tax returns
by adjusting the basis of its assets for tax purposes to an amount estimated
to approximate the Investors' original investment, including reinvestments,
less deductions for depreciation allowed or allowable.
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The Company also filed lawsuits, against the shareholders of and companies
affiliated with the Predecessors to recover certain assets. To the extent
that the Company has been successful in recovering any of such assets, the
shareholders' deficit has decreased by the amount of any such recovery. On
November 15, 1995, the Company settled all existing litigation. See Item 3.
Legal Proceedings.
As part of such settlement, the Company received clear title to a 50%
interest in the Moon Township Property. The Company preliminarily believes
that the value of the entire property may not be greater than the amount
currently included as a Company asset for its 50% interest. The Company has
not recorded an additional amount for this second 50% interest pending
determination of the property's value. In December 1995, the Company also
settled a dispute with another Investor who had transferred some of his
investment to the Reillys. As a result of these settlements and settlement
of an outstanding proof of claim, the Company recorded a net increase to its
shareholders' deficit at reorganization in the amount of $68,555 during 1995.
The Company's financial condition improved during fiscal 1995 and 1996 as a
result of the generation of net income of $1,327,000, and $1,705,000
respectively.
The Company's investment in residential and commercial development phases
from which lots are currently being sold and phases from which lots can be
sold in the first half of 1997 increased by $2,087,000 during fiscal 1996 to
$5,020,000 at October 31, 1996. The Company's inventory of completed, unsold
lots increased from 177 to 274 in fiscal 1996. During fiscal 1996 the
Company completed construction in its 45 lot Northridge Manor Subdivision,
has begun construction of townhouses in the 77 lot Georgetowne Manor
Subdivision, begun construction in the 96 unit Hawthorne Commons Subdivision,
and the 56 lot Northridge Estates Subdivision. The Office Building was
completed in fiscal 1995 at a cost of $1,263,000, and is partially occupied
by the Company for its offices and maintenance facilities with the remainder
leased to the Borough. During 1995 the Company completed preliminary site
preparation on 18 and five acre commercial phases and sold one lot from the
five acre phase for $240,000. Since October 31, 1995, the status of the
Company's remaining commercial parcels from which it intends to sell lots
during 1997 is 1)one additional .8 acre lot from the five acre parcel was
sold for $123,900, 2)the Company has entered into an agreement to sell a 3.5
acre lot for $370,000 from its 5 acre parcel, 3) an option has been granted
for the sale of the 18 acre parcel at $87,500 per usable acre if closed
before September 30, 1997 and at higher prices if closed later than
September 30, 1997. On October 31, 1996, the optionee closed on the first
2.91 acres for a total price of $254,800. 4) The 15 acre site of the barn
and horse arena is under agreement of sale for $495,000, 5) and the adjacent
7 acre parcel is under agreement of sale for a price of $450,000. The
Company does not plan to invest significant additional amounts in these
phases, except to meet specific requirements of buyers. However, when the
Company develops the town center commercial area, it intends to lease the
land and buildings developed and constructed, and will spend significant
resources in developing this property, however, this project is not expected
to begin until 1998.
During fiscal 1995, the Company commenced development activities north of
Route 228, which required extending utilities to this area, and creating a
second intersection on Route 228. These activities cost in excess of
$500,000 during 1995. During 1996, the Company spent $300,000 of the total
estimated $700,000 needed to upgrade Mars-Crider Road. These activities
were needed to facilitate the developmentof the Company's property north of
13
<PAGE>
Route 228 and its commercial properties at the new intersection with Route
228. The Company may also be required to upgrade Rt. 228 in order to develop
its commercial property north of Rt. 228. Such improvements are expected to
cost in excess of $1 million. In November 1995, the Company secured a
$750,000 loan from PNC Bank, N.A. secured by a mortgage on its Office
Building and also negotiated a $1,000,000 line of credit from National City
Bank to be used in its home building activities. In 1996, the Company
secured additional lines of credit of $1,000,000 and $750,000 with First
Western Bank Corp, the proceeds of which will be used for the construction
of homes in the Company's Hawthorne Commons and Georgetown Manor Subdivisions.
The Company had $2,732,000 invested in completed and partially completed
residential units at October 31, 1996 compared to $1,961,000 at October 31,
1995. Such investment increased during fiscal 1996 since the Company had
40 completed and partially completed units at October 31, 1996 as compared
with 30 at October 31, 1995. At fiscal year end 1996, 15 units were actually
complete compared to six in 1995 and the construction on the remaining 25
was more advanced than in the prior year.
During fiscal 1994, the Company began providing financing for the townhouses
it was selling, by holding the mortgages under assignment. This activity
was undertaken so as to facilitate financing until the FNMA requirement of
50% owner occupancy was met. During fiscal 1995, the Company significantly
reduced its investment in these mortgages, and at October 31, 1995 had
$186,000 invested in three mortgage assignments, and at October 31, 1996 had
$62,000 invested in one mortgage. The need for the Company to invest in
these mortgages in the future should be minimal since the FNMA 50% owner
occupancy for the entire project requirement was met at October 31, 1996.
All new performance and maintenance bonding requirements were met through
the Company's commercial bonding line. At October 31, 1996, the Company had
bonds outstanding of approximately $2,400,000.
The Company's cash position declined by $806,358 during fiscal 1996 primarily
as a result of an increase of $2,752,000 in its net investment in lots and
houses, $1,996,000 repaid on its outstanding Company Debt, offset by cash
from net income of $1,705,000, and recovery of basis on the sale of
townhouse units of $857,000.
On December 12, 1996, subsequent to the balance sheet date the Company
repaid an additional $997,932 on its outstanding Company Debt. It is the
Company's plan to make annual distributions in partial repayment of the
Company Debt.
Results of Operations Fiscal 1996 and 1995
The Company's income before taxes for fiscal 1996 was $1,705,000, an
increase of $330,000 from fiscal 1995's net income before taxes of
$1,375,000. Operating income for fiscal 1996 increased from fiscal 1995
by $445,000 or 34%.
The improvement in operating income was the result of a $212,000 increase
in gross profit on the sale of houses and lots, primarily because of slightly
higher volumes, a decrease in general and administrative costs of $375,000
primarily as a result of higher 1995 legal costs associated with
pre-reorganization legal matters and the 1995 Reorganization, and a decline
14
<PAGE>
in rental revenues of $258,000 as a result of the sale of townhouses,
leaving fewer available for rent, and a decrease in operating costs because
of fewer townhouses rented, and more costs capitalized to development
activities.
Interest income declined from $163,000 to $53,000 as a result of the Company
having lower excess cash available to invest during 1996 than 1995.
During fiscal 1996, the Company generated gross revenues of $10,289,000, an
amount almost identical to 1995. Gross revenues from sales of houses and
developed lots increased by $306,000 in fiscal 1996 over 1995, townhouse
sales decreased by $33,000 and rental revenues declined by $258,000 in fiscal
1996.
The Company's cost of lots and houses sold, expressed as a percentage of
sales, decreased slightly from 84.8% in fiscal 1995 to 82.2% in fiscal 1996.
The cost of townhouses sold in fiscal 1996 expressed as a percentage of sales
increased slightly from 49.3% in 1995 to 50.1% in fiscal 1996. The average
sales price of townhouses sold in fiscal 1996 was $74,200 compared to $71,500
in fiscal 1995, however, the Company also expended funds to improve the
townhouses so as to facilitate their sale.
The Company's activity levels for house construction, lot sales, and
townhouse sales during fiscal 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Fiscal 1995 Fiscal 1996
<S> <C> <C>
Lot Sales - Commercial 1 2
Lot Sales - Single & Multi-Family 45 55
Townhouse Sales - New Construction 8
Single Family House Sales 13 13
Fourplex House Sales 21 10
Townhouse Sales -
Original Construction 43 41
</TABLE>
The two commercial lots sold in fiscal 1996 generated $378,700 in gross
revenues compared to the one sold in fiscal 1995 for $240,000; the 55 single
and multifamily lots sold in fiscal 1996 generated gross revenues of
$1,774,000, or an average of $32,200, compared to gross revenues of
$1,388,000 for 45 lots sold in fiscal 1995 or an average of $30,800. The
change in average lot price is a result of a change in the mix of lots sold
in 1996; 18 of the lower priced Brandywine Commons fourplex lots and
Georgetowne Manor Townhouses were sold compared to 21 in 1995. Brandywine
Commons lots are priced at approximately $22,000 and Georgetowne Manor lots
are priced at $18,000 compared to single family lots which are priced in the
$35,000 to $40,000 range, so the average lot price can vary significantly
based on the mix between single family and multi family lots sold. During
fiscal 1996 gross profit increased by $122,000 from the sale of single family
and multi family lots and by $66,000 from the sale of commercial lots.
The Company's revenue from the sale of single family houses was $2.1 million
in fiscal 1996 compared to $1.8 million in fiscal 1995. This increase is a
15
<PAGE>
result of the change in the mix of houses sold, since 13 single family
houses were sold in 1996 and 1995, but the average price of the houses was
$23,000 higher than in 1995. In fiscal 1996, 3 of the 13 houses sold were
from the lower priced Brandywine Woods Subdivision compared to 11 of the 13
sold in fiscal 1995. The Company generated revenues of $1.3 million from
the sale of 10 fourplex units during fiscal 1996 compared to $2.6 million
in 1995 from the sale of 21 fourplex units. The gross profit generated from
the sale of fourplex units declined from $351,000 in fiscal 1995 to
$162,000 in fiscal 1996. During 1996, the Company also generated gross
revenue of $743,000 and gross profits of $58,000 from the sale of 8 newly
constructed townhouse units from its 77 unit Georgetowne Manor Subdivision.
Liquidity and Capital Resources
The Company has pursued the development of its property in phases. It has
used cash generated from the sale of its properties to reduce pre-
reorganization debt, to develop its property and to fund the litigation
efforts to recover assets from former shareholders of the Predecessors.
Future development and building activities will require significantly larger
amounts of capital. While the Company believes, as it has stated in its
prior filings with the Securities and Exchange Commission, that these
development activities can be financed internally, through the sale of lots
and dwelling units, the Company has come to realize that it will not be able
to optimize the development of its assets and therefore maximize the total
amount of distributions to Investors, unless it is able to more readily
obtain financing for its development activities. The Company believes that
internally financed development would proceed at a much slower pace than the
Company now believes is necessary to achieve its primary goals of liquidating
its holdings as quickly as possible and maximizing the total amount of
distributions to Investors. The Company has found that it can optimize the
value which it receives for its assets by simultaneously developing multiple
parcels, which enables the Company to offer a variety of housing products
priced at different levels. However, in order to simultaneously develop
multiple parcels, the Company requires more cash than it is able to generate
internally.
The Company's primary objective is to repay to the fullest extent possible,
and at the earliest possible time, the Company Debt. To this end it
distributed $2.0 million of the net proceeds from the sale of its Virginia
Manor property in January, 1993, made additional distributions of $1.3
million in December 1993, $2.0 million in December 1994, and $2.0 million
in December 1995, $1.0 million in December 1996 and intends to make
additional future distributions in repayment of the Company Debt which will
further deplete the Company's capital resources. Because the Company has
the dual objective of maximizing the cumulative return to its Investors,
which is best accomplished through expanded development and construction
activities, and to repay the Company Debt as soon as possible, which
management believes is best accomplished by annual distributions, it is
important that the Company procure external sources of capital to
facilitate accomplishing both of these objectives. Management also believes
that since a market for the Company Stock and Company Debt has not developed,
it is important to provide the Investors with some return of their investment.
Until 1994, the Company was unable to obtain capital via commercial lending
channels because of outstanding litigation and its capital structure. At the
end of fiscal 1994, the Company obtained a five year, $1.7 million mortgage
loan to replace an existing mortgage loan. The Company also has established
a bonding line in the amount of $2.0 million collateralized by a first
mortgage on 30 of its rental townhouses. During 1996, the Company also
borrowed an additional $750,000 secured by a mortgage on its Office Building
and negotiated a $1,000,000 line of credit to be used for the construction of
houses in its Northridge Manor Subdivision, a $1 million line of credit to
be used for the construction of fourplexes in its Hawthorne Commons
16
<PAGE>
Subdivision and on November 25, 1996 the Company obtained a $750,000 line
of credit to be used for the construction of townhouses in its Georgetowne
Manor Subdivision.
The Company will continue to incur significant development costs related to
development activities north of Rt 228. These development costs, which
exceeded $500,000 in fiscal 1996, are also expected to exceed $500,000 in
1997, and are not related to any specific phase of development but the entire
undeveloped area north of Rt. 228. Therefore, the payback on these
expenditures is longer term than expenditures for the development of
specific phases. In addition, the Company may be required to improve
Rt. 228 before developing its commercial properties north of Rt. 228. The
cost of these improvements are expected to exceed $1 million. During fiscal
1997, the Company expects to generate significant cash flows from the sale of
lots and houses in its Brandywine Woods, Colonial Heights, Brandywine Commons,
Northridge Manor, Georgetowne Manor, Hawthorne Commons and Northridge
Estates Subdivisions and from the sale of commercial lots. See Item 1.
Description of Business and Note 12 to the Financial Statements. However, it
also expects to have significant cash outflows related to site development
both north and south of Rt. 228. In addition, the Company expects to
continue to generate significant cash flows from the sale of its townhouse
units.
During fiscal 1995, cash flows from operating activities were reduced to
$990,000 primarily as a result of the Company having increased its investment
in its inventory of completed and under construction lots and houses by
$1,281,000. Nearly $500,000 of this increase related to general development
north of Rt. 228. This net investment offsets the cash generated by the
Company's reduction in the townhouse mortgages in which it had invested
during fiscal 1994. The Company incurred a net cash outflow of $190,000
from investing activities which was the result of its $1.1 million investment
in the construction of its Office Building and additional site work, sewer
tap in fees, and architectural services related to its planned garden
apartments. As a result of the sale of 43 of its townhouses, the Company
also recovered $972,000 of the remaining cost basis of these townhouses.
Cash flows from financing activities resulted in a net cash outflow of
$2,081,000 because of the repayment in December 1994 of $2,027,000 of
Company Debt and a $54,000 repayment on its mortgage. In fiscal 1996 cash
flows from operating activities were reduced as a result of the Company
increasing its investment in its inventory of completed and under
construction lots and houses by $2,752,000. Of this increase approximately
$500,000 related to the Company's project to improve Mars-Crider Road,
utilities necessary to facilitate the development of the property north of
Route 228 and construction of the intersection necessary to cross Route 228.
In November 1995, the Company received proceeds from a $750,000 loan secured
by a mortgage on its Office Building. These proceeds were intended to
replenish the Company's cash which had been significantly reduced as a result
of its investment in the Office Building. These loan proceeds also helped to
facilitate the Company's $1,996,000 partial repayment of Company Debt on
December 15, 1995. Subsequent to the date of the balance sheet on December
12, 1996, the Company distributed $997,932 in partial repayment of its debt
to the Investors.
Recent Accounting Developments
The Company adopted FAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities" on November 1, 1994. The effect of adopting this new
standard had no impact on the Company's financial condition or results of
operations.
The Company will be required to adopt FAS No 121 "Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of."
FAS No 121 establishes standards for determining when an asset impairment
17
<PAGE>
should be recognized based primarily on an undiscounted cash flow model. The
Company has deferred adoption of this new standard, which must be adopted not
later than November 1, 1996, pending review of its impact. Initially the
Company does not believe that there will be a material impact when this
standard is adopted.
Item 7. Financial Statements
The financial statements of the Company are set forth following Item 13 of
this Form 10-KSB.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Director's, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The Company, as a Pennsylvania business trust, is managed by its sole trustee,
Seven Fields Management, a wholly owned subsidiary of Seven Fields PA.
Pursuant to the Company's Deed of Trust and Bylaws, the number of trustees
of the Company has been set at one. The term of office of Seven Fields
Management as trustee is one year and expires at the next annual meeting of
the Company's shareholders.
Certain information about the Directors of Seven Fields Management, the sole
trustee of the Company, is set forth below. Each of the Directors serves for
a three year term expiring in the year indicated, and are elected by Seven
Fields PA, the sole shareholder of Seven Fields Management. Each such person
is also a director of Seven Fields PA and Seven Fields DEL and except for
directors first elected subsequent to April 30, 1995, each was a director of
the Corporation prior to the Merger.
<TABLE>
<CAPTION>
Name Age Director Director of the Term
Since Corporation Expires
Since
<S> <C> <C> <C> <C>
Guy E. Bubb 75 1995 1988 1998
Michael Burkhart 53 1996 N/A 1999
Samuel A. Goldberg 72 1995 1988 1999
William J. Janusey 73 1995 1989 1998
Alexander Lindsay, Jr. 50 1995 1990 1997
Paul Voytik 72 1995 1988 1997
George K. Wright 70 1995 1988 1997
</TABLE>
<TABLE>
<S> <C> <C>> <C>
Darell L. Craig 46 Chief Operating Employed Since
Officer 1991
Roman Polnyj 46 Chief Financial Employed Since
Officer 1992
</TABLE>
18
<PAGE>
Guy E. Bubb was employed by Allegheny Ludlum Steel Corporation, Pittsburgh,
Pennsylvania, a manufacturer of specialty steel, for 31 years until January
1985 when he retired. For the 10 years prior to his retirement, he held the
position of Director of Personnel with responsibility for 6,000 employees.
From 1978 to April, 1994, Mr. Bubb served as a director of Southwest National
Corp. and its subsidiary, Southwest National Bank in Greensburg,
Pennsylvania. He currently serves as a director of Allegheny Valley Hospital
in Natrona Heights, Pennsylvania, and as President of Allegheny Valley Health
Systems, a non-profit hospital organization, in Natrona Heights, Pennsylvania.
Michael H. Burkhart has been a Certified Public Accountant since 1972 and is
a member of the American Institute of Certified Public Accountants, the
Pennsylvania Institute of Certified Public Accountants and the National
Association of Certified Valuation Analysts. Mr. Burkhart has practiced in
public accounting since 1968, has been a partner with Hinds, Lind, Miller &
Co., Certified Public Accountants, until 1995 when he founded his present firm.
Much of Mr. Burkhart's professional background involves working with
construction and land development companies in the tax, accounting and
management services areas.
Samuel A. Goldberg was employed by the Mine, Safety and Health Administration
of the United States Department of Labor, as Manager of an Analytical
Laboratory for Industrial Hygiene from 1970 to December 1985 when he retired.
As manager, his responsibilities included preparing a budget, determining
personnel and equipment requirements and preparing bid submission on chemical
analysis instruments. He currently serves as a member of the Board of
Directors of East Boro's J.W.V. Housing Corporation and East Boro's J.W.V.
Homeless Veterans Corporation.
William J. Janusey is an architect who has been in private practice for over
30 years. His experience consists of the design of schools, residences,
motels, historical restorations, churches, public institutions, hospitals,
commercial establishments, interior decorating, and light industrial plants.
In 1960 he opened an office for the practice of architecture in Pittsburgh,
Pennsylvania and functioned under the name of William J. Janusey &
Associates. His experience involved the complete design and supervision of
entire projects up to $14,000,000 in cost, and included all phases of
building design and construction, such as management, contract preparation,
administration, negotiations with banking authorities, control of all
construction documents, writing of specifications, submitting cost estimates,
bidding procedures and field supervision of construction work. Over 1,200
buildings have been constructed to date from the firm's design and
construction drawings and specifications during the past 30 years.
Alexander H. Lindsay, Jr. is the President of the law firm of Lindsay,
Jackson & Martin, P.C. in Butler, Pennsylvania, and specializes in
litigation. He is a former Butler County and Cranberry Township solicitor.
From 1975 until 1980, he was an Assistant United States Attorney for the
Western District of Pennsylvania, and from 1977 until 1980 he was Chief of
the Public Corruption Section of the United States Attorney's Office in
Pittsburgh. From 1972 to 1973 he was an Assistant District Attorney for
Butler County. He is a 1968 graduate of Washington and Jefferson College
and a 1971 graduate of the University of Pittsburgh School of Law. Mr.
Lindsay is a director of Southwest National Corp. and its subsidiary,
Southwest National Bank.
Paul Voytik has been Chairman and Chief Executive Officer of the Corporation
since January 1989 and President of the Corporation since February 1988. He
was employed at Westinghouse Electric Corporation for 29 years, 24 of which
he served as an Engineering Manager, until his retirement in November 1985.
Thereafter, he served as a consultant to Westinghouse until 1986. In 1986
he became Vice President and a director of Piedmont Atlantic Corporation,
19
<PAGE>
which engaged in land development in Chapel Hill, North Carolina. He has
over 35 years of experience in building, contracting, and land development.
George Wright has been Vice President of the Corporation since February 1988.
He was employed by Gulf Research & Development for 42 years until his
retirement in February 1985. At the time of his retirement, he held the
position of Director of Safety, Security & Fire Prevention for a 95-acre
research complex of Gulf Oil Corporation.
Darell Craig has been employed by the Registrant as Chief Operating Officer
since September 1991. A graduate of the University of Pittsburgh, Mr. Craig
has been manager of land development and single/multifamily home
construction for over twenty years.
Roman Polnyj has been employed by the Registrant as Chief Financial Officer
since May 1992. Mr. Polnyj holds Masters and Bachelors degrees from Duquesne
University in business administration and was previously employed by Mellon
Bank from 1980 to 1991 holding positions as an Assistant Vice President and
Manager in the real estate division, departmental controller and financial
analyst.
The Company is not aware of any trustee, officer or beneficial owner of
more than ten percent of the Company Shares who failed to file on a timely
basis forms required by Section 16(a) of the Exchange Act during the fiscal
year ended October 31, 1996.
Item 10. Executive Compensation
The following table is a summary of certain information concerning the
compensation awarded or paid to, or earned by, the Company's chief executive
officer during each of the last three fiscal years. No officer or director
of the Company had total annual salary and bonus in excess of $100,000 during
any of the last three fiscal years.
<TABLE>
Summary Compensation Table
<CAPTION>
Long-term compensation
Annual compensation Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
All
Restricted Payouts Other
Name and Other Stock Options/ LTIP Compen-
principal Fiscal Salary Bonus Annual Awards SARs payouts sation
position Year ($) ($) Comp.($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Paul Voytik 1996 37,354 0 0 N/A 0 N/A 0
(President 1995 38,746 0 0 N/A 0 N/A 0
and Chief 1994 32,118 0 0 N/A 0 N/A 0
Executive
Officer)
</TABLE>
Pursuant to the terms of a Management and Administrative Services Agreement,
the Company reimburses Seven Fields Management for all of its expenses
related to the Company, including the costs incurred by Seven Fields PA and
Seven Fields DEL, including director's fees, salaries, and costs related to
shareholder services. Such reimbursement is in lieu of a trustee fee.
20
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of January 24, 1997 regarding
the amount and nature of ownership of Company Shares by each person known by
the Company to be the beneficial owner of more than 5% of the outstanding
Company Shares, by Seven Fields Management, the sole trustee of the Company,
by each of the directors of Seven Fields Management, and by all of such
directors and the executive officers of the Company as a group. Each such
individual has sole voting and investment power with respect to the shares
listed except as otherwise indicated in the footnotes to the table.
<TABLE>
<CAPTION> Percentage of
Name and Address of Amount and Nature of Outstanding
Beneficial Owner (1) Beneficial Ownership Company Shares
<S> <C> <C>
Seven Fields (DEL), Inc. 2,905,682 83
Seven Fields Management, Inc. 0 0
Paul Voytik 2,905,682 83
Michael H. Burkhart 2,905,682 83
George K. Wright 2,905,682 83
Samuel A. Goldberg 2,905,682 83
Guy E. Bubb 2,905,682 83
William J. Janusey 2,905,682 83
Alexander Lindsay, Jr. 2,905,682 83
All directors of the sole trustee and
executive officers of the Company
as a group (9 persons) 2,905,682 83
<FN>
(1) The address of each person is 2200 Garden Drive, Suite 200, Mars,
Pennsylvania 16046-7846.
(2) Represents shares held by Seven Fields (DEL), Inc., of which the
named person is a director and with respect to which such person
shares voting and investment power.
</TABLE>
21
<PAGE>
The following table sets forth information as of January 24, 1997 regarding
the amount and interest ownership of shares of common stock of Seven Fields
PA by each of the directors of Seven Fields Management, the sole Trustee of
the Company and by all of such directors and executive officers of the
Company as a group. Seven Fields PA is the sole shareholder of Seven Fields
DEL, which owns approximately 83% of the outstanding Company shares. Each
person has sole voting and investment power with respect to the shares listed
except as otherwise indicated.
<TABLE>
<CAPTION>
Percentage of
Name and Address of Amount and Nature of Outstanding
Beneficial Owner (1) Beneficial Ownership Company Shares
<S> <C> <C>
Paul Voytik 13,599.89 (2) *
George K. Wright 14,173.63 (2) *
Samuel A. Goldberg 745.97 *
Guy E. Bubb 9,384.71 *
William J. Janusey 2,451.40 (2) *
Alexander Lindsay, Jr. 0
Michael Burkhart 0
All directors of the sole trustee and
executive officers of the Company
as a group (9 persons) 40,355.60 1.16
<FN>
* Indicates ownership of less than 1% of the common stock of Seven Fields
(PA).
(1) The address of each person is 2200 Garden Drive, Suite 200, Mars,
Pennsylvania 16046-7846.
(2) All shares held jointly with spouse.
</TABLE>
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Deed of Trust of the Registrant (5)
3.2 By-Laws of the Registrant (5)
4.1 Excerpt of Amended Plan of Reorganization (1)
22
<PAGE>
<S> <C>
4.2 Specimen Certificate for shares of beneficial interest in
Registrant (5)
4.3 Specimen Note representing general unsecured subordinated
debt of Registrant after separation of stock and debt (2)
4.4 Shareholder Protection Rights Agreement (3)
4.5 Amendment dated October 11, 1994 to Shareholder Protection
Rights Agreement (5)
10.1 Rates, rules and regulations governing the distribution of
water service - PA Public Utility Commission (3)
10.2 Plan and Agreement of Merger between the Registrant and
Seven Fields Development Corporation (5)
10.3 Mortgage Note dated October 28, 1994 of the Registrant to PNC
Bank, National Association (6)
10.4 Open End Mortgage and Security Agreement dated October 28,
1994 between the Registrant and PNC Bank, National
Association (6)
10.5 Assignment of Rents, Leases and Profits dated October 28,
1994 between the Registrant and PNC Bank, National
Association (6)
10.6 Amendment to Loan Documents of October 28, 1994 and release
from mortgage between registrant and PNC Bank National
Association dated May 1, 1996.
10.7 Amendment to Loan Documents of October 28, 1994 related to
financial covenant for the maintenance of minimum tangible
net worth, between the Registrant and PNC Bank National
Association.
10.8 Surety Agreement dated October 28, 1994 between the
Registrant and Allegheny Surety Company (6)
10.9 Mortgage dated October 28, 1994 between the Registrant and
Allegheny Surety Company (6)
10.10 Settlement Agreement with former majority shareholder (7)
10.11 Promissory Note dated November 29, 1995 to PNC Bank (7)
10.12 Open End Mortgage and Security Agreement dated November
29, 1995 to PNC Bank (7)
10.13 Assignment of Rents dated November 29, 1995 to PNC Bank (7)
10.14 Revolving Line of Credit Loan Agreement dated November 13,
1995 between the Registrant and Integra Bank (7)
23
<PAGE>
<S> <C>
10.15 Open End Mortgage and Security Agreement dated November 13,
1995 between the Registrant and Integra Bank (7)
10.16 Agreement for Assignment of Sales Agreements and Contract
Deposits dated November 13, 1995 between the Registrant and
Integra Bank (7)
10.17 Office Lease dated August 1, 1995 between the Registrant and
The Borough of Sevev Fields (7)
10.18 Management and Administrative Services Agreement dated
April 30, 1995 (7)
10.19 Revolving line of credit loan agreement, open-end mortgage
and security agreement, and revolving line of credit note
dated August 13, 1996 between the Registrant and First
Western Bank, National Association.
10.20 Revolving line of credit loan agreement, open-end mortgage
and security agreement, cross-default agreement, and
revolving line of credit note dated November 25, 1996 between
the Registrant and First Western Bank, National Association.
27 Financial Data Schedule - 1996
________________________________
(1) Filed as exhibit to the Registrant's Registration Statement
on Form 10 filed October 23, 1989 and incorporated herein
by reference.
(2) Filed as exhibit to the Registrant's Annual Report on Form
10-K filed February 13, 1991 and incorporated herein by
reference.
(3) Filed as exhibit to the Registrant's Annual Report on Form
10-K filed January 29,1992 and incorporated herein by
reference.
(4) Filed as exhibit to the Registrant's Annual Report on
Form 10-K filed on February 10, 1993 and incorporated
herein by reference.
(5) Filed as exhibit to Registration Statement on Form S-4,
File No. 33-85102, and incorporated herein by reference.
(6) Filed as exhibit to Registrant's Annual Report on Form
10-KSB filed January 27, 1995 and incorporated herein
by reference.
(7) Filed as exhibit to Registrant's Annual Report on Form
10-KSB filed January 26, 1996 and incorporated herein by
reference.
</TABLE>
(b) Reports on Form 8-K.
None
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
SEVEN FIELDS DEVELOPMENT
COMPANY
By PAUL VOYTIK
Paul Voytik
President
Date: January 24, 1997
In accordance with the Exchange Act, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated as directors.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/PAUL VOYTIK President (Principal Executive January 24, 1997
- -----------
Paul Voytik Officer) and Director *
/s/ROMAN POLNYJ Chief Financial Officer (Principal January 24, 1997
- ------------
Roman Polnyj Financial and Accounting Officer)
/s/GEORGE K. WRIGHT Director * January 24, 1997
- ----------------
George K. Wright
/s/SAMUEL A. GOLDBERG Director * January 24, 1997
- ------------------
Samuel A. Goldberg
/s/MICHAEL BURKHART Director * January 24, 1997
- ----------------
Michael Burkhart
<FN>
* Directors of Seven Fields Management, Inc., the sole Trustee of the
Registrant
</TABLE>
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
ITEM 13 (A) INDEX TO FINANCIAL STATEMENTS
Page Reference
Independent Auditors' Report............................... F-1
Balance Sheets
at October 31, 1996 and October 31, 1995.............. F-2
Statements of Operations for the years ended October 31,1996
and October 31, 1995.................................. F-4
Statements of Shareholders' Deficiency for the years ended
October 31, 1996 and October 31, 1995................. F-6
Statements of Cash Flows for the years ended October 31,
1996 and October 31, 1995............................ F-7
Notes to Financial Statements.............................. F-8
F
<PAGE>
Independent Auditors' Report
The Trustee and Shareholders
Seven Fields Development Company
Mars, PA
We have audited the accompanying balance sheets of Seven Fields Development
Company (the "Company") as of October 31, 1996 and October 31, 1995, and the
related statements of operations, shareholders' deficiency and cash flows for
each of the two years in the period ended October 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
October 31, 1996 and October 31, 1995 and the results of its operations and
its cash flows for each of the two years in the period ended October 31,
1996 in conformity with generally accepted accounting principles.
O'Connor, Greenblatt & Company
December 18, 1996
Sewickley, PA
F-1
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
BALANCE SHEETS
AS OF OCTOBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash $ 252,045 $ 2,309
Temporary investments, Note 10 149,825 1,205,919
Total Cash And Temporary Investments 401,870 1,208,228
Certificate of deposit 53,755 23,885
Cash escrow - horses 184,550
Accounts and notes receivable, net
of allowances of $57,552 and $58,308 168,614 241,601
Mortgage notes receivable, Note 4 61,807 186,681
Capitalized development costs, Notes 2,12 5,020,059 2,944,303
Capitalized house construction costs,
net of allowances, Notes 2, 12 2,842,203 1,961,255
Prepaid expenses and deposits 481,518 282,492
Property not currently under development,
Notes 2, 12 2,791,363 2,995,685
Tenant security deposits 51,485 79,220
Deferred income tax assets, Note 9 3,992,000 3,992,000
Property, Buildings And Equipment,
Notes 2, 3, 6, 7
Land 386,789 452,061
Buildings 3,914,327 5,217,808
Equipment and furnishings 1,347,903 1,397,097
Construction in progress 317,124
Total Property, Buildings And Equipment 5,649,019 7,384,090
Accumulated Depreciation (2,083,587) (2,447,881)
Total Property , Buildings And Equipment,
Net Of Accumulated Depreciation 3,565,432 4,936,209
Total Assets $ 19,430,106 $ 19,036,109
<FN>
See Notes to Financial Statements.
</TABLE>
F-2
<PAGE>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
LIABILITIES
<TABLE>
1996 1995
<S> <C> <C>
Accounts payable and accrued expenses $ 507,566 $ 419,324
Accrued estimated costs related to developed
lots and townhouses sold, Note 2 590,920 267,973
Notes payable - credit lines, Note 6 130,000
Mortgages payable, Note 7 1,958,581 1,645,985
Customer deposits and advances 95,137 61,714
Tenant security deposits 51,485 79,220
Legal settlement payable, Note 5 175,000
General unsecured debt - minority investors,
Notes 1, 8, 11 10,067,744 10,406,981
General unsecured debt - Seven Fields
(DEL) Inc., Notes 1, 8, 11 49,135,104 50,796,205
Total Liabilities 62,536,537 63,852,402
<CAPTION>
SHAREHOLDERS' DEFICIENCY
<S> <C> <C>
Shares of beneficial interest, $1 par value,
5,000,000 shares authorized, 3,484,560
shares issued and outstanding,
Notes 1,2,11 3,484,560 $ 3,484,838
Shareholders' deficit - excess of
non-discharged debt over assets
on November 7, 1987 (Date of
reorganization) Notes 1, 2 (52,235,399) (52,240,537)
Retained earnings, since November 7, 1987
(Date of reorganization) 5,644,408 3,939,406
Total Shareholders' Deficiency (43,106,431) (44,816,293)
Total Liabilities And
Shareholders' Deficiency $ 19,430,106 $ 19,036,109
</TABLE>
F-3
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Gross Revenue
Rental income $ 726,762 $ 984,378
Fees & other operating income 74,622 95,959
Water revenue 136,434 126,386
Developed lot & house sales 6,308,330 6,002,613
Townhouse unit sales 3,042,633 3,075,848
10,288,781 10,285,184
Costs And Expenses
Cost of Developed Lots And Houses Sold 5,185,294 5,091,927
Cost Of Townhouses Sold 1,523,056 1,517,937
Other Operating Expenses* 753,477 874,210
General & Administrative Expenses* 764,889 1,140,023
Depreciation Expense 331,269 375,127
8,557,985 8,999,224
Operating Income 1,730,796 1,285,960
Interest Expense* (78,517) (74,106)
Interest Income 52,723 163,419
Income Before Provision for Income Taxes 1,705,002 1,375,273
Provision For Income Taxes, Note 9 48,000
Net Income $ 1,705,002 $ 1,327,273
Net Income Per Share $ .49 $ .38
Weighted Average Number Of Shares 3,484,606 3,484,838
<FN>
* See details on the following page.
See Notes To Financial Statements.
</TABLE>
F-4
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
STATEMENT OF OPERATIONS - CONTINUED
DETAILS OF OTHER OPERATING EXPENSES,
GENERAL AND ADMINISTRATIVE EXPENSES AND INTEREST EXPENSE
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Other Operating Expenses
Payroll, payroll taxes and benefits $ 697,813 $ 666,067
Repairs and maintenance 205,623 216,735
Utilities 135,792 109,339
Insurance 118,257 154,819
Property taxes 152,822 184,499
Other operating supplies and services 77,792 92,264
Total Other Operating Expenses 1,388,099 1,423,723
Less Expenses Capitalized To Development
And Construction (634,622) (549,513)
Net Other Operating Expenses $ 753,477 $ 874,210
General And Administrative Expenses
Payroll, payroll taxes and benefits $ 391,402 $ 406,084
Professional fees 129,515 105,763
Professional fees related to litigation and
pre-reorganization issues 43,735 396,912
Other general and administrative expenses 238,349 282,510
Total General And Administrative Expenses 803,001 1,191,269
Less Expenses Capitalized To Development
And Construction (38,112) (51,246)
Net General And Administrative Expenses $ 764,889 $ 1,140,023
Interest Expense
Total interest expense $ 184,075 $ 154,051
Less interest capitalized to development
and house construction (105,558) (79,945)
Net Interest Expense $ 78,517 $ 74,106
<FN>
See Notes To Financial Statements.
</TABLE>
F-5
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
STATEMENT OF SHAREHOLDERS' DEFICIENCY
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Share-
holders' Retained
Deficit Earnings Total
As Of Since Share-
Beneficial Interest Nov. 7, Nov. 7, holders
Shares Amount 1987 1987 Deficiency
<S> <C> <C> <C> <C> <C>
Balance
Oct. 31, 1994 3,505,591 $3,505,591 $(52,171,982) $2,612,133 $(46,054,258)
Pre-November 7,
1987 Shareholder
Adjustments** 1,500 1,500 (30,004) (28,504)
Net Settlement-
Former Majority
Shareholder
And Related
Share-
holders*** (22,253) (22,253) (38,551) (60,804)
Net Income-
Year Ended
October 31,
1995 1,327,273 1,327,273
Balance October
31, 1995 3,484,838 $3,484,838 $(52,240,537) $3,939,406 $(44,816,293)
Other
Shareholder
Adjustments (278) (278) 5,138 4,860
Net Income-
Year Ended
October 31,
1996 $1,705,002 $ 1,705,002
Balance
October 31,
1996 3,484,560 $3,484,560 $(52,235,399) $5,644,408 $(43,106,431)
<FN>
** Settlement was reached with an investor during 1995 wherein 1,500
shares and the associated debt were issued to the investor.
*** Final settlement was reached with former majority shareholder,
his family, related companies and shareholders in 1995, whereby
the shares and debt of the shareholder were canceled, including
the shares acquired from another shareholder. See Note 5.
See Notes To Financial Statements.
</TABLE>
F-6
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,705,002 $ 1,327,273
Provision for income taxes 48,000
Depreciation 331,269 375,127
Capitalized development costs incurred (3,304,530) (2,036,064)
Capitalized house construction costs incurred (4,575,589) (4,633,020)
Cost of lots and houses sold 5,127,737 5,388,355
Changes in other assets and liabilities:
Restricted cash 184,550 (2,085)
Mortgage notes receivable 124,874 618,539
Other assets (128,174) 40,278
Other liabilities 242,419 (136,089)
Net Cash Flows Provided By
(Used In) Operating Activities (292,442) 990,314
Cash Flows From Investing Activities:
Additions to property, building & equipment (134,788) (1,162,419)
Sale of property, buildings, & equipment 1,174,296 972,214
Total Cash Flows Provided By (Used In)
Investing Activities 1,039,508 (190,205)
Cash Flows From Financing Activities:
Repayment of general unsecured debt (1,996,020) (2,026,757)
Proceeds from borrowings 880,000
Repayment of loans payable (437,404) (54,015)
Total Cash Flows Used In Financing Activities (1,553,424) (2,080,772)
Net Decrease In Cash And Temporary Investments (806,358) (1,280,663)
Cash And Temporary Investments, Beginning of Period 1,208,228 2,488,891
Cash And Temporary Investments, End of Period $ 401,870 $ 1,208,228
Interest Expense Included In Net Income Above $ 78,517 $ 74,106
Interest Paid And Included In Capitalized
Development And House Construction Costs 105,558 79,945
Accrued Interest Expense 1,607
Total Interest Paid $ 184,075 $ 155,658
Income Taxes Paid None None
Supplemental Schedule Of Noncash Investing And
Financing Activities:
Settlement of Lawsuits With Former
Majority Shareholder $ 60,804
Pre-November 7, 1987 Shareholder Adjustments $ 28,504
Other Investor Adjustments $ (4,860)
<FN>
See Notes To Financial Statements.
</TABLE>
F-7
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
Note 1 Organization And Business
Merger And Restructuring
Seven Fields Development Company, a Pennsylvania Business Trust (the
"Company") is the successor by merger to Seven Fields Development Corporation
(the "Corporation"), effective April 30, 1995. Use of the term Company
hereinafter refers to Seven Fields Development Corporation from November 7,
1987 through April 30, 1995 and Seven Fields Development Company thereafter.
In the merger agreement, the Company succeeded to all of the assets,
liabilities and historical operations of the Corporation, and the Company is
to continue the business of the Corporation, which ceased to exist as a
separate corporate entity upon consummation of the merger.
The above described merger was a component of a comprehensive restructuring
of the Corporation pursuant to which approximately 83% of its investors
(shareholders and debtholders) exchanged their stock and debt ("Company
Debt") for the common stock of a newly formed holding company - Seven Fields
Development (PA), Inc. ("Seven Fields PA"). As a result of this
restructuring, Seven Fields PA holds 83% of the stock and debt of the Company
through a wholly owned subsidiary, Seven Fields (DEL), Inc.
Organization Structure, Management And Objectives
The Company was formed for the purpose of merging with the Corporation and
thereafter carrying on the business of the Corporation with the objective
of maximizing the value of its assets and effecting a dissolution and
complete liquidation of its business assets and affairs as soon as
practicable. Such liquidation is expected to occur over an extended period
of time, as its assets are sold and developed in a manner designed to
maximize distributions to the Investors as defined below.
The sole trustee of the Company is Seven Fields Management, Inc. which is
also a wholly-owned subsidiary of Seven Fields PA. The directors and officers
of Seven Fields Management, Inc. are the same persons who were the directors
and officers of the Corporation. The executive officers of the Company are
the same persons who were the executive officers of the Corporation.
The Company as survivor of the merger, remains subject to the Bankruptcy Plan
under which the Corporation commenced operations on November 7, 1987, as more
fully described below.
Business And Operations
The Company's current major activities are the development of its undeveloped
property located in Seven Fields Borough, Butler County, PA; rental of the
more than 90 townhouse units located in Seven Fields Borough; sale of these
existing townhouse units as individual residences; and operation of the
municipal water service for Seven Fields Borough. All of these activities
focus on the single goal of maximizing the assets of the Company and
ultimately distributing such assets to its Investors in complete liquidation
at the earliest appropriate time.
Since the bankruptcy Reorganization in 1987, the Company has sold three
rental properties, repaid four million dollars of debt other than Company
Debt, and returned approximately $7.3 million to its Investors through debt
repayments.
F-8
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 1 Continued
The Company is not actively acquiring additional property for development,
however it expects that it will not be until at least the year 2000 - 2005
before development of its remaining undeveloped property at Seven Fields is
completed.
The Company - Before November 7, 1987 (Date of Reorganization)
Seven Fields Development Corporation was formed pursuant to an amended plan
of reorganization effective November 7, 1987 (the "Plan"). The Corporation,
formerly known as Earned Capital Corporation, was the surviving company of
the reorganization proceedings of Earned Capital Corporation, Managed
Properties, Inc., Canterbury Village, Inc. and Eastern Arabian, Inc. (the
"Debtors") all of which merged, pursuant to the Plan, to form the Company.
The Debtors were formed in 1976 primarily for the purpose of marketing and
managing investments in multi-family residential housing developments. From
1976 until May 1986, when the Debtors filed for reorganization under Chapter
11 of the Federal Bankruptcy Code, they acquired four significant real estate
projects. The Debtors obtained funding to acquire and/or develop these
projects by selling to investors what was purported to be percentage
interests in a particular real estate development which would be managed by
the Debtors. From 1976 to 1986 the Debtors received approximately
$57,000,000 from over 2,600 investors (the "Investors"). These Investors
had no management control over the Debtors' affairs. Management of the
Debtors was vested exclusively with four stockholders who owned 100% of the
stock of the Debtors. Investors' investment balances, including
reinvestments, exceeded $69,000,000 when the Debtors filed petitions for
reorganization with the Bankruptcy Court.
The Plan Of Reorganization And The Company Subsequent To November 7, 1987
The Plan transferred 100% ownership of the Debtors from the four former
stockholders to the more than 2,600 Investors, merged the Debtors into the
Company, removed the former shareholders from having involvement in the
management or ownership of the reorganized company, and required the
repayment in full all debt, secured and unsecured, to creditors on the same
terms of agreements then in existence. The Plan also, despite assets with
a market value far less than the obligation of the Company to the Investors,
did not reduce the face amount of the Company's obligation to those
Investors. The liability to the Investors, representing 95% of the
Investors' claims, remained a general unsecured debt of the Company and the
Company waived discharge of such debt. These non-discharged debts are
subordinated to any existing liens and priorities and any future secured
debt, and the claimant-creditor, his heirs, assigns or successors may not
file suit or take any judgment, or undertake any collection activities.
The Company's Deed of Trust states that the Company's Trustees may declare
and pay to the holders of the Company's shares of beneficial interest
("Company Shares"), such liquidating distributions as they deem proper and
advisable. However, there is no assurance that any liquidating distribution
will ever be declared or paid. Holders of Company shares could only
receive a liquidating distribution after all debt had been repaid.
Presently, and for the foreseeable future, it is unlikely that there would
be any residual assets available for distribution on Company shares.
The general, unsecured debt issued to the Investors bears no interest and is
subordinate to existing and future secured debt of the Company. As indicated
F-9
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 1 Continued
above, the Plan specified that this debt would be paid as soon as possible.
Presently, and for the foreseeable future, the assets of the Company are
inadequate to pay a substantial part of this debt. Upon liquidation, payment
of this general, unsecured debt ranks behind payment of existing and future
secured debt of the Company but before payment to holders of Company Shares.
The restructuring effected in 1995, on a consolidated basis and at the parent
company level, eliminated 83% of the debt outstanding to Investors through
their exchange of their debt for common stock of Seven Fields (PA), Inc.
Because of the requirement of retaining proportionality and the priority of
the debt over Company shares, the debt has remained unchanged at the Company
level, although 83% of such debt is held by the Company's parent.
Note 2 Summary Of Significant Accounting Policies
Reorganization
Merger And Basis Of Presentation
The merger qualifies as a tax-free reorganization and was accounted for in
a manner similar to a pooling of interests. Accordingly, the Company's
financial statements have been restated to include the results of Seven
Fields Development Corporation for all periods prior to May 1, 1995. For
comparative purposes, certain 1995 amounts have been reclassified to conform
to the presentation adopted in 1996.
Reorganization On November 7, 1987
Although the Corporation is the successor in the merger of the four Debtors
pursuant to the Plan, the Company was being treated for accounting purposes
as if it were a newly created corporation in 1987. Most significantly, the
assets upon reorganization have been stated at their appraised value instead
of historical cost. Total assets of the Corporation at November 7, 1987 were
$18,145,669, including fair market value of all real estate and horses in
the amount of $16,792,582 and historical cost for all other assets of
$1,353,087. Since total Investor balances exceeded $69,000,000 and other
liabilities exceeded $5,000,000, the Company emerged from bankruptcy
reorganization proceedings with a shareholders' deficiency of $54,812,544.
Assets received from the shareholders and related parties of the debtors and
pre-reorganization claims against the Company have been treated as an
adjustment of Pre-Reorganization Deficit at November 7, 1987. In addition,
as more fully explained in Note 9, $4,080,000 of deferred tax assets was
recognized on November 1, 1993.
The Company also filed several lawsuits to recover certain assets from the
former shareholders of the Debtors. Recoveries of any such assets serve to
reduce the beginning shareholders' deficit which was created as a part of
the Plan.
Since there was no adequate historical cost records on the part of the
Debtors, the assets of the Company were recorded at appraised value
determined by independent appraisals prepared under authority of the Court.
F-10
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 2 Continued
Use Of Estimates
The preparation of the Company's financial statements requires management to
make estimates and assumptions that affect the amounts reported at the date
of the financial statements for assets, liabilities, revenues and expenses
and disclosure of contingencies. Actual results could differ from those
estimates. The Company makes significant estimates related to common area
development costs which it expects to incur in the future, and costs to
complete specific subdivisions of lots from which lots are being sold.
Fixed Assets And Depreciation
Fixed assets are recorded at cost except for assets transferred to the
Corporation pursuant to the Plan, which are recorded at appraised value as
determined in the bankruptcy reorganization proceedings.
The carrying value of such assets is estimated to be not in excess of net
realizable value. No accumulated depreciation was recorded as of the
Corporation's reorganization on November 7, 1987, and the Company has used
straight line and double declining balance methods utilizing the half year
convention in the year of acquisition since bankruptcy reorganization. The
Company has selected estimated useful lives for the assets received pursuant
to the Plan which approximates the original estimated lives of personal
property and the residual lives of the real property.
Development Costs And Other Capitalized Costs
It is the Company's policy to capitalize all material costs related to the
development of its property. Costs, including but not limited to legal,
engineering, planning and construction, which are specifically identifiable
to each phase, are capitalized to the individual phase, and costs which are
incurred which benefit all phases being developed or to be developed in the
future are allocated to those phases. Costs which are included in the
general and administrative cost center and directly related to development
activities are capitalized to the development phases under construction
during the period. Material interest costs, are capitalized during the
construction period of each phase based on the average interest rate of the
Company's outstanding debt. The full cost of construction, including
overhead, and construction period interest of completed and partially
completed houses, has been capitalized.
Estimated costs for amenities and common areas related to phases from which
lots are being sold are accrued and a proportionate part of such costs are
included in the cost of lots sold.
Revenue Recognition
The Company recognizes revenue on the sale of lots when settlement occurs,
or the collectibility of any related receivable is reasonably assured and
the Company has completed substantially all obligated development related to
the lots sold.
Revenue is recognized upon settlement for houses which the Company
constructs provided construction is substantially completed.
The Company recognizes revenue on the sale of its townhouse units at
settlement. Sales of lots, or housing units from phases or multi unit
buildings where development or construction is not substantially complete
F-11
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 2 Continued
is accounted for in accordance with the percentage of completion method,
based on estimated cost to be incurred. Rental revenue from the Company's
townhouses is recognized on a monthly basis. The Company's leases with its
residential tenants are of a six month or one year duration and are typically
renewed by the tenant.
PUC Regulated Activities
The Company was granted permission by the Pennsylvania Utility Commission
(PUC) to charge for the water services that the Company provides the
residents of Seven Fields Borough effective November 29, 1991.
In accordance with regulations promulgated by the PUC, the Company is
required to apply for permission from the PUC to establish, or change the
rates it charges its customers, follow PUC accounting policies and
procedures, and adhere to all other rules established by the PUC.
Capitalized Development And House Construction Costs
The cost of the inventory of unsold lots is determined based on the lower of
the average lot cost for each phase or market. The cost of unsold
constructed houses is based on the lower of cost or market for each house.
Provision For Losses
Provisions for losses on notes and accounts receivable and lots and houses
are charged to operations when its is determined that the investment in such
assets is impaired.
Cash And Cash Equivalents (Cash And Temporary Investments)
For purposes of the statement of cash flows, the Company considers all highly
liquid investments, not otherwise restricted, with a maturity of three months
or less at the time of purchase to be cash equivalents.
Change Of Accounting Principle And Recent Accounting Developments
The Company adopted FAS No. 115 "Accounting For Certain Investments In Debt
And Equity Securities"' issued by the Financial Accounting Standards Board
effective November 1, 1994. FAS 115 requires companies to recognize gains
and losses due to the fluctuation of market value of such securities. There
was no financial impact to the Company as a result of adopting this new
standard.
In March 1995 the Financial Accounting Standards Board issued FAS No. 121
"Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets
To Be Disposed Of". FAS No. 121 establishes standards for determining when
an asset impairment should be recognized based primarily on an undiscounted
cash flow model. The Company, pending review of its impact, has deferred
adoption of this new standard which must be adopted not later than November
1, 1996. Initially it does not seem that there will be a material impact
when this standard is adopted.
Note 3 Real Estate Rental Activities
A summary of the historical cost of properties held for rent located at
Seven Fields consisting of 91 and 132 residential townhouse units at October
31, 1996 and 1995 respectively, a commercial office building and two
F-12
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 3 Continued
commercial units, all of which are included in property, buildings and
equipment on the Company's balance sheets, follows:
<TABLE>
<CAPTION>
October 31,
1996 1995
<S> <C> <C>
Land $ 386,789 $ 452,061
Buildings 3,914,327 5,217,808
Equipment And Improvements 359,349 647,211
4,660,465 6,317,080
Accumulated Depreciation 1,564,229 2,137,115
$ 3,096,236 $ 4,179,965
</TABLE>
Tenant leases are typically of 6 to 12 month duration. Individual tenants
usually renew their leases upon expiration, however the Company is in the
process of liquidating its rental townhouses. During 1995 the Company
completed construction of a two story office building having 9,434 square
feet. The Company occupies 4,717 square feet and rents 4,717 square feet to
the Borough of Seven Fields under terms of a five year lease which expires
July 31, 2000. The Borough is required to pay all utilities and 50% of the
operating costs of the building. The Company has granted the Borough an
option to purchase the building at the end of the lease at a then fair
market value to be determined on the basis of the average of two appraisals.
Minimum lease payments to be received under non-cancelable operating leases
at October 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 321,677
1998 31,545
1999 35,083
2000 28,302
Thereafter
Total $ 416,607
</TABLE>
Note 4 Mortgage Notes Receivable (Mortgage Assignments)
Commencing in 1993, the Company began financing the purchase of certain of
the townhouse units which it sells to individuals. Such financing is
facilitated by the Company receiving an assignment of the mortgage note
granted by the buyer of the individual townhouse to the mortgagee - Howard
Hanna Financial Services. The Company has not perfected its security
interest in the underlying collateral in that it is the Company's policy to
not record these assignments with the Butler County Recorder of Deeds. The
Company intends to sell these mortgages in the open market when market
conditions are favorable.
The Company charges operations with any credit loss it incurs on an
individual loan basis, and losses because of market changes on an aggregate
basis. Market value is determined based on the current discount rates for
mortgages of identical terms and interest rates. The Company held the
following mortgage note assegnments at October 31, 1996 and 1995:
F-13
(PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 4 Continued
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Number of Mortgage Notes 1 3
Approximate Average Interest Rate 8.125% 7.875%
Final Maturity Date (Predominate) 2024 2024
Face Amount of Mortgage Notes $ 62,910 $ 188,125
Carrying Amount of Mortgage Notes
(Market Value) $ 61,807 $ 186,682
Reconciliation Of The Carrying
Amounts of Notes
1996 1995
Beginning Balances $ 186,682 $ 805,220
Principal Collected (1,160) (5,476)
Notes Sold (124,055) (637,225)
Market Valuation Change and
Realized Gains or (Losses) 340 24,163
Ending Balance $ 61,807 $ 186,682
Delinquent Loans 0 1
Principal Amount of Delinquent Loans 0 $ 63,627
</TABLE>
Note 5 Litigation
The Company has concluded all litigation with the former majority
shareholder of the Debtors as a result of a settlement which was finalized
in November 1995. The significant terms of this settlement are:
1. The second 50% of the land held by the Company in co-tenancy has been
transferred to the Company. The value of this 50% interest has not yet
been finally determined, and no additional amount has been included as an
asset in the Company's balance sheet.
2. The shareholders' derivative action filed against the Company's current
management has been discontinued and withdrawn.
3. All counterclaims assessed by the former majority shareholder against
the Company have been discontinued and withdrawn.
F-14
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 5 Continued
4. The Company has disbursed $175,000 of the horse escrow account to the
former majority shareholder.
5. Both parties agreed to let the court decide the question of ownership of
the 45 acres and former majority shareholder's (The "Reillys") residence,
and agreed that the Court's decision on this property would be non-
appealable. On November 16, 1996, the Court decided to allow the Reilly's
to retain title to this property. No amount had been included in the
Company's balance sheets for this claim.
6. The Corporation shares and debt owned by the former majority shareholder
have been canceled.
Note 6 Notes Payable - Credit Lines
The Company entered into a revolving credit line in the amount of $1,000,000
with National City Bank in November 1995. Interest is payable monthly at
the bank's prime rate plus 1%. The credit line is to be used for individual
house construction in the Northridge Manor Subdivision and is secured by
a mortgage on the Company's property in that subdivision. The credit line
matures December 1, 1998 and advances outstanding more than 12 months are to
be repaid over a 48 month term. National City may call the notes outstanding
on May 15 of each year, however, the Company is allowed 180 days to repay
the balance in full. The total amount outstanding as of October 31, 1996
was $130,000, and bears interest of 9 1/4 % per annum.
In August 1996, the Company also entered into a revolving credit line
of $1,000,000 with First Western Bank, with interest payable monthly at the
bank's prime rate plus 3/4%. The credit line is to be used for constructing
up to 12 homes in the Hawthorne Commons Subdivision, and is secured by
the Company's property in that subdivision. Borrowings are limited to
$80,000 for each house, and any outstanding principal is required to be
repaid upon the sale of each house. At October 31, 1996, the Company has no
amount outstanding under this line of credit.
Subsequent to the balance sheet date on November 25, 1996, the Company also
arranged a third revolving line of credit in the amount of $750,000. The
proceeds under this credit line are restricted to the construction of
townhouses in the Company's Georgetowne Manor Subdivision. Advances under
this credit line will bear interest at First Western Bank's prime rate plus
1/2%, and must be repaid by November 30, 1997.
Note 7 Mortgages Payable
The Company is obligated under a floating rate mortgage note in the amount
of $1,231,025 at October 31, 1996. Interest is based on the bank's prime
rate plus 5/8%, or fixed annually at the bank's fully absorbed cost of
funds, plus 2 1/2%. The rate of interest has been fixed at 8% through April
30, 1997. Repayments are in equal monthly principal and interest installments
of $17,391 with a final balloon payment due November 1, 1999. The mortgage
note is collateralized by 36 rental townhouse units having a net book value
of approximately $737,000 and an approximate fair market value of $2,600,000
based on the recent sales prices of townhouses.
F-15
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31 1996 AND 1995
(CONTINUED)
Note 7 Continued
On November 29, 1995, the Company granted PNC Bank a mortgage on its office
building to secure a term loan in the amount of $750,000. The proceeds of
this loan were used to replenish its working capital, and to carry on its
development and construction activities. This office building was completed
in August 1995 at a cost of $1,263,207. Interest is based on PNC's prime
rate plus 1/2% or is fixed at 2 1/4% above PNC's fully absorbed cost of
funds and is being amortized over a 15 year term, but matures on December 10,
2000. At October 31, 1996, monthly principal and interest payments are
$7,265 based on the current interest rate of 8.12%, which has been fixed
through December 10, 1999.
The Company must also comply with certain financial covenants including at
all times having a tangible net worth (defined as net worth plus general
unsecured debt less deferred tax assets) of $10,000,000, a current ratio
of 2 to 1; debt to net worth (adjusted for general unsecured debt and
deferred tax assets) of .5 to 1; and debt service coverage of 1.1 to 1.
Prior to December 5, 1996, the Company was required to maintain tangible net
worth of $12,425,000 at the end of its fiscal year and $11 million during
the year. During 1996 the Company's net worth did not meet these
requirements, and PNC Bank has waived such non compliance, and on December
5, 1996 reset the net worth covenant at $10 million. It is anticipated that
this net worth covenant will periodically be reduced in future years to
facilitate the Company's planned liquidation of its assets and distribution
of the proceeds of such liquidation to its Debtholders. There are also
certain penalties if prepayments exceed specified amounts. Aggregate
maturities of long term debt at October 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 125,204
1998 145,756
1999 158,163
2000 897,688
2001 631,770
</TABLE>
Surety And Mortgage
The Company is contingently liable under terms of a $2,000,000 mortgage it
granted a commercial surety company on five of its buildings containing 30
townhouse units at its Seven Fields complex. These townhouses, having an
approximate book value of $610,000 at October 31, 1996 and an estimated fair
market value based on recent sales of individual townhouses of $2,200,000,
serve as collateral for performance and maintenance bonds issued by the
surety company totaling $2,400,000, related to the Company's land
development. To date, the Company has successfully completed, to the extent
possible, and to the satisfaction of the Borough, each of its previous
subdivisions and each of its prior bonds have been duly released.
Note 8 Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments at October 31, 1996:
Cash and temporary investments: The carrying amount reported in the balance
sheet for cash and temporary investments approximates fair value.
F-16
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31 1996 AND 1995
(CONTINUED)
Note 8 Continued
Certificates of deposit, accounts and notes receivable, deposits, and
accounts payable: The carrying amounts of these assets and liabilities in
the balance sheet approximates fair value.
General unsecured debt - minority investors and general unsecured debt -
Seven Fields (DEL) Inc.: The carrying amount of general unsecured debt -
minority investors of $10,067,744 and general unsecured debt - Seven Fields
(DEL) Inc. of $49,135,104 is materially in excess of the fair value of these
financial instruments. As more fully described in Notes 1 and 11, the
general unsecured debt is non-interest bearing, has no maturity date, and
legal action by the debt holder to collect is precluded. Furthermore,
since the Company emerged from bankruptcy proceedings in 1987, there have
been no known sales of the debt in the open market. The amount of this debt,
which is ultimately repaid, and the timing of such repayment, is totally
dependent upon the Company's success in developing its property and
liquidating and distributing its assets to the debtholders. Consequently,
this debt is more characteristic of an equity instrument having a preference
upon liquidation, bears no interest or dividend rate, has no fixed cash
stream, or maturity date. It is not practicable to determine the fair value
of the general unsecured debt.
Notes Payable - Credit lines and mortgages payable: The carrying amounts of
notes payable - credit lines and mortgages payable approximates fair value
since interest rates of the mortgages and credit line notes approximates
interest rates currently available to the Company on other debt instruments
and the credit line interest rates are of a variable nature.
Note 9 Income Taxes
The Company recognized deferred tax assets of $4,080,000 on November 1, 1993,
as a result of adopting statement of financial accounting standard No. 109
"Accounting For Income Taxes". The net deferred tax asset of $4,080,000 is
a result of higher tax basis of the Company's assets than the basis
recognized for financial reporting purposes at the time of reorganization.
Recognition of this deferred tax asset reduced the Shareholders' Deficit
created at reorganization.
F-17
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENT
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 9 Continued
As of October 31, 1996, the Company has federal and state net operating loss
carryforwards for tax purposes which, if not utilized, expire as follows:
<TABLE>
<CAPTION>
October 31, Federal State
<S> <C> <C>
1997 $ 1,000,000
1998 1,000,000
2003 $ 2,501,469
2004 3,911,434
2005 4,605,975
2006 626,911
2007 870,453
2008 3,892,382
2009 1,202,522
2010 1,125,160
2011 454,698
Total $19,191,004 $ 2,000,000
</TABLE>
For Pennsylvania income tax purposes, losses of not more than $500,000 per
year from fiscal years ending October 31, 1989 through October 31, 1994
are available to offset taxable income generated in fiscal 1997 and 1998.
Losses generated in fiscal 1996 may be used to offset income generated in
fiscal years 1997 and 1998. The maximum net operating loss that may be used
in any fiscal year is $1,000,000.
Adoption of FAS 109 permitted the Company to recognize deferred tax assets
substantially equivalent to the estimated tax benefits to be derived from
the excess of the tax basis of the Company's assets at reorganization over
the asset amounts used for financial reporting purposes. The Company has
also estimated the extent to which the deferred tax asset should be reduced
by a valuation allowance so that the asset will not be carried in excess of
its estimated realizable value.
The net realizability of the deferred income tax assets is re-evaluated
annually. The deferred tax asset which the Company estimated will be
realizable is calculated annually to be an amount not to exceed 7
times the average pre-tax income for the latest two fiscal years at the
tax rates in effect at that time. The Company's ability to utilize its
deferred tax assets is based solely on its ability to generate sufficient
pre-tax income in the future prior to its complete liquidation, which is
limited by the total property which the Company has available to develop in
the future. As more fully explained in Note 1, the Company does not intend
to acquire additional property to develop, but intends only to develop
its existing property, liquidate its remaining assets, and distribute its
assets to its Investors. It is estimated that this process will not be
completed until the years 2000 to 2005.
F-18
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 9 Continued
At October 31, 1996, the significant components of the Company's deferred
tax assets are as follows:
<TABLE>
<CAPTION>
Federal State Total
<S> <C> <C> <C>
Tax over financial reporting basis
of assets originating at
reorganization $ 2,573,293 $ 840,011 $ 3,413,304
Net operating loss carryforwards
resulting from the utilization of
the higher tax basis of assets
since reorganization 6,457,009 199,800 6,656,809
Potential tax benefit at
October 31, 1996 9,030,302 1,039,811 10,070,113
Valuation allowance -
Reduction for estimated
unutilized deferred tax assets 5,863,302 214,811 6,078,113
Net Deferred Tax Assets $ 3,167,000 $ 825,000 $ 3,992,000
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
1996 1995
<S> <C> <C>
Deferred:
Federal $ (157,000) $ (10,000)
State 157,000 58,000
Provision For Income Taxes $ $ 48,000
</TABLE>
A reconciliation of income taxes with the amounts which would result from
applying the U.S. statutory rate follows:
<TABLE>
<CAPTION>
Year Ended October 31,
1996 1995
<S> <C> <C>
Tax at U.S. Statutory Rate $ 579,701 $ 467,593
State Income Taxes Net of Federal Benefit 112,418 90,677
State Deferred Tax Adjustment For Rate
Change 18,000
Utilization of Deferred Income Tax Asset (692,119) (528,270)
Provision For Income Taxes $ $ 48,000
</TABLE>
Note 10 Temporary Investments
Temporary investments at October 31, 1996 and 1995 consist of $149,825 and
$1,205,919 respectively invested in PNC Bank's PNC Investment Short Term
Common Trust Fund. The underlying securities which consist of U.S. Treasury
F-19
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 10 Continued
and U.S. Government Agency obligations and repurchase agreements relating to
such obligations have average maturities of 20 to 60 days. The proceeds are
deposited automatically to the Company's operating account as needed. Cost
and market value of temporary investments are identical to each other at
October 31, 1995 and 1996.
Note 11 Capital Stock And Subordinated Debt
The Company, at the time of its bankruptcy reorganization on November 7,
1987, as prescribed by the Plan, issued to the Investors certificates
intended to represent shares of common stock and general, unsecured debt of
the Company. The certificates representing the shares state (a) the number
of shares issued, (b) total amount of the Investor's claim and (c) the amount
of such claim as represented by the shares and the undischarged indebtedness
owed to Investors by the Company. The certificates also have the following
statement printed thereon: "The equity and debt interests represented hereby
are not severable." The Board of Directors of the Company, on August 25,
1989, passed a resolution which provided that the shares and the debt held
by each Investor shall be severable and separately transferable.
The two separate instruments have the following characteristics.
General Unsecured Debt (Subordinated Debt)
: Subordinate to all existing debt at Reorganization (November 7, 1987)
: Subordinate to all future secured debt incurred
: Non-interest bearing
: Legal action to collect is precluded
: No voting rights
: Issued at 95% of face value of Investors' account balance regardless of
the value of the underlying assets available to pay this debt
Trust Shares
: Voting stock
: Issued at 5% of face value of Investors' account balance
: Presently and for the foreseeable future has no liquidation value
because of the excess of debt over assets
: Presently and for the foreseeable future will not have dividends
declared and it is anticipated that no dividends will ever be paid
because of the excess of the Company's debt over its assets
F-20
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 11 Continued
Subsequent to the merger and restructuring described in Note 1, 83% of the
Company's stock and debt is held by Seven Fields DEL, a wholly-owned
subsidiary of Seven Fields PA. Seven Fields PA acquired 83% of the
Company's debt and stock in exchange for its common stock from those
Investors (83%) who accepted the Seven Fields PA's exchange offer.
Note 12 Capitalized Development Costs, House Construction Costs, PUC
Regulated Water Costs And Property Held For Investment And Future Development
The Company has incurred substantial costs in continuing the development of
certain of its property located at Seven Fields, Butler County, PA. The
Company's development and house construction activities for the years ended
October 31, 1996 and October 31, 1995 are summarized below for each of the
areas of significant activity.
F-21
<PAGE>
THIS PAGE LEFT BLANK INTENTIONALLY
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 12 Continued
The following information summarizes development activities for 1996.
<TABLE>
<CAPTION>
Com-
Colon- mercial Com-
ial North mercial
Heights Pointe Retail& Brandy- Brandy- North George-
I, II, Center Service wine wine Ridge town
& III Phase P Phase Q Woods Commons Manor Manor
<S> <C> <C> <C> <C> <C> <C> <C>
Acres 82 18 5 34 9 17 10
Total Lots 158 6 3 75 44 45 77
Unsold Lots 9 5 1 8 2 38 69
Balance
October
31, 1995 $399,963 $471,484 $202,348 $387,800 $195,036 $685,185 $573,645
1996 Costs
Capitalized:
Reclassify
Land Costs
Engineering &
Supervision 3,937 6,150 17,603 15,093 18,979 25,462 27,359
Excavation &
Construction 65,528 1,647 44,934 14,649 11,382 142,597 287,338
Overhead
Allocated 1,584 3,972 1,584 1,584 2,388 3,972 3,972
Interest 5,400
Total
Accumulated
Costs 471,012 483,253 266,469 419,126 227,785 857,216 897,714
Less Cost of
Houses And
Lots Sold 282,856 88,548 63,534 261,526 194,838 147,551 111,720
Balance
October 31,
1996 $188,156 $394,705 $202,935 $157,600 $ 32,947 $709,665 $785,994
Classification
of Costs:
House
Construction &
Development 188,156 394,705 202,935 157,600 32,947 709,665 785,994
Unutilized Land
Property, Plant
& Equipment $188,156 $394,705 $202,935 $157,600 $ 32,947 $709,665 $785,994
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Single
Moon, And
North Un- Townhouse, Multi-
Ridge Hawthorne utilized Water & Office Family
Estates Commons Parcels Other Building Houses Total
<S> <C> <C> <C> <C> <C> <C>
31 24 245 40 3
56 96
46 96
$2,356,397 $1,015,303 $1,580,331 $1,961,257 $ 9,828,749
$ 265,302 $ 317,481 (431,358) (317,123) 165,698
55,426 88,050 106,222 2,000 521,858 888,139
1,144,554 858,861 111,674 5,065 3,848,023 6,536,252
3,972 7,944 7,140 38,112
30,150 30,000 40,008 105,558
1,499,404 1,302,336 2,150,075 1,022,368 1,263,208 6,536,844 17,396,810
271,289 11,234 3,694,641 5,127,737
$1,228,115 $1,302,336 $2,150,075 $1,011,134 $1,263,208 $2,842,203 $12,269,073
1,228,115 1,302,336 17,606 2,842,203 7,862,262
2,150,075 641,288 2,791,363
352,240 1,263,208 1,615,448
$1,228,115 $1,302,336 $2,150,075 $1,011,134 $1,263,208 $2,842,203 $12,269,073
</TABLE>
<TABLE>
<CAPTION>
Residential & Residential &
Estimated Additional Costs To Be Commercial Commercial
Incurred In Next 5 Years Land Building
Development Construction Total
<S> <C> <C> <C>
1997 $ 852,000 $ 5,564,000 $ 6,416,000
1998 2,052,000 7,948,000 10,000,000
1999 640,000 6,876,000 7,516,000
2000* 336,000 5,352,000 5,688,000
2001* 1,400,000 4,552,000 5,952,000
<FN>
* Incomplete Data
</TABLE>
F-23
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 12 Continued
The following information summarizes development activities for 1995.
<TABLE>
<CAPTION>
Colonial
Heights Commer- Commer- Brandy- Brandy- North
I, II cial cial wine wine Ridge
& III Phase P Phase Q Woods Commons Manor
<S> <C> <C> <C> <C> <C> <C>
Acres 82 18 5 34 9 17
Total Lots 158 6 3 75 44 45
Unsold Lots 17 6 2 20 12 45
Balance
October 31,
1994 $ 633,270 $ 242,569 $ 117,406 $ 646,340 $ 521,400
1995 Costs
Capitalized:
Reclassify Land
Costs 125,003
Engineering &
Supervision 5,991 22,293 14,990 5,431 2,576 67,076
Excavation &
Construction 67,256 198,878 124,323 18,896 14,313 477,062
Overhead
Allocated 4,044 4,044 4,044 4,044 4,044 4,044
Interest 3,700 1,900 12,000
Total Accum-
ulated Costs 710,561 471,484 262,663 674,711 542,333 685,185
Less Cost of
Houses And
Lots Sold 310,598 60,315 286,911 347,297
Balance
October 31,
1995 399,963 471,484 202,348 387,800 195,036 685,185
Classification
of Costs:
House
Construction
& Development 399,963 471,484 202,348 387,800 195,036 685,185
Unutilized Land
Property,
Plant
& Equipment
$ 399,963 $ 471,484 $ 202,348 $ 387,800 $ 195,036 $ 685,185
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
Office
Moon Twp., And
George- Ununtil- Water Garden Single Multi-
town ized And Apart- Family Family
Manor Parcels Other ments Houses Houses Total
<S> <C> <C> <C> <C> <C> <C>
10 300 40 3
77
77
$2,170,643 $ 977,540 $ 550,553 $ 743,029 $ 879,663 $ 7,482,413
$197,145 (322,148)
15,512 123,507 11,155 33,056 75,394 125,424 502,405
343,888 369,105 38,390 968,602 1,668,095 2,177,676 6,466,484
900 15,290 10,120 50,574
16,200 18,000 12,230 13,016 77,046
573,645 2,356,397 1,027,085 1,580,331 2,498,748 3,195,779 14,578,922
11,782 1,593,904 2,139,366 4,750,173
573,645 2,356,397 1,015,303 1,580,331 904,844 1,056,413 9,828,749
573,645 28,840 904,844 1,056,413 4,905,558
2,356,397 639,288 2,995,685
347,175 1,580,331 1,927,506
$573,645 $2,356,397 $1,015,303 $1,580,331 $ 904,844 $1,056,413 $ 9,828,749
</TABLE>
<TABLE>
<CAPTION>
Residential
& Commercial Residential
Land & Commercial
Estimated Additional Costs To Be Development Construction Total
Incurred In Next 5 Years
<S> <C> <C> <C>
1996 $2,974,000 $7,016,000 $ 9,990,000
1997 2,244,000 9,534,000 11,778,000
1998 614,000 7,422,000 8,036,000
1999* 174,000 6,102,000 6,276,000
2000* 1,791,000 4,782,000 6,573,000
<FN>
* Incomplete Data
</TABLE>
F-25
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 13 Business Segment Information
<TABLE>
<CAPTION>
For The Year Ended October 31, (000's)
1996 1995
Develop- Develop-
ment, ment,
Con- Rental Con-
Rental & struction & struction
General & PUC General & PUC
Operations Activities Total Operations Activities Total
<S> <C> <C> <C> <C> <C> <C>
Gross
Operating
Revenue $ 801 $ 9,488 $10,289 $1,080 $ 9,205 $10,285
Costs &
Operating
Expenses 785 7,442 8,227 975 7,649 8,624
Depreciation
Expense 269 62 331 329 46 375
Operating
Income (Loss)
(253) 1,984 1,731 (224) 1,510 1,286
Total
Identifiable
Assets 7,861 11,569 19,430 8,704 10,332 19,036
Capital
Expendi-
tures $ 16 $ 119 $ 135 $ 98 $ 1,064 $ 1,162
</TABLE>
F-26
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 14 Concentration Of Credit Risks
The Company's customers are the general public for the rental of apartments
in its rental project and customers, mostly its tenants, to which water
utility services are provided. The Company has historically incurred
minimal credit losses.
From time to time the Company maintains cash deposits with its principal
bank in excess of the FDIC insured limits.
The Company began financing certain of the sales of its townhouses during
1993. The mortgage originator, in whose name the mortgage is recorded as a
first mortgage on the townhouse sold, assigns the mortgage note to the
Company, which assumes all of the market and credit risks related to the note.
As of October 31, 1995 and 1996, the Company held $186,682 and $61,807
respectively of these mortgage note assignments. The Company's interest in
the underlying collateral is not perfected in that it is the Company's policy
to not record the mortgage note assignments with the Butler County Recorder
of Deeds. The Company recognized gains of $340 in 1996 and $24,163 in 1995
on these mortgage notes as a result of changes in market interest rates.
The Company will continue to be susceptible to possible future losses as
long term interest rates continue to fluctuate. The risk of such losses can
be somewhat mitigated by the higher yield earned on the mortgage note
assignments held by the Company, than it earns on other funds it invests
short term.
Note 15 Environmental Matters
The Company knows of no environmental risks associated with its properties
and operations.
Note 16 Related Party Transactions
A shareholder and director of Seven Fields PA provided the Company with
certain design and architectural services and was paid $210 for such
services. In addition, the law firm in which a director of Seven Fields PA
is a principal was paid $8,445 for legal services provided to the Company.
The Company's management believes that the Company received services of
economic value equivalent to the amounts paid.
The Company made available a $135,000 construction loan to a homeowners
association of property owners which have purchased the Company's townhouses.
The loan bears interest at 10.25% with principal and interest payments of
$1,803 beginning December 1, 1996. The loan is to be used for certain
improvements to townhouses in the Castle Creek development, and is secured
by all present and future homeowner's fees. The loan matures November 1,
2001. The total amount outstanding at October 31, 1996 was $8,240.
F-27
<PAGE>
SEVEN FIELDS DEVELOPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(CONTINUED)
Note 17 Subsequent Events
Additional Distribution on General Unsecured Debt
The Company made its fifth distribution in partial repayment of its
General Unsecured Debt on December 12, 1996, in the amount of $997,932 or
approximately 1 1/2% of the original amount of this debt.
F-28
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Deed of Trust of the Registrant (5)
3.2 By-Laws of the Registrant (5)
4.1 Excerpt of Amended Plan of Reorganization (1)
4.2 Specimen Certificate for shares of beneficial interest
in Registrant (5)
4.3 Specimen Note representing general unsecured subordinated
debt of Registrant after separation of stock and debt (2)
4.4 Shareholder Protection Rights Agreement (3)
4.5 Amendment dated October 11, 1994 to Shareholder Protection
Rights Agreement (5)
10.1 Rates, rules and regulations governing the distribution of
water service - PA Public Utility Commission (3)
10.2 Plan and Agreement of Merger between the Registrant and
Seven Fields Development Corporation (5)
10.3 Mortgage Note dated October 28, 1994 of the Registrant to
PNC Bank, National Association (6)
10.4 Open End Mortgage and Security Agreement dated October 28,
1994 between the Registrant and PNC Bank, National
Association (6)
10.5 Assignment of Rents, Leases and Profits dated October 28,
1994 between the Registrant and PNC Bank, National
Association (6)
10.6 Amendment to Loan Documents of October 28, 1994 and release
from mortgage between registrant and PNC Bank, National
Association dated May 1, 1996.
10.7 Amendment to Loan Documents of October 28, 1994 related to
financial covenant for the maintenance of minimum tangible
net worth, between the Registrant and PNC Bank, National
Association.
10.8 Surety Agreement dated October 28, 1994 between the
Registrant and Allegheny Surety Company (6)
10.9 Mortgage dated October 28, 1994 between the Registrant and
Allegheny Surety Company (6)
10.10 Settlement Agreement with former majority shareholder (7)
<PAGE>
10.11 Promissory Note dated November 29, 1995 to PNC Bank (7)
10.12 Open End Mortgage and Security Agreement dated
November 29, 1995 to PNC Bank (7)
10.13 Assignment of Rents dated November 29, 1995 to PNC Bank (7)
10.14 Revolving Line of Credit Loan Agreement dated November 13,
1995 between the Registrant and Integra Bank (7)
10.15 Open End Mortgage and Security Agreement dated November 13,
1995 between the Registrant and Integra Bank (7)
10.16 Agreement for Assignment of Sales Agreements and Contract
Deposits dated November 13, 1995 between the Registrant
and Integra Bank (7)
10.17 Office Lease dated August 1, 1995 between the Registrant
and The Borough of Seven Fields (7)
10.18 Management and Administrative Services Agreement dated
April 30, 1995 (7)
10.19 Revolving line of credit loan agreement, open-end mortgage
and security agreement, and revolving line of credit note
dated August 13, 1996 between the Registrant and First
Western Bank National Association.
10.20 Revolving line of credit loan agreement, open-end mortgage
and security agreement, cross-default agreement, and
revolving line of credit note dated November 25, 1996 between
the Registrant and First Western Bank National Association.
27 Financial Data Schedule - 1996
<PAGE>
(1) Filed as exhibit to the Registrant's Registration Statement
on Form 10 filed October 23, 1989 and incorporated herein by
reference.
(2) Filed as exhibit to the Registrant's Annual Report on Form
10-K filed February 13, 1991 and incorporated herein by
reference.
(3) Filed as exhibit to the Registrant's Annual Report on
Form 10-K filed January 29, 1992 and incorporated herein by
reference.
(4) Filed as exhibit to the Registrant's Annual Report on
Form 10-K filed on February 10, 1993 and incorporated
herein by reference.
(5) Filed as exhibit to Registration Statement on Form S-4,
File No. 33-85102, and incorporated herein by reference.
(6) Filed as exhibit to Registrant's Annual Report on
Form 10-KSB filed January 27, 1995 and incorporated herein
by reference.
(7) Filed as exhibit to Registrant's Annual Report on
Form 10-KSB filed January 26, 1996 and incorporated herein
by reference.
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 401,870
<SECURITIES> 53,755
<RECEIVABLES> 287,973
<ALLOWANCES> 57,552
<INVENTORY> 10,653,625
<CURRENT-ASSETS> 0
<PP&E> 5,649,019
<DEPRECIATION> (2,083,587)
<TOTAL-ASSETS> 19,430,106
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<BONDS> 61,161,429
<COMMON> 3,484,560
0
0
<OTHER-SE> (46,590,991)
<TOTAL-LIABILITY-AND-EQUITY> 19,430,106
<SALES> 9,487,397
<TOTAL-REVENUES> 10,288,781
<CGS> 6,708,350
<TOTAL-COSTS> 8,557,985
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 78,517
<INCOME-PRETAX> 1,705,002
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<INCOME-CONTINUING> 1,705,002
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<EXTRAORDINARY> 0
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