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, 1998
[ ] 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)
(724) 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: $ $14,167,271.
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The aggregate market value of the issuer's voting stock held by
non-affiliates as of January 29, 1999 is indeterminable. There is no known
market for the issuer's common stock, and the terms of any private sales
of such common stock that did occur are not known to the issuer.
As of January 29, 1999 there were 2,905,514 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. 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, 1998)
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
1998, the Company committed to purchase 3 single family and 8 townhouse lots
in the Nevillewood Development in the Pittsburgh south hills area. As of
October 31, 1998, the Company had closed on two of the single family and 2 of
the townhouse lots in Nevillewood. This activity in Nevillewood marks the
first time that the Company has expanded its construction activities beyond
the Seven Fields vicinity since its 1987 reorganization. During fiscal 1997,
the Company began construction of 11 homes and 29 multi-family units, sold
14 homes and 24 multi-family units and at October 31, 1997 had an inventory
of 11 homes and 31 multi-family units. In fiscal 1998, the Company began
construction including its activities in Nevillewood of 13 homes and 33
multi-family units, sold 14 homes and 25 multi-family units and at October
31, 1998, had an inventory of 9 houses and 39 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 Phase
I of the Northridge Estates Subdivision of 56 single-family lots. Homes in
the Northridge Manor Subdivision are being sold for prices ranging from
$175,000 to $210,000 and townhouse units in the Georgetowne Manor
Subdivision are being sold for $100,000 to $125,000. Homes in the Hawthorne
Commons and Northridge Estates range in price between $140,000 and $220,000
and between $200,000 and $250,000 respectively. During 1998, the
Company completed development of Phase 2 Northridge Estates consisting of 43
single family lots being sold for approximately $45,000 each. Also during
1998, the Company sold all of its remaining original townhouses. The Company
is doing all of the construction of the fourplexes and townhouses as well as
most of the construction in its Northridge Manor 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 a two-story office
building at Seven Fields (the "Office Building"), began development of areas
north of Rt. 228 for the first time, and developed and sold its first
commercial lot. The Office Building, which consists of 9,434 usable
square feet plus a garage-basement, is used as the Company's offices and
maintenance facility. The Company leases one floor of the Office Building to
the Borough as its municipal offices. The Company has granted the Borough
an option to purchase the Office Building at fair market value at the end of
its five-year lease. The Company, so as to facilitate its plans to develop
its property north of Rt. 228, 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 Route 228, were substantially completed at a total cost
of approximately $940,000. During fiscal 1997 and 1998, the Company made
significant improvements to Route 228, which divides the Company's property.
These improvements, which cost nearly $2.0 million, have facilitated the
development of the Company's property located north of Route 228 by the
Company, or other developers who have purchased property from the Company.
During 1998, the Company also completed a new sales center, sold several
additional commercial parcels of property, and sold its Moon Township property.
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 in 1998 compared
to 1997.
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 that 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 that 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. 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 27 full-time and 8 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 that 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 an additional $300,000 during 1999 for
completion of the storm water control and wetlands work north of Route 228.
The cost of these improvements will be charged to the developments north of
Route 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 price of this commercial property in
exchange for the buyer's agreement to construct the required improvements.
Rather than developing the garden apartments that were planned, the
Company has sold part of this partially developed parcel to another
developer, and also intends selling the remainder of the parcel.
The estimated costs to be incurred during the fiscal years 1999 to 2003
for the development of residential and commercial lots and construction of
residential and commercial building units are summarized on Page 8.
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The following schedules summarize the Company's capitalized development costs
and its development plans for the five years ending October 31, 2003.
<TABLE>
<CAPTION>
Capitalized Development And Construction
October 31, 1998
Net Unsold Unsold Capitalized
Acres Lots Units Costs
<S> <C> <C> <C> <C>
Land Development
Substantially Completed Subdivisions
South of Rt. 228 125 277 4 $ 76,082
Northridge Manor 17 45 15 308,638
Northridge Estates Phase I 31 56 11 324,347
Northridge Estates Phase II 22 43 36 1,122,989
Multi Family
Georgetowne Manor 10 77 32 414,107
Hawthorne Commons 24 96 86 1,952,089
Commercial
Phase P 18 5 2 210,542
Phase Q 5 3 - -
Phase J 22 2 - -
Phase M 18 5 1 794,357
Phase I, Garden Apartments & Other 0.8 1 1 79,511
Phase I Office Land 1.2 1 - -
Phase O 4 1 - -
Total Costs -
Currently Under Development 298 612 188 5,282,662
Accumulated Costs of Property
to be Developed in the Future 171 - - 3,038,721
House Construction
Houses Completed 2 340,142
Houses Under Construction 7 784,134
Fourplex & Townhouses Completed 5 718,442
Fourplex & Townhouses
Under Construction 34 1,620,568
Additional Housing Starts
(Nominal Costs Incurred) 143,311
Total House Construction Costs 48 3,606,597
Development Costs Classified as
Property Buildings & Equipment
Office Building 3 1 0 1,263,208
Real Estate Sales Office 2.7 1 0 515,893
Water Authority Assets - - - 374,881
5.7 2 - 2,153,982
Total Capitalized Development
& Construction Costs 474.7 614 - $ 14,081,962
</TABLE>
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Estimated Additional Costs
To be Incurred Fiscal 1999-2003 (000's)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
Total Development Costs $ 453 $ 1,334 $ 1,187 $ 876 $ 35
Building Costs 8,548 7,024 6,064 6,304 5,804
Total Development $ 9,001 $ 8,358 $ 7,251 $ 7,180 $ 5,839
and Building Costs
</TABLE>
Financial Information Relating to Industry Segments
and Classes of Products
<TABLE>
<CAPTION>
Year Ended October 31, (000's)
1998 1997
<S> <C> <C>
Sales to Unaffiliated Customers
Rental and General Operations $ 243 $ 579
Land Development, House Construction
and PUC Regulated Services 13,924 10,352
Total Sales $ 14,167 $ 10,931
Operating Income
Rental and General Operations $ (109) $ (211)
Land Development, House Construction and PUC
Regulated Services 2,273 1,577
Total Operating Income $ 1,366 $ 2,164
Identifiable Assets
Rental and General Operations $ 6,808 $ 3,123
Land Development, House Construction and PUC
Regulated Services (Including
Land Held for Future Development) 14,138 13,439
Total Identifiable Assets $ 17,261 $ 20,247
See Item 7. Financial Statements.
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, 1998, had sold all of the units.
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.
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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, 1998, completed construction of a property
sales center north of Rt. 228.
The Company also sold 40 acres of unimproved commercial and residential
property located in Moon Township, Allegheny County, Pennsylvania (the "Moon
Township Property") in 1998.
The Company purchased 2 single-family lots and 2 townhouse lots in the
Nevillewood Community, Collier Township, a suburb southwest of Pittsburgh
during 1998. In addition, the Company is committed to purchase 7 additional
lots in Nevillewood over the next 29 months.
The Company also holds mortgage notes receivable related to the sale of
certain of the original 237 townhouses. See Item 6. Management's Discussion
and Analysis or Plan of Operation - Financial Condition and Note 4 to
Financial Statements.
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 fiscal year ended October 31, 1998.
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, 1998, there were 2,218 holders of Company
Shares, 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,
1998 and 1997. 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.
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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. Until 1998
the Company had no plans to acquire and develop any other properties except
minor acquisitions which might enhance the development of existing
properties. However, during 1998, the Company acquired or committed to
acquire a total of 11 lots in the Nevillewood Community, a southwest suburb
of Pittsburgh. The Company has begun building single family and townhouse
units on these lots. In total the Company will be able to build
35 housing units on these 11 lots.
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 1998 and 1997 as a
result of the generation of net income of $828,000 and $761,000 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 1999 was $5.2 million at October 31, 1998. The
Company's inventory of completed, unsold lots at Seven Fields decreased from
226 to 188 in fiscal 1998, however, the Company has committed to purchase an
additional 11 lots at Nevillewood where it will build 35 houses and
townhouses.
During 1997, development work in 77 lot Georgetowne Manor, 96 lot Hawthorne
Commons, and 56 lot Phase I Northridge Estates was completed. In 1997 the
Company sold 6 separate commercial lots totaling 33 acres for a total gross
sales price of $2,215,000. In 1998 the Company completed the 43 lot
Northridge Estates Phase II, and sold 4 of its commercial parcels consisting
of approximately 11.4 acres for $1,251,000. In addition, the Company sold
its remaining 74 original townhouses for $4,136,000, sixty-five of which
were sold in bulk to a single investor for $3,542,500. The sale of the
40-acre parcel located in Moon Township was also finalized in 1998 at a
selling price of $575,000. The expected sale of the Town Center and Town
Village area totaling 34 acres did not close and the buyer opted out of the
agreement of sale due to the inability to obtain the zoning changes which
were required for the planned development. Construction of the Rt. 228
improvements were substantially completed and construction of the storm
water detention pond was begun in 1998. The final cost of the Rt. 228
improvements was approximately $2.0 million and the estimated cost of the
storm water detention pond is $525,000. The Company does not plan to invest
significant additional amounts in any of the remaining commercial lots, other
than amounts that would be recoverable at the time of sale.
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 Route 228. Most of
the site development work between Route 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 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 was increased to $2,250,000 in
1998, that 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, 1998, the Company had available
borrowing capacity under its lines of credit of approximately $4 million
compared to $2 million at October 31, 1997.
The Company had $3,607,000 invested in completed and partially completed
residential units at October 31, 1998 compared to $3,687,000 at October 31,
1997. This investment decreased slightly during fiscal 1998 despite the fact
the Company had 48 completed and partially completed units at October 31,
1998 as compared with 42 at October 31, 1997. The construction progress of
the 48 units at October 31, 1998 was not as advanced as the 42 units in 1997.
All new performance and maintenance bonding requirements were met through
the Company's new commercial bonding line that is no longer collateralized
by the Company's real estate. At October 31, 1997, the Company had bonds
outstanding of approximately $1,250,000.
The Company's cash position remained constant in 1998 as a result of cash
generated from operations including utilization of deferred tax assets and
depreciation of $2,414,000, a decrease in lot and house inventory of
$201,000, recovery of basis on the sale of townhouses of $939,000, and a net
decrease in other assets and liabilities of $397,000, offset by net repayment of
mortgages and notes payable of $1,535,000, repayments to Investors of
$2,331,000 and capital expenditures of $92,000.
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
The Company's income before taxes for fiscal 1998 was $2,216,000, an
increase of $946,000 from fiscal 1997's net income before taxes of
$1,270,000. Operating income for fiscal 1998 increased from fiscal
1997 by $798,000.
The increase in operating income was the result of a $1,648,000 increase
in gross profit on the sale of the 74 original townhouses compared to 17 in
1997 offset by a $750,000 decrease in gross profit resulting from the sale of
residential and commercial lots and houses, a decrease in general and
administrative and operating costs of $121,000, an increase in water
revenue of $25,000, and a decline in rental revenues of $336,000 and
depreciation expense of $92,000 as a result of the sale of townhouses,
leaving fewer available for rent.
Interest income increased from $32,000 to $71,000 as a result of the
Company having more excess cash available to invest during 1998 than 1997.
Net income included a provision for deferred income taxes of $1,388,000 in
1998, compared to $508,000 in 1997. The 1998 and 1997 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 that, at a minimum, approximate statutory income tax rates.
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<PAGE>
During fiscal 1998, the Company generated gross revenues of $14,167,000,
an increase of $3,236,000 over 1997. Gross revenues from sales of houses and
developed lots increased by $712,000 in fiscal 1998 over 1997, townhouse
sales increased by $2,834,000 as a result of 57 more units sold and rental
revenues declined by $336,000 in fiscal 1998.
The Company's cost of lots and houses sold, expressed as a percentage of
sales, increased from 79 % in fiscal 1997 to 88% in fiscal 1998 because of
the lower margin earned on the sale of commercial lots. The cost of
townhouses sold in fiscal 1998 expressed as a percentage of sales decreased
from 55.9 % in 1997 to 46% in fiscal 1998. The average sales price of
townhouses sold in fiscal 1998 was $55,900 compared to $76,500 in fiscal
1997, however, the Company also expended greater funds to improve the
townhouses and incurred higher selling expenses so as to facilitate their
sale at retail in 1997.
The Company's sales of houses constructed, lots developed and existing
townhouses during fiscal 1998 and 1997 were as follows:
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
<S> <C> <C>
Moon Township 1 0
Lot Sales Commercial 4 6
Lot Sales - Single & Multi-Family 67 60
Townhouse Sales 18 19
Single Family House Sales 14 14
Fourplex House Sales 7 5
Townhouse Sales - Original Construction 74 17
</TABLE>
The four commercial lots sold in fiscal 1998 generated $1,251,000 in gross
revenues compared to the six sold in fiscal 1997 for $2,215,000. The 67
single and multifamily lots sold in fiscal 1998 generated gross revenues of
$2,175,000, or an average of $32,400, compared to gross revenues of
$1,817,500 for 60 lots sold in fiscal 1997 or an average of $30,200. The
change in average lot price is a result of a change in the mix of lots sold
in 1998.
The Company's revenue from the sale of single family houses was $2.6
million in fiscal 1998 compared to $2.3 million in fiscal 1997. Fourteen
single-family houses were sold in 1998 and 1997. The Company generated
revenues of $1,074,000 from the sale of 7 fourplex units during fiscal 1998
compared to $722,000 in 1997 from the sale of 5 fourplex units. During
1998, the Company also generated gross revenue of $1,944,000 from the sale of
18 newly constructed townhouse units in the 77 unit Georgetowne Manor
Subdivision compared to $1,853,000 from 19 units in 1997. The sale of the
Moon Twp. Property also generated $575,000 in 1998.
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.
The Company's primary objective is to repay its Investors to the fullest
extent possible, and at the earliest possible time. 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, $2.0 million in
December 1995, $1.0 million in December 1996,
-12-
<PAGE>
$2.3 million in February 1998 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 its
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
an annual return of some 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 which until 1998 was
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
which was subsequently increased to $2,250,000 in 1998 to be used for the
construction of houses in certain subdivisions, 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 $4 million of borrowing capacity available in these lines of
credit at October 31, 1998.
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 1998, and are expected to approximate $500,000 in
1999, and are related to general development 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 $2.0 million for Rt. 228 improvements. During fiscal 1999, the Company
expects to generate significant cash flows from the sale of lots and houses
in its Northridge Manor, Georgetowne Manor, Hawthorne Commons and Northridge
Estates Subdivisions, from the sale of commercial lots and the sale of
houses and townhouses at Nevillewood. See Item 1. Description of Business
and Note 12 to the Financial Statements.
In fiscal 1997 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 $1,476,000. In 1998 cash of
$201,000 was generated as a result of a reduction of lot and house inventory.
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 $1,271,000. Although the Company has begun to recognize income
tax expense it probably will not be required to make substantial cash
payments for income taxes.
The Company's cash position remained constant in 1998 as a result of it
having repaid bank notes and mortgages of $1.5 million and making
distributions to Shareholders and on Company Debt of $2.3 million with the
cash it generated from operations and from the disposal of its remaining
original townhouses.
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
-13-
<PAGE>
if the necessary upgrades to its software are not made on a timely basis the
impact would be minimal. The Company's accounting software is licensed from
third party vendors, and the Company has already installed year 2000
compliant upgrades at a nominal cost.
Recent Accounting Developments
The Company has adopted FAS No. 128 "Earnings per Share" and FAS No. 129
"Disclosure of Information about Capital Structure". The Company will be
required to adopt FAS No. 130 "Reporting Comprehensive Income"; and FAS
No. 131 "Disclosures about Segments of an Enterprise and Related
Information". FAS No. 130 and FAS No. 131 must be adopted for the fiscal
year beginning November 1, 1998.
For the most part all of these new pronouncements only 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.
-14-
<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 Term
Name Age Since Since Expires
<S> <C> <C> <C> <C>
Michael Burkhart 55 1996 N/A 1999
Samuel A. Goldberg 74 1994 1988 1999
Robert A. Janusey 47 1998 N/A 2001
Cheryl Kirchner 51 1997 N/A 2001
Alexander Lindsay, Jr. 52 1994 1990 2000
Paul Voytik 74 1994 1988 2000
George K. Wright 72 1994 1988 2000
</TABLE>
<TABLE>
<S> <C> <C> <C>
Darell Craig 48 Chief Operating Officer Employed Since 1991
Lynn Hoffman-Kyle 44 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.
Robert A. Janusey is Vice President of Shiloh Industrial Contractors, Inc. a
commercial and industrial contractor which he co-founded in 1986.
Mr. Janusey, who holds a BS in civil engineering from Geneva College was also
a project manager for Chapman Corporation from 1980 to 1986 and a draftsman
for Janusey & Associates from 1976 to 1980.
Cheryl Kirchner 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.
-15-
<PAGE>
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 of the Corporation since January 1989,
Chief Executive Officer from 1989 to 1998 and President of the Corporation
since February 1988. He was employed at Westinghouse Electric Corporation
for 29 years, 24 of which he served as an Engineering Manager, until his
retirement in November 1985. Thereafter, he served as a consultant to
Westinghouse until 1986. In 1986 he became Vice President and a director of
Piedmont Atlantic Corporation, 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 and Chief Executive Officer since 1998. 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, 1998.
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
of the Company, except as indicated in the following table, had total annual
salary and bonus in excess of $100,000 during any of the last three fiscal
years.
-16-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term compensation
Annual compensation Awards Payouts
Re- All
stricted Other
Name and Stock Options/ LTIP Compen-
principal Fiscal Salary Bonus Annual Awards SARs Payouts sation
position Year $ $ Comp $ $ # $
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul Voytik
(President 1998 53,760 0 0 N/A 0 N/A 0
and Board 1997 39,655 0 0 N/A 0 N/A 0
Chairman) 1996 37,354 0 0 N/A 0 N/A 0
Darell Craig
(Chief 1998 82,445 34,594 0 N/A 0 N/A 0
Executive 1997 78,340 4,990 0 N/A 0 N/A 0
Officer) 1996 76,635 4,989 0 N/A 0 N/A 0
</TABLE>
Each Director is paid a fee of $600 per board meeting attended.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of January 29, 1999
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 Amount and Outstanding
Address of Nature of Company Shares
Beneficial Beneficial Ownership
Owner (1)
<S> <C> <C>
Paul Voytik 13,599.89 (2) *
George K. Wright 14,173.63 (2) *
Samuel A. Goldberg 745.97 *
Robert A. Janusey 257.18 *
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) 29,960.28 1.1
</TABLE>
[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.
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.
-17-
<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. (2)
3.2 By-Laws of Seven Fields Development (PA), Inc. (2)
10.1 Rates, rules and regulations governing the
distribution of water service - PA Public Utility
Commission (1)
10.3 Mortgage Note dated October 28, 1994, of the Seven
Fields Development Company to PNC
Bank, National Association (3)
10.4 Open End Mortgage and Security Agreement dated
October 28, 1994, between Seven Fields
Development Company and PNC Bank, National
Association (3)
10.5 Assignment of Rents, Leases and Profits dated October
28, 1994, between Seven Fields
Development Company and PNC Bank, National
Association (3)
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 (5)
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 (5)
10.10 Settlement Agreement with former majority shareholder (4)
10.11 Promissory Note dated November 29, 1995, to PNC Bank (4)
10.12 Open End Mortgage and Security Agreement dated
November 29, 1995, to PNC Bank (4)
10.15 Open End Mortgage and Security Agreement dated
November 13, 1995, between Seven Fields
Development Company and Integra Bank (4)
10.16 Agreement for Assignment of Sales Agreements and
Contract Deposits dated November 13,
1995, between Seven Fields Development Company and
Integra Bank (4)
10.17 Office Lease dated August 1, 1995, between Seven
Fields Development Company and The
Borough of Seven Fields (4)
10.18 Management and Administrative Services Agreement
dated April 30, 1995, (4)
-18-
<PAGE>
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 (5)
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 (5)
10.21 Agreement of sale with CMS-Nevillewood Limited
Partnership to acquire 8 building lots for
$896,000.(6)
10.22 Agreement of sale of 65 townhouses with Edward Feree.(6)
10.23 Purchase money mortgage with Watersoft Inc. (Feree)
related to sale of 65 townhouses.(6)
10.24 Mortgage note with Watersoft (Feree) related to sale
of 65 townhouses.(6)
10.25 Amended and restated revolving credit facility with
National City Bank for $2,250,000.(6)
21 List of subsidiaries of Seven Fields Development
(PA), Inc.(2)
27 Financial data schedule.
99 Deed of Trust of Seven Fields Development Company.(2)
(1) 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.
(2) Filed as exhibit to the Company's Registration Statement
on Form S-4, File No. 33-85102, and incorporated herein
by reference.
(3) Filed as exhibit to Seven Fields Development Corporation's
Annual Report on Form 10-KSB filed January 27, 1995, and
incorporated herein by reference.
(4) Filed as exhibit to Seven Fields Development Company's
Annual Report on Form 10-KSB filed January 26, 1996,
and incorporated herein by reference.
(5) Filed as exhibit to Seven Fields Development Company's
Annual Report on Form 10-KSB filed
January 24, 1997, and incorporated herein by reference.
(6) Filed as exhibit to Seven Fields Development Company's
Annual Report on Form 10-KSB filed January 29, 1999 and
incorporated herein by reference.
</TABLE>
(b) Reports on Form 8-K.
None
-19-
<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 29, 1999
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 Executive Officer) January 29, 1999
Paul Voytik and Director
LYNN HOFFMAN-KYLE Chief Financial Officer January 29, 1999
Lynn Hoffman-Kyle (Principal Financial and
Accounting Officer)
GEORGE K. WRIGHT Director January 29, 1999
George K. Wright
CHERYL KIRCHNER Director January 29, 1999
Cheryl Kirchner
MICHAEL BURKHART Director January 29, 1999
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, 1998 and October 31, 1997 F-3
Statements of Operations for the years ended October 31, 1998
and October 31, 1997 F-5
Statements of Shareholders' Equity for the years
ended October 31, 1998 and October 31, 1997 F-7
Statements of Cash Flows for the years
ended October 31, 1998 and October 31, 1997 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, 1998 and October 31, 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of
the two years in the period ended October 31, 1998. 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, 1998 and October 31, 1997 and the consolidated results of
its operations and its cash flows for each of the two years in the period
ended October 31, 1998, in conformity with generally accepted accounting
principles.
O'Connor, Greenblatt & Company
December 30, 1998
Sewickley, PA
F-2
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
<S> <C> <C>
Cash $ 109,159 $ 227,896
Temporary investments, Note 10 308,103 195,710
Total Cash And Temporary Investments 417,262 423,606
Accounts and notes receivable, net of
allowances of $57,492 and $57,589 199,483 197,688
Mortgage notes receivable, Note 4 497,918 61,114
Capitalized development costs, Notes 2, 12 5,282,662 5,365,267
Capitalized house construction costs, net of
allowances, Notes 2, 12 3,606,597 3,687,231
Prepaid expenses and deposits 78,445 391,600
Property not currently under
development, net of allowances of 3,038,721 3,077,133
$123,788 in 1997, Notes 2, 12
Tenant security deposits 40,740
Deferred income tax assets, Note 9 2,096,129 3,483,784
Property, Buildings And Equipment,
Notes 2, 3, 6, 7
Land 484,756 359,725
Buildings 1,294,345 3,373,859
Equipment and furnishings 845,934 1,393,155
Construction in progress 449,757
Total Property, Buildings And Equipment 2,625,035 5,576,496
Accumulated Depreciation (581,633) (2,055,493)
Total Property, Buildings And Equipment, Net
Of Accumulated Depreciation 2,043,402 3,521,003
Total Assets $17,260,619 $20,249,166
</TABLE>
[FN]
See Notes to Financial Statements.
F-3
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Accounts payable and accrued expenses $ 586,672 $ 701,176
Accrued estimated costs related to developed
lots and buildings sold, Note 2 1,041,873 812,427
Notes payable - credit lines, Note 6 196,000 918,157
Mortgages payable, Note 7 972,461 1,785,570
Customer deposits and advances 106,245 133,046
Tenant security deposits 40,740
General unsecured debt - Minority investors,
Notes 1, 8, 11 9,501,710 9,897,933
Total Liabilities 12,404,961 14,289,049
<CAPTION>
SHAREHOLDERS' EQUITY
<S> <C> <C>
Common stock, $1 par value, 10,000,000
shares authorized, 2,905,514 and 2,905,682
shares issued and outstanding, Notes 1, 2, 11 2,905,514 2,905,682
Additional paid in capital 46,953,580 48,885,852
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) 7,231,963 6,403,982
Total Shareholders' Equity 4,855,658 5,960,117
Total Liabilities And
Shareholders' Equity $ 17,260,619 $ 20,249,166
</TABLE>
F-4
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Gross Revenue
Apartment rentals $ 188,361 $ 524,230
Fees & other operating income 54,704 54,461
Water revenue 185,499 160,154
Developed lot & house sales 9,603,121 8,890,865
Townhouse unit sales 4,135,586 1,301,124
14,167,271 10,930,834
Costs And Expenses
Cost of Developed Lots And Houses Sold 8,449,160 6,986,853
Cost Of Townhouses Sold 1,912,857 726,775
Other Operating Expenses* 596,180 778,385
General & Administrative Expenses* 850,092 786,056
Depreciation Expense 194,921 286,360
12,003,210 9,564,429
Operating Income 2,164,061 1,366,405
Interest Expense* (19,590) (129,022)
Interest Income 71,165 32,305
Income Before Provision for Income Taxes 2,215,636 1,269,688
Provision For Income Taxes, Note 9 1,387,655 508,216
Net Income $ 827,981 $ 761,472
Net Income Per Share Basic And Diluted, Note 2 $ .24 $ .22
* See details on the following page.
</TABLE>
[FN]
See Notes To Financial Statements.
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, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Other Operating Expenses
Payroll, payroll taxes and benefits $ 685,754 $ 760,351
Repairs and maintenance 129,136 215,547
Utilities 118,646 139,719
Insurance 94,534 136,689
Property taxes 83,497 138,189
Other operating supplies and services 118,876 97,295
Total Other Operating Expenses 1,230,443 1,487,790
Less Cost Capitalized To Development And
Construction (634,263) (709,405)
Net Other Operating Expenses $ 596,180 $ 778,385
General And Administrative Expenses
Payroll, payroll taxes and benefits $ 405,517 $ 416,070
Professional fees 112,193 119,819
Other general and administrative expenses 400,374 309,567
Total General And Administrative Expenses 918,084 845,456
Less Costs Capitalized To Development And
Construction (67,992) (59,400)
Net General And Administrative Expenses $ 850,092 $ 786,056
Interest Expense
Total interest expense $ 151,666 $ 245,819
Less Interest Capitalized to Development and
House Construction (132,076) (116,797)
Net Interest Expense $ 19,590 $ 129,022
</TABLE>
[FN]
See Notes To Financial Statements.
F-6
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
Common Stock
Shares Amount
<S> <C> <C> <C> <C> <C> <C>
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
Dis-
tribu-
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
Return Of
Capital
Dis-
tri-
bution (1,929,585) (1,929,585)
Shares
Donated
To The
Company
And
Retired (168) (168) (2,687) (2,855)
Net Income 827,981 827,981
Balance
October
31, 1998 2,905,514 $2,905,514 $46,953,580 $(52,239,399) $7,231,963 $4,855,658
</TABLE>
[FN]
See Notes To Financial Statements.
F-7
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 827,981 $ 761,472
Provision for deferred income taxes 1,387,655 508,216
Depreciation 194,921 286,360
Capitalized development costs incurred (3,545,553) (2,989,270)
Capitalized house construction costs incurred (5,213,184) (5,473,589)
Cost of lots and houses sold 8,960,386 6,986,853
Changes in other assets and liabilities:
Other assets 352,100 125,345
Other liabilities 47,237 439,916
Net Cash Flows Provided By
Operating Activities 3,011,543 645,303
Cash Flows From Investing Activities:
Additions to property, buildings & equipment (91,766) (562,342)
Payments on notes receivable 50,696 693
Sale of property, buildings, & equipment 886,944 320,412
Total Cash Flows Provided By
(Used In) Investing Activities 845,874 (241,237)
Cash Flows From Financing Activities:
Repayment of Investor debt (396,223) (169,804)
Return of capital distribution (1,932,272) (828,131)
Proceeds from borrowings 310,000
Net borrowings (repayments) on credit lines (722,157) 788,157
Repayment of existing mortgage (1,123,109) (173,011)
Total Cash Flows Used In
Financing Activities (3,863,761) (382,789)
Net Increase (Decrease) In Cash And
Temporary Investments (6,344) 21,277
Cash And Temporary Investments,
Beginning of Period 423,606 402,329
Cash And Temporary Investments, End of Period $ 417,262 $ 423,606
Interest Expense Included In Net Income
From Operating Activities Above $ 19,590 $ 129,022
Interest Paid And Included In Capitalized
Development Costs And Houses
Under Construction 132,076 116,797
Total Interest Paid $ 151,666 $ 245,819
Income Taxes Paid None None
Supplemental Schedule Of Noncash
Investing And Financing Activities:
Notes Receivable From The Sale Of Property $ 487,500
</TABLE>
[FN]
See Notes To Financial Statements.
F-8
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
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, and
operation of the municipal water service in Seven Fields Borough. Prior to
January 1998, the Company also rented townhouses located in Seven Fields
Borough. Since 1987, the Company sold these townhouses as individual
residences and in January 1998 sold the remaining 65 townhouses in a bulk
sale. All of these activities focus on the single goal of maximizing the
assets of the Company and ultimately distributing such assets to its
Investors in complete liquidation at the earliest appropriate time.
Since the bankruptcy Reorganization in 1987, the Company has sold four
rental properties, repaid five million dollars of debt other than Company
Debt, and returned approximately $10.6 million to its Investors.
F-9
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
Note 1 Continued
Prior to 1998 the Company was not actively acquiring additional property
for development. In 1998 the Company committed to purchase 11 lots in
Nevillewood, a southwest suburb of Pittsburgh, at a total cost of
approximately $1.0 million. The Company is constructing single family homes
and townhouses on these completed lots. It will not be until at least the
years 2000 - 2005 before development of its remaining undeveloped property
at Seven Fields is completed, unless sales of some of its remaining property
are made in bulk.
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 that 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 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.
F-10
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
Note 1 Continued
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.
For comparative purposes, certain 1997 amounts have been reclassified to
conform to the presentation adopted in 1998.
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.
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 that it expects to incur in the future, and costs to
complete specific subdivisions of lots from which lots are being sold.
F-11
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 2 Continued
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 that 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 that 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.
Public Utility Commission "PUC" Regulated Activities
The Company earns fees for the water services it provides the residents
of Seven Fields Borough.
F-12
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 2 Continued
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.
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, 1998 AND 1997
(CONTINUED)
Note 2 Continued
The computation of earnings per share is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Consolidated Net Income $ 827,981 $ 761,472
Less Net Income Accruing to Minority
Interest in Trust (17%) 137,527 126,480
Net Income Applicable to Seven Fields
PA Shareholders $ 690,454 $ 634,992
Weighted Average Shares Outstanding 2,905,577 2,905,682
Earnings Per Share, Basic and Diluted .24 .22
</TABLE>
Note 3 Real Estate Rental Activities
A summary of the historical cost of properties held for rent located at
Seven Fields that are included in property, buildings and equipment on the
balance sheets, is as follows. These properties include a commercial
office building and sales center in 1998 and 1997, and 74 residential
townhouses in 1997.
<TABLE>
<CAPTION>
October 31,
1998 1997
<S> <C> <C>
Land $ 484,756 $ 359,725
Buildings 1,294,345 3,373,859
Equipment and Improvements 0 314,157
Assets under construction 449,757
Total Rental Properties 1,779,101 4,497,498
Accumulated Depreciation (89,556) (1,445,956)
Total Rental Properties, Net. $ 1,689,545 $ 3,051,542
</TABLE>
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 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. The Company leases a real estate sales office
that it constructed in 1995 under terms of a three year lease which expires
January 21, 2001. The lease also contains two one-year renewal options at a
rent adjusted for the change in the CPI and requires the Lessee to pay all
utilities and maintenance of the property.
F-14
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 3 Continued
Minimum lease payments to be received under non-cancelable operating
leases at October 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 77,083
2000 70,302
2001 7,000
Thereafter
Total $ 154,385
</TABLE>
Note 4 Mortgage Notes Receivable (Mortgage Assignments)
Commencing in 1993, the Company began financing the purchase of certain
of the townhouse units which it sells to individuals. Such financing is
facilitated by the Company receiving an assignment of the mortgage
note granted by the buyer of the individual townhouse to the mortgagee -
Howard Hanna Financial Services. The Company has not perfected its security
interest in the underlying collateral in that it is the Company's
policy to not record these assignments with the Butler County Recorder of
Deeds. The Company intends to sell the remaining mortgage it holds in the
open market when market conditions are favorable.
The Company sold its 65 remaining townhouses in bulk in January 1998.
As partial consideration, the Company accepted a mortgage note in the amount
of $487,500 and was granted a second mortgage secured by the 65 townhouses
sold. This mortgage note which bears interest at 7 1/2% is repayable at the
rate of $7,500 for each townhouse the mortgagor sells but not less than
$255,000 by July 28, 2000, an additional $127,500 by July 28, 2001, and the
remaining principal balance by July 28, 2002.
The Company charges operations with any credit loss it incurs on an
individual loan basis, and losses because of market changes on an aggregate
basis. Market value is determined based on the current discount rates for
mortgages of identical terms and interest rates. The Company held
the following mortgage note and note assignment at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
Bulk Retail Total
Sale Sale 1998 1997
<S> <C> <C> <C> <C>
Number of Mortgage Notes 1 1 2 1
Approximate Average Interest Rate 7.5% 8.125% 8.125% 8.125%
Final Maturity Date 2002 2024 2024 2024
Face Amount of Mortgage Notes 487,500 62,910 550,410 $ 62,910
Carrying Amount of Mortgage Notes
(Market Value) $ 435,000 $ 62,918 $ 497,918 $ 61,114
</TABLE>
F-15
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 4 Continued
Reconciliation of the Carrying Amounts of Notes
<TABLE>
<CAPTION>
Bulk Retail Total
Sale Sale 1998 1997
<S> <C> <C> <C> <C>
Beginning Balances $ 61,114 $ 61,114 $ 61,807
New Loans $ 487,500 487,500
Principal Collected (52,500) (534) (53,034) (693)
Market Valuation Change
and Realized Gains
or (Losses) 2,338 2,338
Ending Balance $ 435,000 $ 62,918 $ 497,918 $ 61,114
Delinquent Loans 1 1
Principal Amount of
Deliquent Loans $ 61,686 $ 61,686
</TABLE>
Note 5 Commitments, Surety And Litigation
The Company has concluded all litigation with the former majority
shareholder of the Debtors as a result of a settlement that was finalized in
November 1995.
Surety
The Company is contingently liable under terms of maintenance and
performance bonds totaling $1,250,000 to a commercial surety company. To
date, the Company has successfully completed, to the extent possible,
and to the satisfaction of the Borough and other governmental units, each of
its previous subdivisions and other construction, and each of its prior
bonds have been duly released.
Purchase Commitment
The Company has entered into a lot purchase agreement for the
acquisition of three single family lots and eight townhouse building lots in
the Nevillewood development. Under terms of this agreement as of October
31, 1998, the Company is obligated to purchase one additional single family
lot in 1999 for $65,000 and three additional townhouse lots in 1999 at a
total cost of $336,000 and three lots in 2000 for an additional
$336,000. The Company will build four townhouse units on each townhouse lot
and as of October 31, 1998 has closed on two of the eight lots and has eight
townhouse units under construction.
Note 6 Notes Payable - Credit Lines
The Company utilizes a revolving credit line in the amount of $2,250,000
($1,000,000 in 1997) with National City Bank. Interest is payable monthly at
the bank's prime rate plus 1/2%. The credit line is to be used for individual
house construction in Seven Fields and Nevillewood in an amount not to exceed
$1.5 million, and for townhouse construction at Nevillewood in an amount not
to exceed $750,000 and is secured by the constructed homes for which the
loan proceeds are used, and by the Company's remaining lots in its Northridge
Manor Subdivision. The credit line matures June 1, 2002 and advances
outstanding more than 12 months are to be repaid over a 48-month term.
F-16
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 6 Continued
National City may call the notes outstanding on May 1 of each year,
however, the Company is allowed 180 days to repay the balance in full. No
balance was outstanding at October 31 1998.
The Company 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, 1998, the total outstanding balance amounted to $196,000 with
interest payable at 8 1/4%.
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%. No balance was outstanding at October 31, 1998.
The Company also maintains a $250,000 working capital credit line with
PNC Bank with interest payable at the bank's prime rate plus .625%. At
October 31, 1998, the Company had no amount outstanding under this credit
line.
Note 7 Mortgages Payable
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 $668,449 at October 31, 1998. 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, 1998, monthly principal and interest payments are $7,265 based on
the current interest rate of 8.12%, which has been fixed through December 10,
1999.
The Company must also comply with certain financial covenants including
at all times having a tangible net worth (defined as net worth plus general
unsecured debt less deferred tax assets) of $10,000,000, a current ratio of
2 to 1; debt to net worth (adjusted for general unsecured debt and
deferred tax assets) of .5 to 1; and debt service coverage of 1.1 to 1. 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 Investors.
The Company also granted National City Bank a $250,000 mortgage secured
by the real estate sales office that has a net book value of $510,000. This
loan, having a balance of $244,012 at October 31, 1998, bearing interest on
a floating basis (7.91% at October 31, 1998) and maturing January 8, 2003,
requires the Company to make 60 monthly principal and interest payments of
$2,376 with the balance payable at maturity.
F-17
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 7 Continued
The Company also granted mortgages totaling $60,000 on two lots it
purchased at Nevillewood. These loans bear interest at Prime plus 1% if not
paid by April 1999, and are repayable upon the sale of the lots upon which
the Company is presently building town homes. Aggregate maturities of long
term debt at October 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 102,740
2000 46,369
2001 609,664
2002 11,801
2003 201,887
$ 972,461
</TABLE>
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, 1998:
Cash and temporary investments: The carrying amount reported in
the balance sheet for cash and temporary investments approximates
fair value.
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 $9,501,710 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 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
F-18
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31 1998 AND 1997
(CONTINUED)
Note 8 Continued
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 a higher tax basis of the Company's assets
than the basis recognized for financial reporting purposes at the time of
reorganization. Recognition of this deferred tax asset reduced the
Shareholders' Deficit created at reorganization.
As of October 31, 1998, the Company has federal and state net operating
loss carryforwards for tax purposes which, if not utilized, expire as
follows:
<TABLE>
<CAPTION>
October 31, Federal State
<S> <C> <C>
2003 $ 2,364,433
2004 3,911,434
2005 4,605,975
2006 626,911 $ 434,857
2007 870,453
2008 3,892,382 454,879
2009 1,202,522
2010 1,125,160
2011 436,732
2012
2013 676,571
$ 19,712,573 $ 889,736
</TABLE>
For Pennsylvania income tax purposes, net operating losses generated in
fiscal 1996 and thereafter may be carried over for ten years. The maximum
net operating loss that may be used in any fiscal year to reduce Pennsylvania
taxable income 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 assets should be reduced
by a valuation allowance so that the assets will not be carried in excess of
estimated realizable value.
The net realizability of the deferred income tax assets is re-evaluated
periodically. The deferred tax assets that 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 on its ability to generate
F-19
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31 1998 AND 1997
(CONTINUED)
Note 9 Continued
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. In 1997 and 1998, the Company began increasing
the deferred tax valuation allowance so as to reduce its net deferred tax
assets to amounts which will not exceed utilization of such assets based on
its property which remains to be sold.
At October 31, 1998, the significant components of the Company's deferred
tax assets are as follows:
<TABLE>
<CAPTION>
Federal State Total
<S> <C> <C> <C>
Tax over financial reporting
basis of assets originating
at reorganization $ 1,383,387 $ 451,585 $ 1,834,972
Net operating loss
carryforwards resulting
from the utilization
of the higher tax basis
of assets since
reorganization 6,672,055 88,884 6,760,939
Potential tax benefit at
October 31, 1998 8,055,442 540,469 8,595,911
Valuation allowance unutilized
deferred tax assets 6,482,821 16,961 6,499,782
Net Deferred Tax Assets $1,572,621 $ 523,508 $ 2,096,129
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997
<S> <C> <C>
Deferred
Federal $1,165,963 $ 381,374
State 221,692 126,842
Provision For Income Taxes $1,387,655 $ 508,216
</TABLE>
Note 9 Continued
A reconciliation of income taxes with the amounts which would result
from applying the US statutory rate follows:
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997
<S> <C> <C>
Tax at US Statutory Rate $ 754,506 $ 427,214
State Income Taxes Net of Federal Benefit 146,316 83,017
Federal Benefit
Utilization of Deferred Income Tax Assets (2,015)
Increase in Valuation Allowance 486,833
Provision For Income Taxes $1,387,655 $ 508,216
</TABLE>
F-20
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
Note 9 Continued
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 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
F18
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 8 Continued
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 varable 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 a higher tax basis of the Company's assets than the basis recognized
for financial reporting purposes at the time of reorganization. Recognition
of this deferred tax asset reduced the Shareholders' Deficit created at
reorganization.
As of October 31, 1998, 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
2003 $ 2,364,433
2004 3,911,434
2005 4,605,975
2006 626,911 $ 434,857
2007 870,453
2008 3,892,382 454,879
2009 1,202,522
2010 1,125,160
2011 436,732
2012
2013 676,571
$ 19,712,573 $ 889,736
</TABLE>
For Pennsylvania income tax purposes, net operating losses generated in fiscal
year 1996 and thereafter may be carried over for ten years. The maximum net
operating loss that may be used in any fiscal year to reduce Pennsylvania
taxable income 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 assets should be reduced
by a valuation allowance so that the assets will not be carried in excess
of estimated realizable value.
The net realizability of the deferred income tax assets is re-evaluated
periodically. The deferred tax assets that the Company estimates will be
realized 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 on its ability to generate
F-19
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 9 Continued
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. In 1997 and 1998, the Company increased the deferred
tax valuation allowance so as to reduce its net deferred tax assets to amounts
which will not exceed utilization of such assets based on its property which
remains to be sold.
At October 31, 1998, the significant components of the Company's deferred
tax assets are as follows:
<TABLE>
<CAPTION>
Federal State Total
<S> <C> <C> <C>
Tax over financial reporting
basis of assets originating
at reorganization $ 1,383,387 $ 451,585 $ 1,834,972
Net operating loss carry-
forwards resulting from the
utilization of the higher
tax basis of assets since
reorganization 6,672,055 88,884 6,760,939
Potential tax benefit at
October 31, 1998 8,055,442 540,469 8,595,911
Valuation allowance -
reduction for estimated
unutilized deferred tax
assets 6,482,821 16,961 6,499,782
Net Deferred Tax Assets $ 1,572,621 $ 523,508 $ 2,096,129
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended October 31,
Deferred 1998 1997
<S> <C> <C>
Federal $1,165,963 $ 381,374
State 221,692 126,842
Provision For Income Taxes $1,387,655 $ 508,216
</TABLE>
Note 9 Continued
A reconciliation of income taxes with the amounts which would result from
applying the US statutory rate follows:
<TABLE>
<CAPTION>
Year Ended October 31,
1998 1997
<S> <C> <C>
Tax at US Statutory Rate $ 754,506 $ 427,214
State Income Taxes Net of Federal Benefit 146,316 83,017
Utilization of Deferred Income Tax Assets (2,015)
Increase in Valuation Allowance 486,833
Provision For Income Taxes $1,387,655 $ 508,216
</TABLE>
<PAGE>
F-20
Note 10 Temporary Investments
Temporary investments at October 31, 1998, and 1997 consist of $308,103
and $195,710 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 aberafe maturutues 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, 1998 and 1997 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 share of common stock and general unsecured debt of the
Corporation. The certificates representing the sahres states(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 that 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, 1998 and 1997 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-21
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
OCTOBER 31, 1998 AND 1997
(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, 1998 and October 31, 1997 are summarized below for each of the
areas of significant activity.
F-22
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND1997
(CONTINUED)
Note 12 Continued
The following information summarizes development activities for 1998.
<TABLE>
<CAPTION>
Sub-
stantially
Com-
pleted
Sub-
divisions North George- North
South of Ridge towne Ridge Hawthorne
Route 228 Manor Manor Estates Commons
<S> <C> <C> <C> <C> <C>
Total Acres 125 17 10 53 24
Total Lots 277 45 77 99 96
Unsold Lots 4 15 32 47 86
Balance October
31, 1997 $ 164,943 $ 562,760 $ 637,408 $ 790,660 $1,953,567
1998 Costs
Capitalized:
Reclassify Land Costs - - - 317,362 -
Selling, Engineering
& Supervision 3,177 27,413 26,561 95,166 6,722
Excavation &
Construction 1,032 47,057 (2,347) 988,810 152,135
Overhead Allocated 3,816 3,816 3,816 3,498
Interest - - - 22,500 -
Total Accumulated
Costs 169,152 641,046 665,438 2,218,314 2,115,922
Less Cost of Lots &
Houses Sold 93,070 332,408 251,331 770,978 163,833
Balance October 31,
1998 $ 76,082 $308,638 $414,107 $1,447,336 $1,952,089
Classification of
Costs:
Capitalized
Development Costs $ 76,082 $308,638 $414,107 $1,447,336 $1,952,089
Capitalized House
Construction Costs
Property Not
Currently Under
Development - - - - -
Land (Related to
Rental Properties) - - - - -
Buildings (Rental
Properties)
Equipment And
Furnishings (1) - - - - -
$ 76,082 $308,638 $414,107 $1,447,336 $1,952,089
(1) Equipment and
Furnishings used
in development
and construction
Other Equipment and
Furnishings
Total Equipment
and Furnishings
</TABLE>
<TABLE>
<CAPTION>
Estimated additional
costs to be incurred
in next five
years: (000's) 1999 2000 2001 2002
<S> <C> <C> <C> <C>
Land Development 453 1,334 1,187 876
Building Construction 8,548 7,024 6,064 6,304
Total 9,001 8,358 7,251 7,180
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
Com- Com- Moon Twp.,
mercial mercial Route 228
Parcels Parcels Unutil- Water
South of North of ized and Office
Route 228 Route 228 Parcels Other Buildings Houses Total
<S> <C> <C> <C> <C> <C> <C>
47 22 171 40 6 - 515
10 - - 1 - - 605
3 - - - - - 187
$ 350,424 $ 229,685 $2,559,631 $ 1,553,859 $1,712,965 $3,687,231 $14,203,133
155,427 166,295 (639,084) - - - -
120,915 81,450 54,559 183,564 - 591,850 1,191,377
23,526 920,354 1,033,123 (784,200) 66,136 4,411,420 6,857,046
3,816 10,800 30,492 - - 120,000 180,054
- - - 7,400 - 89,914 119,814
654,108 1,408,584 3,038,721 960,623 1,779,101 8,900,415 22,551,424
351,055 614,227 - 598,742 - 5,293,818 8,469,462
$303,053 $ 794,357 $3,038,721 $ 361,881 $1,779,101 $3,606,597 $14,081,962
$303,053 $ 794,357 $ - $ (13,000)$ - $ - $ 5,282,662
3,606,597 3,606,597
- - 3,038,721 - - - 3,038,721
- - - - 484,756 - 484,756
1,294,345 1,294,345
- - - 374,881 - - 374,881
$303,053 $ 794,357 $3,038,721 $ 361,881 $1,779,101 $3,606,597 $14,081,962
$ 374,881
$ 471,053
$ 845,934
2003
$ 35
$ 5,804
$ 5,839
</TABLE>
F-24
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 12 Continued
The following information summarizes development activities for 1997.
<TABLE>
<CAPTION>
Substan-
tially
Com-
pleted
Sub-
divisions North George- North
South of Ridge town Ridge Hawthorne
Route 228 Manor Manor Estates Commons
<S> <C> <C> <C> <C> <C>
Total Acres 125 17 10 31 24
Total Lots 277 45 77 56 96
Unsold Lots 8 29 50 28 93
Balance October 31, 1996 $378,703 $709,665 $785,994 $1,228,115 $1,302,336
1997 Costs Capitalized:
Reclassify Land Costs - - - - -
Selling Expenses 18,561 19,994 22,400 11,471 15,880
Engineering &
Supervision 1,403 6,091 18,285 13,899 52,013
Excavation &
Construction (28,598) 22,401 71,577 67,809 652,614
Overhead Allocated - 4,752 4,752 4,752 9,504
Interest - - - - -
370,069 762,903 903,008 1,326,046 2,032,347
Less Cost of Houses &
Lots Sold 205,126 200,143 265,600 535,386 78,780
Balance October 31, 1997 $164,943 $562,760 $637,408 $ 790,660 $1,953,567
Classification of Costs:
House Construction &
Development $164,943 $562,760 $637,408 $ 790,660 $1,953,567
Unutilized Land - - - - -
Property, Plant
& Equipment - - - - -
$164,943 $562,760 $637,408 $790,660 $1,953,567
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
Com- Com-
mercial mercial
Parcels Parcels Moon Twp.,
South of North of Route 228,
Route Route 228 Unutilized Water & Office
228 Phase M Parcels Other Buildings Houses Total
<S> <C> <C> <C> <C> <C> <C>
45 18 199 40 5.7
11 18 - - 5
4 14 - - 3
$597,640 $ $ 2,150,075 $1,011,134 $1,263,208 $2,842,203 $12,269,073
125,128 229,630 (417,709) 15,191 47,760 - -
88,493 49,109 - 57,500 - 346,861 630,269
27,558 13,652 129,872 140,922 24,833 105,267 533,795
54,240 312,839 683,137 446,558 367,911 4,902,599 7,553,087
11,880 1,251 14,256 - 8,253 - 59,400
- 13,500 - 11,000 1,000 108,546 134,046
904,939 619,981 2,559,631 1,682,305 1,712,965 8,305,476 21,179,670
554,515 390,296 - 128,446 - 4,618,245 6,976,537
$350,424 $229,685 $2,559,631 $1,553,859 $1,712,965 $3,687,231 $14,203,133
$3,687,231 $ 3,687,231
$350,424 $229,685 $ - $ 675,820 $ - - 5,365,267
- - 2,559,631 517,502 - - 3,077,133
- - - 360,537(2) 1,712,965(1) - 2,073,502
$350,424 $229,685 $2,559,631 $1,553,859 $1,712,965 $3,687,231 $14,203,133
</TABLE>
Reconciliation Of Development Activities With Balance Sheet Classifications
<TABLE>
Con-
struction
In Equip-
Land Buildings Progress ment Total
<S> <C> <C> <C> <C> <C>
Costs Included
Above $ 241,971 $1,021,237 $ 449,757 (1)$1,712,965
Equipment
Costs Included
Above $ 360,537 (2) 360,537
Assets Not
Considered
Development
Related 117,754 2,352,622 - 1,032,618 3,502,994
Total Balance
Sheet
Classification $ 359,725 $3,373,859 $ 449,757 $1,393,155 $5,576,496
</TABLE>
F-26
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 13 Business Segment Information
<TABLE>
<CAPTION>
For The Year Ended October 31, (000's)
1998 1997
Devel- Devel-
opment, opment,
Construc-, Construc-
Rental & tion Rental & tion,
General & PUC General & PUC
Opera- Activi- Activi-
tions ties Total Operations ties Total
<S> <C> <C> <C> <C> <C> <C>
Gross
Operating
Revenue $ 243 $ 13,924 $ 14,167 $ 579 $ 10,352 $ 10,931
Costs &
Operating
Expenses 228 11,580 11,808 616 8,663 9,279
Depreciation
Expense 124 71 195 174 112 286
Operating
Income (Loss) (109) 2,273 2,164 (211) 1,577 1,366
Total
Identifiable
Assets 3,123 14,138 17,261 6,808 13,439 20,247
Capital
Expenditures - 92 92 - 562 562
</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, 1998 and 1997, the Company held $61,686 and
$62,219 respectively of these mortgage note assignments. The
Company's interest in the underlying collateral is not perfected in that it
is the Company's policy to not record the mortgage note assignments with the
Butler County Recorder of Deeds. The effect of changes in market
interest rates in recent years has not had a material effect on the Company.
The Company also holds a mortgage note for $435,000 secured by a second
mortgage on 65 townhouses it sold in a bulk sale during 1998.
Note 15 Environmental Matters
The Company knows of no environmental risks associated with its properties
and operations.
Note 16 Related Party Transactions
A director of the Company provided the Company with certain legal services
and was paid $1,701. The Company's management believes that the Company
received services of economic value equivalent to the amounts paid.
F-27
<PAGE>
SEVEN FIELDS DEVELOPMENT (PA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(CONTINUED)
Note 16 Continued
The Company made available a $135,000 construction loan to a homeowners
association of property owners that have purchased the Company's townhouses.
The loan bears interest at 10.25% and principal repaid during 1998 amounted
to $26,577. The loan was used for certain improvements to the townhouse
in the Castle Creek development and is secured by all present and future
homeowner's fees. The loan matures November 1, 2001. The total amount
outstanding at October 31, 1998 was $98,126. 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 November 1, 2002. No amount
was outstanding on this note at October 31, 1998. The Company established this
homeowners association to facilitate the management of certain common costs
related to the townhouses and has provided varying degrees of support to the
homeowners association since its establishment.
F-28
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-1-1997
<PERIOD-END> OCT-31-1998
<CASH> 417,262
<SECURITIES> 0
<RECEIVABLES> 697,401
<ALLOWANCES> 0
<INVENTORY> 11,927,980
<CURRENT-ASSETS> 0
<PP&E> 2,625,035
<DEPRECIATION> (581,633)
<TOTAL-ASSETS> 17,260,619
<CURRENT-LIABILITIES> 0
<BONDS> 10,474,171
<COMMON> 2,905,514
0
0
<OTHER-SE> 1,950,144
<TOTAL-LIABILITY-AND-EQUITY> 17,260,619
<SALES> 13,924,206
<TOTAL-REVENUES> 14,167,271
<CGS> 10,362,017
<TOTAL-COSTS> 12,003,210
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,590
<INCOME-PRETAX> 2,215,636
<INCOME-TAX> 1,387,655
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 827,981
<EPS-PRIMARY> .22
<EPS-DILUTED> 0
</TABLE>
