US Securities and Exchange Commission
Washington, DC 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from .................. to ....................
Commission file number 33-85102-01
SEVEN FIELDS DEVELOPMENT (PA), INC.
(Name of small business issuer in its charter)
Pennsylvania 25-1752570
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2200 GARDEN DRIVE, SUITE 200, MARS, PA 16046-7846
(Address of principal executive offices) (Zip Code)
(412) 776-5070
(Issuer's telephone number, including area code)
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:
Common Stock, 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 of 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: $ $10,930,834.
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The aggregate market value of the issuer's voting stock held by non-
affiliates as of January 28, 1998 is indeterminable. There is no known
market for the issuer's common stock, and the terms of any private sales of
such common stock which did occur are not known to the issuer.
As of January 28, 1998 there were 2,905,682 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ; No X
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
Item 1. Description of Business
Background and Reorganization
Seven Fields Development (PA), Inc. (the "Company" or "Seven Fields PA") is
a Pennsylvania corporation which, through its indirect, majority-owned
subsidiary, Seven Fields Development Company, a Pennsylvania business trust
(the "Trust"), engages in the business of managing multi-family residential
rental units and developing and selling real estate in the western
Pennsylvania area.
The Company was incorporated by Seven Fields Development Corporation (the
"Corporation") in 1994 as part of the Corporation's 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 Company 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 the Company
("Company Stock") on the basis of one share of Company 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 the Company and formed the Trust as a
Pennsylvania business trust.
(3) The Corporation formed Seven Fields Management, Inc. as a wholly-owned
subsidiary of the Company to be the sole trustee of the Trust.
(4) The Corporation and the Trust entered into an Agreement of Plan of Merger
(the "Merger Agreement") pursuant to which the Corporation merged with and
into the Trust and each shareholder of the Corporation received one share of
beneficial interest in the Trust (a "Trust Share") in exchange for each share
of Corporation Stock held of record.
(5) Each of the Company, the Trust, 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 Company
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 the Company as the holder of
all Corporation Stock tendered in the Exchange Offer, received Trust Shares
in exchange for their Corporation Stock. Such persons also continue to hold
their Corporation Debt which became an obligation of the Trust as a result
of the Merger (hereinafter referred to as "Trust Debt" or "Investor Debt").
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.
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The Company acts strictly as a holding company and is the sole shareholder of
Seven Fields Management, which is the sole trustee of the Trust, and Seven
Fields DEL, which owns approximately 83% of the outstanding Trust Shares and
Trust Debt.
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 effective November 7, 1987, (the "Bankruptcy Plan").
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 US 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 Trust, as the survivor
to the Merger, remains subject to the Bankruptcy Plan.
Operating Activities (November 7, 1987 through October 31, 1997)
Since it commenced business on November 7, 1987, the Company, (unless
otherwise indicated, Company, as used hereinafter, refers to the Company and
its subsidiaries existing since November 7, 1987), has focused its attention
primarily on managing and selling its rental properties; developing and
selling its undeveloped property as individual residential and commercial
lots; and constructing and selling homes.
The ultimate goal of the Company is to enhance the liquidation value of its
assets so as to return to its stockholders the maximum amount at the
earliest possible time.
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 1991, the Company completed
a Master Plan for development of Seven Fields. Seven Fields Borough agreed
in concept with the Master Plan and adopted a zoning ordinance. The Master
Plan consists of 18 separately identifiable parcels of which seven are
designated single family containing 260 acres, five are designated multi-
family containing 59 acres, five are designated commercial containing 86
acres and two are designated high density containing fifteen acres. In 1992,
the Company acquired forty adjacent acres located in Cranberry Township that
are designated for single family use.
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In August 1990, the Company began construction of single family homes at
Seven Fields under the trade name "Hawthorne Construction Company". During
fiscal 1996, the Company began construction of 18 homes and 23 multi-family
units, sold 13 homes and 18 multi-family units and at October 31, 1996, had
an inventory of 14 homes and 26 multi-family units. In fiscal 1997, the
Company began construction of 11 additional homes and 29 multi-family units,
sold 14 homes and 24 multi-family units, and at October 31, 1997, had 11
homes and 31 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 built 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 $170,000 to $250,000. In the Company's Brandywine
Commons Subdivision, the Company built fourplex units which were sold at
prices ranging between $115,000 and $175,000. 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. 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 expected to sell for prices ranging from
$175,000 to $210,000, and townhouse units in the Georgetowne Manor
Subdivision are being sold for $100,000 to $125,000. Homes in Hawthorne
Commons and Northridge Estates are expected to range in price between
$140,000 and $220,000 and between $180,000 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 most of the construction in the
Northridge Manor Subdivision, 75% of the construction in the Brandywine Woods
Subdivision, 20% of the construction in the Colonial Heights Subdivision and
10% in Northridge Estates. Approximately eight other builders are currently
constructing homes at Seven Fields.
In fiscal 1995, the Company completed construction of an 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 building at fair market value during the term of its five year lease.
The Company, so as to facilitate its plans to develop the property north of
Rt. 228, has spent significant amounts to extend utility service to this area.
This cost is being allocated to the subdivisions north of Rt. 228.
During fiscal 1997, improvements to the Mars-Crider Road, an important
access road in Cranberry Township and Seven Fields Borough to the Company's
subdivisions north of Rt. 228, were substantially completed at a total
approximate cost of $940,000. In September 1997, the Company began
constructing significant improvements to Rt. 228 which divides the Company's
property. These improvements, having an estimated cost of $1.6 million,
once completed will facilitate the development of the Company's property
located north of Rt. 228 by the Company, or other developers which purchase
property from the Company.
During 1997, the Company also substantially completed a new sales center,
sold several additional commercial parcels of property, and entered into
agreements to sell its Moon Township property and most of its remaining
commercial property at Seven Fields.
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.
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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.
Demand for the Company's single family homes was stable compared to 1996,
and although demand for the fourplex and new townhouse units was strong,
sales of existing townhouse units was down significantly from previous years.
Management believes that lower sales of existing townhouses is a result of
competition from the resale of townhouses which it had previously sold, and
to some extent by the competition from the sale of its newly constructed
Georgetowne Manor Townhouses.
The Company has entered into an agreement to sell 68 of the remaining
original townhouses to a single investor at an average selling price of
$54,500 each. The sale of these townhouses is expected to be completed
in early 1998.
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 property 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 costs so as to comply with various
environmental laws. Such costs are considered a normal cost of operations,
and have historically not caused the Company's selling prices for lots
and houses to be uncompetitive.
The Company anticipates spending nearly $1.5 million during 1998 for
completion of the Rt. 228 improvements, and storm water control work north
of Rt. 228. The cost of these improvements will be charged to the
commercial developments north of Rt. 228. It is also anticipated that the
Company will either incur $350,000 to grade the commercial property
adjoining the planned Rt. 228 intersection, or reduce the selling
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price of this commercial property in exchange for the buyer's agreement to
construct the required improvements.
The Company has again deferred construction of its planned garden apartments,
and is considering selling this partially developed parcel to another
developer.
The estimated costs to be incurred during the fiscal years 1998 to 2002, for
the development of residential and commercial lots and construction of
residential and commercial building units are summarized on Page 9.
The following schedules summarize the Company's capitalized development
costs and its development plans for the five years ending October 31, 2002.
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Capitalized Development And Construction
<TABLE>
<CAPTION>
October 31, 1997
<S> <C> <C> <C> <C>
Land Development Net Unsold Capatalized
Acres Lots Units Costs
Colonial Heights
Phases I, II and III 82 158 5 $ 106,343
Brandywine Woods 34 75 3 58,600
Northridge Manor 17 45 29 562,760
Northridge Estates 17 56 28 790,660
$ 1,518,363
Multi Family
Brandywine Commons 9 44 0 $ 0
Georgetowne Manor 10 77 50 637,408
Hawthorne Commons 24 96 93 1,953,567
$ 2,590,975
Commercial
Phase P 18 6 4 $ 350,424
Phase Q 5 3 0 0
Phase J 22 2 0 0
Phase M (1, 2, 3) 18 18 14 229,685
$ 580,109
Unallocated Road Improvements $ 675,820
Total Capitalized Development
Costs - Currently Under Development $ 5,365,267
Future Phases (Single, Multi Family & Commercial) $ 2,559,631
Total Capitalized Land Development Costs $ 7,924,898
Other
Moon Township,
Net Of Valuation Allowance Of $123,788 $ 517,500
House Construction
Houses Completed, Net Of
Valuation Allowance Of $16,200 7 $ 985,723
Houses Under Construction-
Single Family 4 177,498
Fourplex and Townhouse Units
Completed 3 277,603
Fourplex and Townhouse Units
Under Construction 28 1,992,629
Additional Housing Starts
(Nominal Costs Incurred) 163,079
Garden Apartment Development Costs 90,699
Total House Construction, Net $ 3,687,231
Development Assets Classified
as Property, Buildings & Equipment
Office Building $ 1,263,208
Construction In Progress - Sales Office 449,757
Water Authority Assets 360,539
$ 2,073,504
Total Capitalized Development and Construction Costs $ 14,203,133
<FN>
1) Lots of Phase M are stated in acres, since final subdivision of unsold
acreage will depend on the buyers' requirements.
2) Accumulated development costs are prior to the allocation of Rt 228
improvement costs of approximately $30,000 per acre.
3) The Company anticipates spending approximately $350,000 for grading and
roads in Phase M, or alternatively may provide financial incentives to a
buyer who acquires Phase M's remaining acreage in bulk.
</TABLE>
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Estimated Additional Costs
To be Incurred Fiscal 1998-2002 (000's)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
Total Development Costs $ 2,226 $ 1,560 $ 934 $ 121 $ 918
Building Costs 6,459 7,004 6,534 5,480 4,840
Total Development and
Building Costs $ 8,685 $ 8,564 $ 7,468 $ 5,601 $ 5,758
<CAPTION>
Financial Information Relating to Industry Segments
and Classes of Products
Year Ended October 31, (000's)
1997 1996
<S> <C> <C>
Sales to Unaffiliated Customers
Rental and General Operations $ 579 $ 801
Land Development, House Construction
and PUC Regulated Services 10,352 9,488
Total Sale $ 10,931 $ 10,289
Operating Income
Rental and General Operations $ (211) $ (255)
Land Development, House Construction
and PUC Regulated Services 1,577 1,984
Total Operating Income $ 1,366 $ 1,729
Identifiable Assets
Rental and General Operations $ 6,808 $ 7,862
Land Development, House Construction and
PUC Regulated Services (Including
Land Held for Future Development) 13,439 11,569
Total Identifiable Assets $ 20,247 $ 19,431
<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
originally consisted of 540.2 acres including required open space, of which
24.5 acres are in Adams Township, and 40 are in Cranberry Township, however
a substantial amount of this acreage has already been developed and sold by
the Company.
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, 1997, had sold a total of 163 units.
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.
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The Company's remaining property located in Seven Fields 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 developed. See Item 1. Description of
Business and Note 12 to the Financial Statements.
The property in Adams Township was sold in 1997 in two separate sales. 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, and as of October 31, 1997, had nearly completed construction of a
property sales center north of Rt. 228.
The Company also owns approximately 40 acres of unimproved commercial and
residential property located in Moon Township, Allegheny County, Pennsylvania
(the "Moon Township Property"). The Company has entered into an agreement
for the sale of this property for $575,000. This sale is expected to close
in 1998.
The Company also holds a mortgage note 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.
Item 3. Legal Proceedings
The Company is not a party to any currently pending legal proceedings.
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 fiscalyear ended October 31, 1997.
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, 1997, there were 2,192 holders of Company
Shares, which is the only outstanding class of equity of the Company.
(c) Dividends Cash dividends on the Company Shares were declared by the
Company during its last two fiscal years and were treated as partial returns
of shareholders' capital.
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, 1997, and 1996.
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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 financial condition improved during fiscal 1997 and 1996 as a
result of the generation of net income of $761,000, and $1,703,000
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 1998 increased by $345,000 during fiscal 1997 to
$5,365,000 at October 31, 1997. The Company's inventory of completed,
unsold lots decreased from 274 to 226 in fiscal 1997. During fiscal 1996
the Company completed construction in its 45 lot Northridge Manor
Subdivision, began construction of townhouses in the 77 lot Georgetowne
Manor Subdivision, began construction in the 96 unit Hawthorne Commons
Subdivision, and the 56 lot Northridge Estates Subdivision. During 1997,
development work in Georgetowne Manor, Hawthorne Commons and the 56 lot
Northridge Estates was completed. During 1996, the Company sold .8 acre
and 2.91 acre commercial lots for $123,900 and $254,800 respectively. In
1997 the Company sold 6 separate commercial lots totaling 33 acres for a
total gross sales price of $2,215,000, and at October 31, 1997, was
committed under terms of signed sales agreements for the sale of 7 additional
commercial lots totaling 56 acres for a gross sales value of $5,102,000. In
addition, subsequent to October 31, 1997, the Company has entered into
agreements to sell its Moon Township property for $575,000 and all of the
remaining original townhouses for $3,706,000. The Company does not plan to
invest significant additional amounts in any of the remaining commercial
lots, except it might grade one commercial parcel and construct a required
road at a total estimated cost of $350,000. The Company would expect to
recover this cost since the graded land should increase in value by such
expenditure. In addition, the yet uncompleted Rt. 228 improvements and
storm water retention facilities will be charged to the unsold commercial
parcels as such parcels are sold. The current estimated cost of these
improvements are $30,000 per acre, and such improvements are expected to be
completed in 1998.
During 1997, the Company substantially completed the reconstruction of
Mars-Crider Road at a total cost of $940,000, the cost of which has been
proportionately added to all residential phases north of Rt. 228. Most of
the site development work between Rt. 228 and Mars-Crider, including base
roads and required utility extension has been completed, the cost of which
was proportionately added to the phases benefiting from these improvements.
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In late 1997, the Company completed an agreement with the Pennsylvania
Department of Transportation for Rt. 228 improvements. Rt. 228 bisects the
Company's property, and is viewed as critical to the Company's commercial
property development. As a result of this agreement the Company will be
permitted to continue development of its commercial property in an acceptable
manner, however, the Company is required to make significant improvements
to Rt. 228 which are estimated to cost $1.6 million. Subsequent to October
31, 1997, Phase 1 of these improvements has been substantially completed.
The cost of these improvements, estimated to be $30,000 per commercial acre,
are allocated to all commercial lots north of Rt. 228 as such lots are sold.
In November 1995, the Company obtained 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 which is being used in its home
building activities. In 1996, the Company obtained additional lines of
credit of $1,000,000 and $750,000 from First Western Bank., the proceeds of
which are also being used for the construction of homes in the Company's
Hawthorne Commons and Georgetown Manor Subdivisions. In 1997, a $250,000
working capital line of credit was obtained from PNC Bank. At October 31,
1997, the Company had available borrowing capacity under its lines of credit
of approximately $2 million compared to $2.4 million at October 31, 1996.
The Company had $3,687,000 invested in completed and partially completed
residential units at October 31, 1997, compared to $2,842,000 at October 31,
1996. Such investment increased during fiscal 1997, since the Company had
42 completed and partially completed units at October 31, 1997 as compared
with 40 at October 31, 1996. The construction progress of the 42 units at
October 31, 1997, was more advanced than the 40 units in 1996.
All new performance and maintenance bonding requirements were met through
the Company's commercial bonding line. At October 31, 1997, the Company had
bonds outstanding of approximately $2,000,000.
The Company's cash position remained constant during fiscal 1997 as a result
of an increase of $1,926,000 in its net investment in lots and houses,
including the new sales center, a $997,931 repayment on its outstanding
Company Debt and distributions to its shareholders as a partial return of
their capital, offset by cash from net income of $1,270,000 before
utilization of the deferred tax asset, and recovery of basis on the sale of
townhouse units of $320,000 and the incurring of additional net debt of
$615,000.
It is the Company's plan to make annual distributions in partial repayment
of the Company Debt, and as partial return of shareholders' capital.
Results of Operations Fiscal 1997 and 1996
The Company's income before taxes for fiscal 1997 was $1,270,000, a decrease
of $433,000 from fiscal 1996's net income before taxes of $1,703,000.
Operating income for fiscal 1997 decreased from fiscal 1996 by $363,000 or 21%.
The decline in operating income was the result of a $781,000 increase in
gross profit on the sale of houses and lots, primarily because of higher
volumes, a $945,000 decrease in gross profit resulting from the sale of only
17 of the original townhouses as compared to 41 in fiscal 1996, an increase
in general and administrative and operating costs of $45,000, and a decline
in rental revenues of $223,000 and depreciation expense of $45,000 as a
result of the sale of townhouses, leaving fewer available for rent.
Interest income declined from $53,000 to $32,000 as a result of the Company
having less excess cash available to invest during 1997 than 1996.
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<PAGE>
During fiscal 1997, the Company generated gross revenues of $10,931,000, an
increase of $642,000 over 1996. Gross revenues from sales of houses and
developed lots increased by $2,583,000 in fiscal 1997 over 1996, townhouse
sales decreased by $1,742,000 as a result of 24 fewer units sold and rental
revenues declined by $223,000 in fiscal 1997.
Net income included a provision for deferred income tax of $508,000 or 15
cents per share in 1997. No provision for deferred income taxes was recorded
in 1996. The deferred income tax provision resulted from the Company's
periodic evaluation of its ability to generate sufficient future profits to
utilize its deferred tax assets. It is anticipated that deferred income tax
provisions will be recorded in future years which approximate statutory
income tax rates.
The Company's cost of lots and houses sold, expressed as a percentage of
sales, decreased from 82.2 % in fiscal 1996 to 75.8% in fiscal 1997 because
of the better margin earned on the sale of commercial lots. The cost of
townhouses sold in fiscal 1997 expressed as a percentage of sales increased
from 50.1 % in 1996 to 55.9% in fiscal 1997. The average sales price of
townhouses sold in fiscal 1997 was $76,500 compared to $74,200 in fiscal
1996, however, the Company also expended greater 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 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
<S> <C> <C>
Lot Sales - Commercial 6 2
Lot Sales - Single & Multi-Family 60 55
Townhouse Sales - New Construction 19 8
Single Family House Sales 14 13
Fourplex House Sales 5 10
Townhouse Sales - Original Construction 17 41
</TABLE>
The six commercial lots sold in fiscal 1997 generated $2,215,000 in gross
revenues compared to the two sold in fiscal 1996 for $379,000; the 60 single
and multifamily lots sold in fiscal 1997 generated gross revenues of
$1,817,500, or an average of $30,200, compared to gross revenues of
$1,774,000 for 55 lots sold in fiscal 1996 or an average of $32,200. The
change in average lot price is a result of a change in the mix of lots sold
in 1997; 24 of the lower priced Brandywine Commons and Hawthorne Commons
fourplex lots, and Georgetowne Manor Townhouses were sold compared to 18 in
1996. Fourplex lots are priced at approximately $28,000 and Georgetowne
Manor lots are priced at $17,000 compared to single family lots which are
priced in the $35,000 to $45,000 range. Therefore the average lot price can
vary significantly based on the mix between single family and multi family
lots sold.
The Company's revenue from the sale of single family houses was $2.3 million
in fiscal 1997 compared to $2.1 million in fiscal 1996. One more single
family house was sold in 1997 compared to 1996. The Company generated
revenues of $722,000 from the sale of 5 fourplex units during fiscal 1997
compared to $1.3 million in 1996 from the sale of 10 fourplex units. During
1996, the Company also generated gross revenue of $1,853,000 from the sale
of 19 newly constructed townhouse units compared to $743,000 from 8 units in
1996 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, until such litigation was
completed in 1995, to fund the litigation efforts to recover assets from
former shareholders of the Predecessors.
-13-
<PAGE>
The Company's primary objective is to repay to the fullest extent possible,
and at the earliest possible time, its Investors. 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 Investors 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 Investors as soon as possible, which management believes is
best accomplished by annual distributions, it is important for the Company
to maintain 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.
In 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 million 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 Subdivision
and a $750,000 line of credit to be used for the construction of townhouses
in its Georgetowne Manor Subdivision. In 1997, a $250,000 working capital
line was obtained from PNC Bank. The Company has approximately $2 million of
borrowing capacity in these lines of credit at October 31, 1997.
The Company will continue to incur significant development costs related to
development activities north of Rt. 228. These development costs exceeded
$1.0 million in 1997 and $500,000 in 1996, and are also expected to exceed
$1,400,000 in 1998, 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. The 1996, 1997, and 1998 expenditures include approximately
$900,000 for the reconstruction of Mars-Crider Road, and $1.6 million for
Rt. 228 improvements. During fiscal 1998, the Company expects to generate
significant cash flows from the sale of lots and houses in its Brandywine
Woods, Colonial Heights, 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 north of Rt. 228.
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 Rt. 228 and construction of the intersection necessary to
cross Rt. 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.
In 1997, the Company distributed $997,000 in partial repayment of the
Company's debt and distributions to its shareholders, and increased its
investment by $1,952,000 in its inventory of completed and partially
completed houses, development of finished commercial and residential building
lots, and in the Mars-Crider Road and Rt. 228 improvements. The Company
generated the cash necessary to finance these activities from an increase in
its outstanding bank debt of $615,000 and generation of net pre-tax income of
$1,270,000. Although the Company has begun to recognize income tax expense
it probably will not be required to make substantial cash payments for income
taxes for several years.
-14-
<PAGE>
The Company expects to generate significant positive cash flows in 1998
because of its anticipated sale of its remaining original townhouses and the
sale of several of its commercial properties, all of which are under
agreements of sale at October 31, 1997.
Other Matters - Year 2000 Issue
The Company's management is in the process of evaluating the impact of the
failure of software used in the Company's administrative and accounting
activities to address date sensitive matters after the year 1999. None of
the software used by the Company is integral to its operations, and therefore
if the necessary upgrades to its software are not made in a timely basis the
impact would be minimal. The Company's accounting software is licensed from
third party vendors, some of whom have announced upgrades at a nominal cost.
Recent Accounting Developments
The Company has adopted FAS No 121 "Accounting For The Impairment Of Long-
Lived Assets And For Long-Lived Assets To Be Disposed Of" effective November
1, 1996. FAS No 121 establishes standards for determining when an asset
impairment should be recognized based primarily on an undiscounted cash flow
model. There was no material impact from adoption of this standard.
The Company will be required to adopt FAS No. 128 "Earnings per Share"; FAS
No. 129 "Disclosure of Information about Capital Structure"; FAS No. 130
"Reporting Comprehensive Income"; and FAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information". FAS No. 128 and FAS No. 129 are
required to be adopted for the Company's fiscal year beginning November 1,
1997, and FAS No. 130 and FAS No. 131 must be adopted for the fiscal year
beginning November 1, 1998. None of these pronouncements may be adopted
early.
For the most part all four of these new pronouncements enhance disclosure of
certain financial information. Initially the Company does not believe that
there will be a material financial impact or significant change in disclosure
upon adoption of these new standards.
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.
-15-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Certain information about the directors and executive officers of the Company
is set forth below. Each of the Directors serves for a three year term
expiring in the year indicated. Prior to the 1995 Reorganization except for
directors first elected subsequent to April 30, 1995, each of the directors
was also a director of the Corporation.
<TABLE>
<CAPTION>
Director of the
Director Corporation
Name Age Since Since Term Expires
<S> <C> <C> <C> <C>
Michael Burkhart 54 1996 N/A 1999
Samuel A. Goldberg 73 1994 1988 1999
William J. Janusey 74 1994 1989 1998
Cheryl Kirchner 50 1997 N/A 1998
Alexander Lindsay, Jr. 51 1994 1990 2000
Paul Voytik 73 1994 1988 2000
George K. Wright 71 1994 1998 2000
</TABLE>
<TABLE>
<S> <C> <C> <C>
Darell Craig 47 Chief Operating Officer Employed Since 1991
Lynn Hoffman-Kyle 43 Chief Financial Officer Employed Since 1988
</TABLE>
Michael 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, and was 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 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
-16-
<PAGE>
buildings have been constructed to date from the firm's design and
construction drawings and specifications during the past 30 years.
Cheryl Kirchner who was elected in March 1997 to fill the remaining term of
Guy E. Bubb when he retired from the Board, is a registered nurse with over
20 years experience in the field of health care management and the
development of patient care systems. She received a Bachelor's Degree
from Youngstown State University with a major in nursing and a Master's
Degree in health service administration from St. Francis College. As owner
of a geriatric care management service, she developed systems of support for
the elderly and their families. Currently she is employed at the
University of Pittsburgh in the Department of Neurological Surgery.
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 is a director of Piedmont Atlantic
Corporation, 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 Corporation 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.
Lynn Hoffman-Kyle prior to being named Chief Financial Officer in December
1997, was employed by the Corporation as Controller since 1988. A graduate
of Pennsylvania State University, Ms. Hoffman-Kyle has held various
accounting positions for over twenty years.
The Company is not aware of any director, officer or beneficial owner of
more than ten percent of its common stock 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, 1997.
The Board of Directors of the Company does not have an audit or a
compensation committee. The duties that would be delegated to such
committees are handled by the full Board.
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
-17-
<PAGE>
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>
Annual compensation Long-term compensation
Awards Payouts
All
Restricted Other
Name and Other Stock Options/ LTIP Compen-
principal Fiscal Salary Bonus Annual Awards SARs Payouts sation
position Year $ $ Comp $ $ # $ $
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul Voytik 1997 39,655 0 0 N/A 0 N/A 0
(President 1996 37,354 0 0 N/A 0 N/A 0
and Chief 1995 38,746 0 0 N/A 0 N/A 0
Executive
Officer)
</TABLE>
Each Director is paid a fee of $500 per board meeting attended.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of January 28, 1998 regarding
the amount and nature of ownership of Company Stock by each of the directors
of the Company, and by all of the directors and 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>
Paul Voytik 13,599.89 (2) *
George K. Wright 14,173.63 (2) *
Samuel A. Goldberg 745.97 *
William J. Janusey 2,451.40 (2) *
Cheryl Kirchner 1,183.61 *
Alexander Lindsay, Jr. 0 0
Michael Burkhart 0 0
All directors and
executive officers of
the Company as a
group (9 persons) 32,154.50 1.1
<FN>
* Indicates ownership of less than 1% of the Company Stock.
1.The address of each person is 2200 Garden Drive, Suite 200, Mars,
Pennsylvania 16046.
2.All shares held jointly with spouse.
</TABLE>
The Company knows of no person who has or shares voting power and/or
investment power with respect to more than 5% of the outstanding Company
stock.
-18-
<PAGE>
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 Articles of Incorporation of Seven Fields Development (PA),
Inc. (5)
3.2 By-Laws of Seven Fields Development (PA), Inc. (5)
10.1 Rates, rules and regulations governing the distribution of
water service - PA Public Utility Commission (3)
10.3 Mortgage Note dated October 28, 1994, of the Seven Fields
Development Company to PNC Bank, National Association (6)
10.4 Open End Mortgage and Security Agreement dated October 28,
1994, between Seven Fields Development Company and PNC Bank,
National Association (6)
10.5 Assignment of Rents, Leases and Profits dated October 28, 1994,
between Seven Fields Development Company and PNC Bank, National
Association (6)
10.6 Amendment to Loan documents of October 28, 1994, and release
from mortgage between Seven Fields Development Company and PNC
Bank, National Association dated May 1, 1996 (8)
10.7 Amendment to loan documents of October 28, 1994 related to
financial covenant for maintenance of minimum tangible net
worth, between Seven Fields Development Company and PNC Bank,
National Association (8)
10.8 Surety Agreement dated October 28, 1994, between Seven Fields
Development Company and Allegheny Surety Company (6)
10.9 Mortgage dated October 28, 1994, between Seven Fields
Development Company 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)
10.15 Open End Mortgage and Security Agreement dated November 13,
1995, between Seven Fields Development Company and Integra Bank
(7)
-19-
<PAGE>
<S> <C>
10.16 Agreement for Assignment of Sales Agreements and Contract
Deposits dated November 13, 1995, between Seven Fields
Development Company and Integra Bank (7)
10.17 Office Lease dated August 1, 1995, between Seven Fields
Development Company 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 Seven Fields Development
Company and First Western Bank, National Association (8)
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 Seven
Fields Development Company and First Western Bank, National
Association (8)
21 List of subsidiaries of Seven Fields Development (PA), Inc. (5)
27 Financial data schedule
99 Deed of Trust of Seven Fields Development Company (5)
(1) Filed as exhibit to the Seven Fields Development Corporation's
Registration Statement on Form 10 filed October 23, 1989, and
incorporated herein by reference.
(2) Filed as exhibit to the Seven Fields Development Corporation's
Annual Report on Form 10-K filed February 13, 1991, and
incorporated herein by reference.
(3) Filed as exhibit to the Seven Fields Development Corporation's
Annual Report on Form 10-K filed January 29, 1992, and
incorporated herein by reference.
(4) Filed as exhibit to the Seven Fields Development Corporation's
Annual Report on Form 10-K filed February 10, 1993, and
incorporated herein by reference.
(5) Filed as exhibit to the Company's Registration Statement on
Form S-4, File No. 33-85102, and incorporated herein by
reference.
(6) Filed as exhibit to Seven Fields Development Corporation's
Annual Report on Form 10-KSB filed January 27, 1995, and
incorporated herein by reference.
(7) Filed as exhibit to Seven Fields Development Company's Annual
Report on Form 10-KSB filed January 26, 1996, and incorporated
herein by reference.
(8) Filed as exhibit to Seven Fields Development Company's Annual
Report on Form 10-KSB filed January 24, 1997, and incorporated
herein by reference.
</TABLE>
(b) Reports on Form 8-K.
None
-20-
<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 (PA), INC.
By PAUL VOYTIK
Paul Voytik
President
Date: January 28, 1998
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 of Seven Fields Development (PA), Inc.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
PAUL VOYTIK President (Principal January 28, 1998
Paul Voytik Executive Officer) and
Director
LYNN HOFFMAN-KYLE Chief Financial Officer January 28, 1998
Lynn Hoffman-Kyle (Principal Financial
and Accounting Officer)
GEORGE K. WRIGHT Director January 28, 1998
George K. Wright
SAMUEL A. GOLDBERG Director January 28, 1998
Samuel A. Goldberg
MICHAEL BURKHART Director January 28, 1998
Michael Burkhart
</TABLE>
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page Reference
Independent Auditors' Report F-2
Balance Sheets at October 31, 1997 and October 31, 1996 F-3
Statements of Operations for the years ended October 31, 1997
and October 31, 1996 F-5
Statements of Shareholders' Equity for the years ended
October 31, 1997 and October 31, 1996 F-7
Statements of Cash Flows for the years ended October
31, 1997 and October 31, 1996 F-8
Notes to Financial Statements F-9
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Seven Fields Development (PA), Inc.
Mars, PA
We have audited the accompanying consolidated balance sheets of Seven Fields
Development (PA), Inc. and subsidiaries (the "Company") as of October 31,
1997 and October 31, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years
in the period ended October 31, 1997. 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 consolidated financial position of the Company
as of October 31, 1997 and October 31, 1996 and the consolidated results of
its operations and its cash flows for each of the two years in the period
ended October 31, 1997, in conformity with generally accepted accounting
principles.
O'Connor, Greenblatt & Company
December 18, 1998
Sewickley, PA
F-2
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
<S> <C> <C>
Cash $ 227,896 $ 252,504
Temporary investments, Note 10 195,710 149,825
Total Cash And Temporary Investments 423,606 402,329
Certificate of deposit 53,755
Accounts and notes receivable, net of allowances
of $57,589 and $57,552 197,688 168,614
Mortgage notes receivable, Note 4 61,114 61,807
Capitalized development costs, Notes 2, 12 5,365,267 5,020,059
Capitalized house construction costs, net of
allowances, Notes 2, 12 3,687,231 2,842,203
Prepaid expenses and deposits 391,600 481,519
Property not currently under development,
net of allowances of $123,788, Notes 2, 12 3,077,133 2,791,363
Tenant security deposits 40,740 51,485
Deferred income tax assets, Note 9 3,483,784 3,992,000
Property, Buildings And Equipment, Notes 2, 3, 6, 7
Land 359,725 386,789
Buildings 3,373,859 3,914,327
Equipment and furnishings 1,393,155 1,347,903
Construction in progress 449,757
Total Property, Buildings And Equipment 5,576,496 5,649,019
Accumulated Depreciation (2,055,493) (2,083,587)
Total Property, Buildings And Equipment, Net
Of Accumulated Depreciation 3,521,003 3,565,432
Total Assets $20,249,166 $19,430,566
<FN>
See Notes to Financial Statements.
</TABLE>
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accounts payable and accrued expenses $ 701,176 $ 509,923
Accrued estimated costs related to
developed lots and townhouses sold, Note 2 812,427 590,920
Notes payable - credit lines, Note 6 918,157 130,000
Mortgages payable, Note 7 1,785,570 1,958,581
Customer deposits and advances 133,046 95,137
Tenant security deposits 40,740 51,485
General unsecured debt -
minority investors, Notes 1, 8, 11 9,897,933 10,067,744
Total Liabilities 14,289,049 13,403,790
<CAPTION>
SHAREHOLDERS' EQUITY
<S> <C> <C>
Common stock, $1 par value, 10,000,000
shares authorized, 2,905,682 shares issued and
outstanding, Notes 1, 2, 11 2,905,682 2,905,682
Additional paid in capital 48,885,852 49,713,983
Shareholders' deficit -
excess of non-discharged debt over
assets on November 7, 1987,
(Date of reorganization) Notes 1, 2 (52,235,399) (52,235,399)
Retained earnings, since November 7, 1987,
(Date of reorganization) 6,403,982 5,642,510
Total Shareholders' Equity 5,960,117 6,026,776
Total Liabilities And
Shareholders' Equity $20,249,166 $19,430,566
</TABLE>
F-4
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Gross Revenue
Apartment rentals $ 524,230 $ 726,762
Fees & other operating income 54,461 74,622
Water revenue 160,154 136,434
Developed lot & house sales 8,890,865 6,308,330
Townhouse unit sales 1,301,124 3,042,633
10,930,834 10,288,781
Costs And Expenses
Cost of Developed Lots And Houses Sold 6,986,853 5,185,294
Cost Of Townhouses Sold 726,775 1,523,056
Other Operating Expenses* 778,385 753,477
General & Administrative Expenses* 786,056 766,768
Depreciation Expense 286,360 331,269
9,564,429 8,559,864
Operating Income 1,366,405 1,728,917
Interest Expense* (129,022) (78,517)
Interest Income 32,305 52,726
Income Before Provision for Income Taxes 1,269,688 1,703,126
Provision For Income Taxes, Note 9 508,216
Net Income $ 761,472 $ 1,703,126
Net Income Per Share, Note 2 $ .22 $ .49
<FN>
* See details on the following page.
See Notes To Financial Statements.
</TABLE>
F-5
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
DETAILS OF OTHER OPERATING EXPENSES,
GENERAL AND ADMINISTRATIVE EXPENSES AND INTEREST EXPENSE
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Other Operating Expenses
Payroll, payroll taxes and benefits $ 760,351 $ 697,813
Repairs and maintenance 215,547 205,623
Utilities 139,719 135,792
Insurance 136,689 118,257
Property taxes 138,189 152,822
Other operating supplies and services 97,295 77,792
Total Other Operating Expenses 1,487,790 1,388,099
Less Cost Capitalized To Development And
Construction (709,405) (634,622)
Net Other Operating Expenses $ 778,385 $ 753,477
General And Administrative Expenses
Payroll, payroll taxes and benefits $ 416,070 $ 391,402
Professional fees 119,819 129,515
Professional fees related to litigation and
pre-reorganization issues 43,736
Other general and administrative expenses 309,567 240,227
Total General And Administrative Expenses 845,456 804,880
Less Costs Capitalized To Development And
Construction (59,400) (38,112)
Net General And Administrative Expenses $ 786,056 $ 766,768
Interest Expense
Total interest expense $ 245,819 $ 184,075
Less interest capitalized to development and
house construction (116,797) (105,558)
Net Interest Expense $ 129,022 $ 78,517
<FN>
See Notes To Financial Statements.
</TABLE>
F-6
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Share-
holders' Retained
Addi- Deficit Earnings Total
tional As Of Since Share
Common Stock Paid In November 7, November 7, holders'
Shares Amount Capital 1987 1987 Equity
<S> <C> <C> <C> <C> <C> <C>
Balance 2,905,960 $2,905,960 $51,375,083 $(52,240,537)$3,939,384 $5,979,890
October
31, 1995
Return of
Capital
Distribu-
tion (1,656,399) (1,656,399)
Shares
Donated
To The
Company
& Retired (278) (278) (4,701) 5,138 159
Net
Income-
Year
Ended
October 31,
1996 1,703,126 1,703,126
Balance
October 31,
1996 2,905,682 $2,905,682 $49,713,983 $(52,235,399) $5,642,510 $6,026,776
Return Of
Capital
Distribu-
tion (828,131) (828,131)
Net Income -
Year Ended
October 31,
1997 761,472 761,472
Balance
October 31,
1997 2,905,682 $2,905,682 $48,885,852 $(52,235,399) $6,403,982 $5,960,117
<FN>
See Notes To Financial Statements.
</TABLE>
F-7
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Cash Flows From Operating Activities 1997 1996
Net income $ 761,472 $ 1,703,126
Provision for deferred income taxes 508,216
Depreciation 286,360 331,269
Capitalized development costs incurred (2,989,270) (3,304,530)
Capitalized house construction costs incurred (5,473,589) (4,633,146)
Cost of lots and houses sold 6,986,853 5,185,294
Changes in other assets and liabilities:
Restricted cash 184,550
Mortgage notes receivable 693 124,874
Other assets 125,345 (128,174)
Other liabilities 439,916 243,792
Net Cash Flows Provided By (Used In)
Operating Activities 645,996 (292,945)
Cash Flows From Investing Activities:
Additions to property, buildings & equipment (562,342) (134,788)
Sale of property, buildings, & equipment 320,412 1,174,296
Total Cash Flows Provided By (Used In)
Investing Activities (241,930) 1,039,508
Cash Flows From Financing Activities:
Repayment of Investor Debt (169,804) (339,237)
Return of capital distribution (828,131) (1,656,399)
Proceeds from borrowings 880,000
Net borrowings on credit lines 788,157
Repayment of existing mortgage (173,011) (437,404)
Total Cash Flows Used In Financing Activities (382,789) (1,553,040)
Net Increase (Decrease) In Cash And
Temporary Investments 21,277 (806,477)
Cash And Temporary Investments,
Beginning of Period 402,329 1,208,806
Cash And Temporary Investments, End of Period $ 423,606 $ 402,329
Interest Expense Included In Net Income
From Operating Activities Above $ 129,022 $ 78,517
Interest Paid And Included In Capitalized
Development Costs And Houses Under
Construction 116,797 105,558
Total Interest Paid $ 245,819 $ 184,075
Income Taxes Paid None None
Supplemental Schedule Of Noncash Investing
And Financing Activities:
Other Investor Adjustments $ (4,860)
<FN>
See Notes To Financial Statements.
</TABLE>
F-8
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
Note 1 Organization And Business
Seven Fields Development (PA), Inc. (the "Company" or "Seven Fields PA")
was formed in 1994 as part of a comprehensive restructuring of Seven Fields
Development Corporation (the "Corporation"), in which (1) holders of 83% of
the Corporation's common stock and general unsecured subordinated debt
("Investor Debt") exchanged such stock and debt for common stock of Seven
Fields PA, and (2) Seven Fields Development Company, a Pennsylvania business
trust (the "Trust") merged with and into the Corporation (the "Merger"),
with the Trust as the surviving entity. In the Merger the holders of the
Corporation's common stock, which included Seven Fields PA and the holders
who did not elect to participate in the above described exchange, received
shares of beneficial interest in the Trust ("Trust Shares"). Such persons
also retained their Investor Debt, which became an obligation of the Trust
as the successor, by merger, to all of the assets and liabilities of the
Corporation. As part of the restructuring, Seven Fields PA contributed all
of the Trust Shares and Investor Debt which it received in the exchange
and the Merger to its wholly-owned subsidiary, Seven Fields (DEL), Inc.
("Seven Fields DEL").
Organization Structure, Management And Objectives
The Trust was formed for the purpose of merging with the Corporation and
thereafter serving as the operating subsidiary of Seven Fields PA 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 practical. 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 Trust is Seven Fields Management, Inc. ("Seven Fields
Management") which is also a wholly-owned subsidiary of Seven Fields PA. The
directors and officers of Seven Fields Management are the same persons who
were the directors and officers of the Corporation, and are also the
directors and officers of Seven Fields PA.
The Trust as survivor of the merger, remains subject to the Bankruptcy Plan
under which Seven Fields Development Corporation commenced operations on
November 7, 1987, as is 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 70 townhouse units located in Seven Fields
Borough; sale of these existing townhouse units as individual residences or
in bulk; and operation of the municipal water service in Seven Fields
Borough. All of these activities focus on the single goal of
maximizing the assets of Seven Fields PA and ultimately distributing such
assets to its Investors in complete liquidation at the earliest appropriate
time.
F-9
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
Note 1 Continued
Since bankruptcy reorganization of the Corporation in 1987 as described
below, the Company has sold three rental properties, repaid four million
dollars of debt other than Investor Debt, and returned approximately $8.3
million to its Investors, as a result of payments on Investor Debt and
distributions to its common stockholders.
The Company is not actively acquiring additional property for development,
however it expects that it will not be until at least the years 2000-2005
before development of its remaining undeveloped property at Seven Fields is
completed.
The Company - Before November 7, 1987 (Date of Reorganization)
The 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 Corporation.
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 had 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 following summary of the Plan applies to Seven Fields PA's operating
subsidiary, the Trust, and not to the capital structure of Seven Fields PA,
since the reorganization which was consummated in 1995 resulted in the
exchange of 83% of the Investor Debt and Stock for common stock of Seven
Fields PA.
The Plan on November 7, 1987, transferred 100% ownership of the Debtors from
the four former stockholders to the more than 2,600 Investors, merged the
four debtors into the surviving corporation, removed the former shareholders
from involvement in the management or ownership of the reorganized company,
and required the repayment in full of all debt, secured and unsecured, to
creditors on the same terms as agreements then in existence. The Plan also,
despite assets with a fair 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
F-10
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
Note 1 Continued
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 general, unsecured debt issued to the Investors bears no interest and
is subordinate to existing and future secured debt. As indicated above, the
Plan specified that this debt would be paid as soon as possible. The
repayment of this debt, subsequent to the reorganization in 1995, occurs at
the Trust level, which requires the Trust to make all such repayments of the
Investor Debt on a pro-rata basis to all of the debt holders. Seven
Fields PA, through its subsidiary Seven Fields DEL, holds the debt interest
of those investors who accepted the exchange offer (83%). As a result of
maintaining this intercompany debt structure, as repayments of the Debt are
made by the Trust to Seven Fields PA, Seven Fields PA intends to distribute
such amounts to its shareholders as return of capital distributions. As
repayment of Investor Debt occurs at the Trust level, 83% of such repayments
will be made to Seven Fields PA, so that on a consolidated basis, for every
$100 distribution, $17 will represent a repayment of Investor Debt and $83
will represent a return of capital distribution to the common stockholders
of the Company.
Note 2 Summary Of Significant Accounting Policies
Principles Of Consolidation
The consolidated financial statements include Seven Fields PA, Seven Fields
DEL, Seven Fields Management, Inc., and Seven Fields Development Company.
Intercompany accounts and transactions are eliminated in the consolidated
financial statements.
Reorganization
Merger And Basis Of Presentation
The Merger, which became effective April 30, 1995, 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 1996 amounts have been reclassified to
conform to the presentation adopted in 1997.
Reorganization on November 7, 1987
Although the Corporation was the successor in the merger of the four Debtors
pursuant to the Plan, the Company has been treated for accounting purposes
as if it were a newly created corporation at November 7, 1987. Most
significantly, the Corporation's assets upon reorganization were 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 for all real estate and horses in the amount of $16,792,582 and
historical cost for all other assets of $1,353,087.
F-11
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 2 Continued
Use of Estimates
The presentation 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 disclosures 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 values
determined in the 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 straight line and double declining balance
methods utilizing the half year convention in the year of acquisition have
been used since reorganization. The Company 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 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 are directly related to development
activities are capitalized to the development phases under construction
during the period incurred. Material interest costs are capitalized
during the construction period of each phase based on the average interest
rate of the debt outstanding. The full cost of construction, including
overhead and construction period interest 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 is
included in the cost of lots sold.
Revenue Recognition
Revenue is recognized on the sale of lots when settlement occurs, or the
collectibility of any related receivable is reasonably assured and the
Company has substantially completed all obligated development related to the
lots sold.
Revenue is recognized upon settlement for houses which are constructed
provided construction is substantially complete. Revenue is recognized 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 are accounted for in accordance with the
percentage of completion method, based on estimated costs to be incurred.
Rental revenue from townhouses is recognized on a monthly basis. Leases with
residential tenants are of a six month or one year duration and are typically
renewed by the tenant.
F-12
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 2 Continued
Public Utility Commission "PUC" Regulated Activities
The Company earns fees for the water services it provides the residents of
Seven Fields Borough.
In accordance with regulations promulgated by the PUC, permission from the
PUC is required to establish, or change the rates charged customers.
Accounting policies, procedures, and rules established by the PUC must be
adhered to.
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 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 to reduce the carrying amount so as to not exceed
net realizable value.
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
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 a cash flow model. The adoption of this new standard in 1997 had no
material effect on the financial statements.
Minority Interest
Seven Fields PA owns, through its subsidiary Seven Fields DEL, 83% of the
outstanding shares of the Trust resulting in a 17% minority interest. Under
generally accepted accounting principles, it is not appropriate to reflect a
negative (i.e., a debit balance) minority interest in a balance sheet.
Therefore, in the balance sheet of Seven Fields PA there is no minority
interest reflected because there is a capital deficiency in the Trust.
Similarly, there is no minority interest provision reflected in Seven Fields
PA's statement of operations because of such capital deficiency. Although
17% of any future earnings of the Trust will accrue to the benefit of the
minority shareholders of the Trust, no such minority interest will be
reflected in the statement of operations so long as the Trust continues to
have a capital deficiency, and as a result a negative minority interest.
Earnings Per Share
Earnings per share have been calculated to exclude the effect of the earnings
which accrue to the benefit of the minority shareholders, although under
generally accepted accounting principles such minority interests may not be
reflected in the balance sheet or statement of operations so long as the
capital deficiency exists in the Trust.
F-13
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 2 Continued
The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Consolidated Net Income $ 761,472 $1,703,126
Less Net Income Accruing to Minority Interest
in Trust (17%) 126,480 282,935
Net Income Applicable to Seven Fields
PA Shareholders $ 634,992 $1,420,191
Weighted Average Shares Outstanding 2,905,682 2,905,728
Earnings Per Share .22 .49
</TABLE>
Weighted average number of shares are adjusted to reflect retroactive
changes related to settlements with shareholders relating to the
Corporation's reorganization on November 7, 1987.
Note 3 Real Estate Rental Activities
A summary of the historical cost of properties held for rent located at
Seven Fields consisting of 74 and 91 residential townhouse units at October
31, 1997, and 1996 respectively, a commercial office building and a
sales center, all of which are included in property, buildings and equipment
on the balance sheets, is as follows:
<TABLE>
<CAPTION>
October 31,
1997 1996
<S> <C> <C>
Land $ 359,725 $ 386,789
Buildings 3,373,859 3,914,327
Equipment and Improvements 314,157 359,349
Assets under construction 449,757
Total Rental Properties 4,497,498 4,660,465
Accumulated Depreciation 1,445,956 1,564,229
Total Rental Properties, Net $ 3,051,542 $ 3,096,236
</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, construction of
a two story office building having 9,434 usable square feet was completed.
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
F-14
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 3 Continued
July 31, 2000. The Borough is required to pay utilities and 50% of the
operating costs of the building. The building also contains a basement which
the Company utilizes for its operations. The Company has granted the Borough
an option to purchase the building at the end of the lease at 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, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 309,367
1999 31,545
2000 35,083
2001 28,302
Thereafter
Total $ 404,297
</TABLE>
Note 4 Mortgage Notes Receivable (Mortgage Assignments)
Commencing in 1993, the Company began financing the purchase of certain of
the townhouse units it sold 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 its policy to not record these
assignments with the Butler County Recorder of Deeds. It is intended that
the remaining mortgage will be sold in the open market when market
conditions are favorable.
The Company held the following mortgage note assignment at October 31, 1997,
and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Number of Mortgage Notes 1 1
Approximate Average Interest Rate 8.125% 8.125%
Final Maturity Date 2024 2024
Face Amount of Mortgage Notes $ 62,910 $ 62,910
Carrying Amount of Mortgage Notes
(Market Value) $ 61,114 $ 61,807
Reconciliation of the Carrying
Amounts of Notes 1997 1996
Beginning Balances $ 61,807 $ 186,682
Principal Collected (693) (1,160)
Notes Sold (124,055)
Market Valuation Change and Realized
Gains or (Losses) 340
Ending Balance $ 61,114 $ 61,807
Delinquent Loans 0 0
Principal Amount of Delinquent Loans 0 0
</TABLE>
F-15
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 5 Litigation
All litigation with the former majority shareholder of the Debtors has been
concluded as a result of a settlement which was finalized in November 1995.
Note 6 Notes Payable - Credit Lines
The Company utilizes a revolving credit line in the amount of $1,000,000
with National City Bank. Interest is payable monthly at the bank's prime
rate plus 1%. The credit line is to be used for individual hous 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, 1997
was $351,000, and bears interest at 9 1/2% per annum.
The Company also maintains a revolving credit line of $1,000,000 with First
Western Bank, with interest payable monthly at the bank's prime rate plus
1/2%. 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, 1997, the total outstanding balance amounted to $480,000 and
bears interest of 9.25%.
The Company also utilizes 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 bear interest at First Western Bank's prime
rate plus 1/2%, and must be repaid by November 30, 1997. The total balance
outstanding under this credit line amounted to $87,500 as of October 31, 1997
and bears interest of 9%.
The Company also has a $250,000 working capital credit line with PNC Bank
bearing interest at the bank's prime rate plus .625. At October 31, 1997,
the Company had no amount outstanding under this credit line.
Note 7 Mortgages Payable
The Company is obligated to PNC Bank under a floating rate mortgage note in
the amount of $1,088,734 at October 31, 1997. 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 9.125%
at October 31, 1997. Repayments are in equal monthly principal and interest
installments of $17,294 with a final balloon payment due November 1, 1999.
The mortgage note is collateralized by 19 rental townhouse units having a
net book value of approximately $302,000 and an approximate fair market
value of $1,450,000 based on the recent sales prices of townhouses.
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 with a balance of
$696,836 at October 31, 1997. 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, 1997, monthly principal and interest payments are
F-16
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31 1997 AND 1996
(CONTINUED)
Note 7 Continued
$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. It is anticipated that the $10 million 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 and shareholders. There are also
certain penalties if prepayments exceed specified amounts. Aggregate
maturities of long term debt at October 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 131,813
1999 156,567
2000 899,903
2001 597,287
$ 1,785,570
</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 $480,000 at October 31, 1997 and an estimated fair
market value based on recent sales of individual townhouses of $2,300,000,
serve as collateral for performance and maintenance bonds issued by the
surety company totaling $2,000,000, 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, 1997:
Cash and temporary investments: The carrying amount reported
in the balance sheet for cash and temporary investments
approximates fair value.
Certificates of deposit, accounts and notes receivable, deposits, and
accounts payable: The carrying amounts of these assets and
liabilities in the balance sheet approximate fair value.
General unsecured debt - minority investors The carrying amount
of general unsecured debt - minority investors of $9,897,933 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
F-17
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31 1997 AND 1996
(CONTINUED)
Note 8 Continued
the proceeds from sales of its assets to the debtholders and
shareholders. 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.
Because of these factors, 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 approximate fair value
since interest rates of the mortgages and credit line notes approximate
interest rates currently available to the Company on other debt
instruments and all of 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 the higher tax basis of assets than the basis
recognized for financial reporting purposes at the time of reorganization.
Recognition of the deferred tax assets reduced the Shareholders' Deficit
created at reorganization.
At October 31, 1997, the Company has Federal and state net operating loss
carryforwards for tax purposes which, if not utilized, expire as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
October 31, Federal State
1998 $ 936,732
2003 $ 2,365,285
2004 3,911,434
2005 4,605,975
2006 626,911
2007 870,453
2008 3,892,382
2009 1,202,522
2010 1,125,182
2011 438,605
$19,038,749 $ 936,732
</TABLE>
For Pennsylvania income tax purposes, losses of not more than $500,000 from
fiscal years ending October 31, 1989 through October 31, 1994, are available
to offset taxable income generated in fiscal 1997 and 1998. Losses of not
more than $1,000,000 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.
F-18
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 9 Continued
The net realizability of the deferred income tax assets is re-evaluated
periodically. The deferred tax asset which the Company estimates 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 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 2000-2005.
At October 31, 1997, the significant components of the 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 $ 2,203,127 $ 719,176 $ 2,922,303
Net operating loss carryforwards
resulting from the utilization
of the higher tax basis of
assets since reorganization 6,441,357 93,580 6,534,937
Potential Tax Benefit at
October 31, 1997 8,644,484 812,756 9,457,240
Valuation Allowance - Reduction
for estimated unutilized
deferred tax assets 5,775,120 198,336 5,973,456
Net Deferred Tax Assets $ 2,869,364 $ 614,420 $ 3,483,784
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended October 31
1997 1996
<S> <C> <C>
Deferred:
Federal $ 381,374 $ (157,000)
State 126,842 157,000
Provision For Income Taxes $ 508,216 $ 0
</TABLE>
A reconciliation of income taxes with the amounts which would result from
applying the US statutory rate follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Tax at US Statutory Rate $ 427,214 $ 579,701
State Income Taxes Net Of Federal Benefit 83,017 112,418
Utilization of Deferred Income Tax Assets (2,015) (692,119)
Provision For Income Taxes $ 508,216 $ 0
</TABLE>
F-19
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 10 Temporary Investments
Temporary investments at October 31, 1997, and 1996 consist of $195,710 and
$149,825 respectively invested in PNC Bank's PNC Investment Short Term
Common Trust Fund. The underlying securities which consist of US Treasury
and US 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, 1997, and 1996 respectively.
Note 11 Capital Stock And Subordinated Debt
The Corporation, at the time of its 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
Corporation. The certificates representing the shares stated (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 Corporation. 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
Corporation, 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.
As a result of the reorganization effective April 30, 1995, 83% or
$50,796,205 of the Investor Debt and 83% of the Common Stock was exchanged
for common stock in Seven Fields PA. Therefore, the General Unsecured Debt
and Common Stock outstanding on the October 31, 1997 and 1996 balance sheets
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.
: This debt as reflected on the Company's balance sheet is to be repaid
by periodic distributions as determined appropriate by the Company's
Board of Directors. When such distributions are made for every $17 of
debt repaid, it is the intent of the Company to distribute to
its shareholders $83 as a liquidating distribution. These
circumstances were created by the 1995 reorganization which was
structured so as to assure proportionality of the interests
between those Investors which accepted the exchange offer and those
Investors who did not accept the exchange offer. The economic
interests of the Investors remained proportional because of the
ownership of the debt of the Corporation which was exchanged for the
F-20
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 11 Continued
common stock of Seven Fields PA which was not canceled, but was
transferred to Seven Fields DEL, a wholly owned subsidiary of Seven
Fields PA. Therefore, as the Trust repays the debt; for every $17 of
debt paid to the non-exchanging Investors, $83 will be repaid on
the debt held by Seven Fields DEL. It is the Company's intent that all
such repayments of debt received by Seven Fields DEL will be distributed
to Seven Fields PA, which in turn will be distributed to the common
stockholders of Seven Fields PA as a return of capital distribution.
Common Stock
: Voting Stock - One vote per share.
: Dividends - If and when declared by the Board of Directors.
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 the property located at Seven Fields, Butler County, PA. The
Company's development and house construction activities for the years ended
October 31, 1997 and October 31, 1996 are summarized below for each of the
areas of significant activity.
F-21
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
<TABLE>
<CAPTION>
Sub- Com-
stantially mercial
Com- Parcels
pleted South
division North George- North Haw- of
South of Ridge town Ridge thorne Route
Route 288 Manor Manor Estates Commons 228
<S> <C> <C> <C> <C> <C> <C>
Total Acres 125 17 10 31 24 45
Total Lots 277 45 77 56 96 11
Unsold Lots 8 29 50 28 93 4
Balance
October 31,
1996 $378,703 $709,665 $785,994 $1,228,115 $1,302,336 $597,640
1997 Cost
Capitalized:
Reclassify
Land Costs 125,128
Selling
Expenses 18,561 19,994 22,400 11,471 15,880 88,493
Engineering &
Supervision 1,403 6,091 18,285 13,899 52,013 27,558
Excavation &
Construction (28,598) 22,401 71,577 67,809 652,614 54,240
Overhead
Allocated 4,752 4,752 4,752 9,504 11,880
Interest
370,069 762,903 903,008 1,326,046 2,032,347 904,939
Less Cost of
Houses &
Lots Sold 205,126 200,143 265,600 535,386 78,780 554,515
Balance
October 31,
1997 $164,943 $562,760 $637,408 $790,660 $1,953,567 $350,424
Classification
of Costs:
House
Construction
& Development$164,943 $562,760 $637,408 $790,660 $1,953,567 $350,424
Unutilized Land
Property, Plant
& Equipment
$164,943 $562,760 $637,408 $790,660 $1,953,567 $350,424
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
Moon
Com- Twp.
mercial Route
Parcels 228
North of Water
Route Un- and Office
228 utilized Other Buildings Houses Total
Phase M Parcels
<S> <C> <C> <C> <C> <C>
18 199 40 5.7
18 5
14 3
$ $2,150,075 $1,011,134 $1,263,208 $2,842,203 $12,269,073
229,630 (417,709) 15,191 47,760
49,109 57,500 346,861 630,269
13,652 129,872 140,922 24,833 105,267 533,795
312,839 683,137 446,558 367,911 4,902,599 7,553,087
1,251 14,256 8,253 59,400
13,500 11,000 1,000 108,546 134,046
619,981 2,559,631 1,682,305 1,712,965 8,305,476 21,179,670
390,296 128,446 4,618,245 6,976,537
$229,685 $2,559,631 $1,553,859 $1,712,965 $3,687,231 $14,203,133
$229,685 $2,559,631 $1,553,859 $1,712,965 $3,687,231 $14,203,133
</TABLE>
<TABLE>
<CAPTION>
Estimated Additional Costs Residential & Residential &
to be incurred in Commercial Commercial
Next Five Years: (000's) Land Building
Development Development Total
<S> <C> <C> <C>
1998 $ 2,226 $ 6,459 $ 8,685
1999 1,560 7,004 8,564
2000 934 6,534 7,468
2001 121 5,480 5,601
2002 918 4,840 5,758
</TABLE>
Note 12 Continued
The following information summarizes development activities for 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Com- Com-
Colon- mercial mercial
ial Pointe Retail & Brandy- Brandy- North George-
I, II Center Service wine wine Ridge town
&III Phase P Phase Q Woods Commons Manor Manor
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 &
Construc-
tion 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 5,400
Interest
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
Classi-
fication
of Costs:
House
Construc-
tion &
Develop-
ment 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-24
<PAGE>
<TABLE>
<CAPTION>
Single
Moon, And
North Un- Townhouse, Multi-
Ridge Hawthorne utilized Water & Office Family
Estates Comons 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>
F-25
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 13 Business Segment Information
<TABLE>
<CAPTION>
For The Year Ended October 31, (000's)
1997 1996
Development, Development,
Rental & Construction Rental & Construction
General & PUC General & PUC
Operations Activities Total Operations Activities Total
<S> <C> <C> <C> <C> <C> <C>
Gross
Operating
Revenue $ 579 $ 10,352 $10,931 $ 801 $ 9,488 $10,289
Costs &
Operating
Expenses 616 8,663 9,279 787 7,442 8,229
Depreciation
Expense 174 112 286 269 62 331
Operating
Income
(Loss) (211) 1,577 1,366 (255) 1,984 1,729
Total
Identifi-
able Assets $6,808 13,439 20,247 7,862 11,569 19,431
Capital
Expendi-
tures $ $ 562 $ 562 $ 16 $ 119 $ 135
</TABLE>
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 residential home owners, 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, 1997 and 1996, the Company held $61,114 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.
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 the Company provided the Company with certain
design and architectural services and was paid $480 for such services. In
addition, the law firm in which a director of the Company is a principal was
paid $10,194 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% and principal repaid during 1997 amounted
to $10,298. The Loan was 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 and at October 31, 1997
had an outstanding balance of
F-26
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1996
(CONTINUED)
Note 16
Continued $124,702. A second construction loan of $58,000 was made available
to the same homeowners association in August 1997. Interest is set at
10.25% and the loan matures on November 1, 2002. No amount was outstanding
on this note at October 31, 1997.
F-27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-1-1996
<PERIOD-END> OCT-31-1997
<CASH> 423,606
<SECURITIES> 0
<RECEIVABLES> 258,802
<ALLOWANCES> 0
<INVENTORY> 12,129,631
<CURRENT-ASSETS> 0
<PP&E> 5,576,496
<DEPRECIATION> 2,055,493
<TOTAL-ASSETS> 20,249,166
<CURRENT-LIABILITIES> 0
<BONDS> 11,683,503
<COMMON> 2,905,682
0
0
<OTHER-SE> 3,054,435
<TOTAL-LIABILITY-AND-EQUITY> 20,249,166
<SALES> 10,352,143
<TOTAL-REVENUES> 16,930,834
<CGS> 7,713,628
<TOTAL-COSTS> 9,564,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,022
<INCOME-PRETAX> 1,269,688
<INCOME-TAX> 508,216
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 761,472
<EPS-PRIMARY> .22
<EPS-DILUTED> 0
</TABLE>
