UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from
_______ to ________
Commission file number 0-7616
I.R.S. Employer Identification Number 23-1739078
Avatar Holdings Inc.
(a Delaware Corporation)
201 Alhambra Circle
Coral Gables, Florida 33134
(305) 442-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,546,392 shares of Avatar’s common stock ($1.00 par value) were outstanding as of October 31, 2001.
1
AVATAR HOLDINGS INC. AND SUBSIDIARIES
INDEX
| PAGE | ||||||
PART I. Financial Information | ||||||
Item 1. Financial Statements (Unaudited) | ||||||
| Consolidated Balance Sheets — September 30, 2001 and December 31, 2000 | 3 | |||||
| Consolidated Statements of Operations — Nine months and three months ended September 30, 2001 and 2000 | 4 | |||||
| Consolidated Statements of Cash Flows — Nine months ended September 30, 2001 and 2000 | 5 | |||||
| Notes to Consolidated Financial Statements | 7 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |||||
PART II. Other Information | ||||||
Item 6. Exhibits and Reports on Form 8-K | 19 | |||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
| September 30, | December 31, | |||||||||
| 2001 | 2000 | |||||||||
| Assets | ||||||||||
| Cash and cash equivalents | $ | 93,517 | $ | 49,161 | ||||||
| Restricted cash | 1,340 | 869 | ||||||||
| Investments — marketable securities | 20,999 | 69,966 | ||||||||
| Contracts and mortgage notes receivable, net | 4,025 | 5,061 | ||||||||
| Other receivables, net | 4,993 | 6,374 | ||||||||
| Land and other inventories | 175,863 | 171,906 | ||||||||
| Property, plant and equipment, net | 51,407 | 51,764 | ||||||||
| Other assets | 21,152 | 12,679 | ||||||||
| Deferred income taxes | 3,446 | 1,412 | ||||||||
| Total Assets | $ | 376,742 | $ | 369,192 | ||||||
| Liabilities and Stockholders’ Equity | ||||||||||
| Liabilities | ||||||||||
| Notes, mortgage notes and other debt: | ||||||||||
| Corporate | $ | 108,931 | $ | 112,367 | ||||||
| Real estate | 1,300 | 2,493 | ||||||||
| Estimated development liability for sold land | 18,481 | 18,320 | ||||||||
| Accounts payable | 1,196 | 2,414 | ||||||||
| Accrued and other liabilities | 34,798 | 30,611 | ||||||||
| Total Liabilities | 164,706 | 166,205 | ||||||||
| Stockholders’ Equity | ||||||||||
| Common Stock, par value $1 per share | ||||||||||
| Authorized: 50,000,000 shares | ||||||||||
| Issued: 9,310,556 shares at September 30, 2001 9,170,102 shares at December 31, 2000 | 9,311 | 9,170 | ||||||||
| Additional paid-in capital | 161,073 | 157,237 | ||||||||
| Retained earnings | 54,201 | 49,129 | ||||||||
| 224,585 | 215,536 | |||||||||
| Treasury stock, at cost, 764,164 shares | (12,549 | ) | (12,549 | ) | ||||||
| Total Stockholders’ Equity | 212,036 | 202,987 | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | 376,742 | $ | 369,192 | ||||||
See notes to consolidated financial statements.
3
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Nine and Three months ended September 30, 2001 and 2000
(Unaudited)
(Dollars in thousands except per share data)
| Nine Months | Three Months | ||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||
| Revenues | |||||||||||||||||
| Real estate sales | $ | 107,934 | $ | 97,221 | $ | 38,727 | $ | 36,033 | |||||||||
| Deferred gross profit | 1,154 | 1,592 | 383 | 478 | |||||||||||||
| Interest income | 4,875 | 5,563 | 1,717 | 1,712 | |||||||||||||
| Trading account profit | 6,829 | 5,200 | — | 11,165 | |||||||||||||
| Other | 3,165 | 9,274 | 1,014 | 4,736 | |||||||||||||
| Total revenues | 123,957 | 118,850 | 41,841 | 54,124 | |||||||||||||
| Expenses | |||||||||||||||||
| Real estate expenses | 102,673 | 93,110 | 35,295 | 33,427 | |||||||||||||
| General and administrative expenses | 7,542 | 7,726 | 2,500 | 2,500 | |||||||||||||
| Interest expense | 3,771 | 4,816 | 1,000 | 1,850 | |||||||||||||
| Other | 1,463 | 2,626 | 462 | 860 | |||||||||||||
| Total expenses | 115,449 | 108,278 | 39,257 | 38,637 | |||||||||||||
| Income before income taxes | 8,508 | 10,572 | 2,584 | 15,487 | |||||||||||||
| Income tax expense | 3,436 | 294 | 1,025 | 1,360 | |||||||||||||
| Net income | $ | 5,072 | $ | 10,278 | $ | 1,559 | $ | 14,127 | |||||||||
| Basic EPS: | |||||||||||||||||
| Net income | $ | 0.60 | $ | 1.22 | $ | 0.18 | $ | 1.68 | |||||||||
| Diluted EPS: | |||||||||||||||||
| Net income | $ | 0.60 | $ | 1.17 | $ | 0.18 | $ | 1.29 | |||||||||
See notes to consolidated financial statements.
4
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Nine months ended September 30, 2001 and 2000
(Dollars in Thousands)
| 2001 | 2000 | |||||||||
| OPERATING ACTIVITIES | ||||||||||
| Net income | $ | 5,072 | $ | 10,278 | ||||||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||
| Depreciation and amortization | 4,267 | 2,829 | ||||||||
| Deferred gross profit | (1,154 | ) | (1,592 | ) | ||||||
| Trading account profit | (6,829 | ) | (5,200 | ) | ||||||
| Deferred income taxes | (1,569 | ) | 1,588 | |||||||
| Loss on exchange of Notes | 59 | — | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Restricted cash | (471 | ) | 2,540 | |||||||
| Principal payments on contracts receivable | 2,840 | 3,998 | ||||||||
| Receivables | (650 | ) | (266 | ) | ||||||
| Other receivables | 1,381 | (3,245 | ) | |||||||
| Inventories | (4,170 | ) | (15,772 | ) | ||||||
| Other assets | (9,668 | ) | (185 | ) | ||||||
| Accounts payable and accrued and other liabilities | 3,057 | (22,590 | ) | |||||||
| NET CASH USED IN OPERATING ACTIVITIES | (7,835 | ) | (27,617 | ) | ||||||
| INVESTING ACTIVITIES | ||||||||||
| Investment in property, plant and equipment | (2,422 | ) | (15,661 | ) | ||||||
| Proceeds from sale of (investment in) marketable securities | 55,806 | (5,815 | ) | |||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 53,384 | (21,476 | ) | |||||||
| FINANCING ACTIVITIES | ||||||||||
| Principal payments on revolving lines of credit and long-term borrowings | (1,193 | ) | (4,608 | ) | ||||||
| NET CASH USED IN FINANCING ACTIVITIES | (1,193 | ) | (4,608 | ) | ||||||
| INCREASE (DECREASE) IN CASH | 44,356 | (53,701 | ) | |||||||
| Cash and cash equivalents at beginning of period | 49,161 | 143,259 | ||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 93,517 | $ | 89,558 | ||||||
See notes to consolidated financial statements.
5
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) — continued
For the Nine months ended September 30, 2001 and 2000
(Dollars in Thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
| 2001 | 2000 | |||||||
| Interest — net of amount capitalized of $2,816 and $1,854 in 2001 and 2000, respectively | $ | 1,443 | $ | 2,415 | ||||
| Income taxes paid | $ | — | $ | 1,700 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
| 2001 | 2000 | |||||||
| Loss on write-off of deferred fees on exchange of Notes | $ | 71 | $ | — | ||||
| Notes, mortgages and other debt: corporate | (3,436 | ) | — | |||||
| Accrued and other liabilities | (88 | ) | — | |||||
| Common stock | 141 | — | ||||||
| Additional paid in capital | 3,371 | — | ||||||
| $ | 59 | $ | — | |||||
6
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(Dollars in thousands)
Basis of Statement Presentation and Summary of Significant Accounting Policies
The consolidated balance sheets as of September 30, 2001 and December 31, 2000, and the related consolidated statements of operations for the nine and three month periods ended September 30, 2001 and 2000 and the consolidated statements of cash flows for the nine months ended September 30, 2001 and 2000 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statement presentation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year.
For a complete description of Avatar’s other accounting policies, refer to Avatar Holdings Inc.’s 2000 Annual Report on Form 10-K and the notes to Avatar’s consolidated financial statements included therein.
Reclassifications
Certain 2000 financial statement items have been reclassified to conform to the 2001 presentation.
Earnings Per Share
Earnings per share is computed based on the weighted average number of shares outstanding of 8,431,759 and 8,482,559 for the nine and three months ended September 30, 2001, respectively; and 8,405,938 for the nine and three months ended September 30, 2000. Basic earnings per share is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of Avatar. The computation of earnings per share for the nine and three months ended September 30, 2001 did not assume the conversion of the Notes and employee stock options, as the effect of both is anti-dilutive. There is no difference between basic and diluted earnings per share for 2001. Basic and diluted earnings per share for the nine and three months ended September 30, 2000 were calculated as follows:
7
Notes to Consolidated Financial Statements (Unaudited) — continued
Earnings Per Share — continued
| Nine Months | Three Months | ||||||||
| 2000 | 2000 | ||||||||
| Numerator: | |||||||||
| Numerator for basic earnings per share - Income from continuing operations after income taxes | $ | 10,278 | $ | 14,127 | |||||
| Interest on 7% Convertible Subordinated Notes, net of tax | 3,658 | 1,219 | |||||||
| Numerator for diluted earnings per share | $ | 13,936 | $ | 15,346 | |||||
| Denominator: | |||||||||
| Denominator for basic earnings per share - Weighted average shares | 8,406 | 8,406 | |||||||
| Effect of dilutive securities: | |||||||||
| 7% Convertible Subordinated Notes | 3,534 | 3,534 | |||||||
| Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion | 11,940 | 11,940 | |||||||
| Basic earnings per share | $ | 1.22 | $ | 1.68 | |||||
| Diluted earnings per share | $ | 1.17 | $ | 1.29 | |||||
Repurchase and Exchange of Common Stock and Notes
On January 27, 2000, Avatar’s Board of Directors authorized the expenditure of up to $20,000 to purchase, from time to time, shares of its common stock and/or its 7% Convertible Subordinated Notes (the “Notes”) in the open market, through privately negotiated transactions or otherwise, depending on market and business conditions and other factors. As of September 30, 2001, none of these authorized expenditures had been made.
During the third quarter of 2001, Avatar exchanged 140,454 shares of its common stock for Notes with a face value of $3,436. Avatar realized a net loss of $59 on these transactions.
Cash and Cash Equivalents and Restricted Cash
Avatar considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Due to the short maturity period of the cash equivalents, the carrying amount of these instruments approximates their fair values. Restricted cash includes deposits of $1,340 and $869 as of September 30, 2001 and December 31, 2000, respectively. These balances are comprised primarily of housing deposits from customers that will become available when the housing contracts close.
8
Notes to Consolidated Financial Statements (Unaudited) — continued
Stock Options
Under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” companies are allowed to measure compensation cost in connection with employee stock compensation plans, using a fair value based method; or to use an intrinsic value based method in accordance with Accounting Principles Board Opinion No.25, “Accounting for Stock Issued to Employees” (APB 25). Avatar has elected to follow APB 25 and related interpretations in accounting for its employee stock options.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those reported.
Investments — Marketable Securities
Investments in marketable securities are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity.” Avatar’s portfolio consists of held-to-maturity securities and trading securities. Under SFAS No. 115, held-to-maturity securities include debt securities with the intent and ability to hold to maturity and are measured at amortized cost. During 2000, Avatar invested in U.S. Government issues, which mature in one year or less. The amortized cost balance at September 30, 2001 and December 31, 2000 was $20,999 and $41,968, respectively. Under SFAS No. 115, trading securities include debt and marketable equity securities held for resale in anticipation of earning profits from short-term movements in market prices. Trading account securities are measured at fair market value and both realized and unrealized gains and losses are included in net trading account profit in the accompanying consolidated statements of operations. Fair values for actively traded debt and equity securities are based on quoted market prices on national markets.
During the second quarter of 2001, Avatar sold substantially all of its trading securities investment portfolio for $34,806. The aggregate purchase price of the trading securities sold was $19,393 producing a total pre-tax realized gain of $15,413, which includes a pre-tax realized gain of $6,829 and $0 for the nine and three months ended September 30, 2001.
Contracts and Mortgage Notes Receivables
Contracts and mortgage notes receivables are summarized as follows:
| September 30, | December 31, | ||||||||
| 2001 | 2000 | ||||||||
| Contracts and mortgage notes receivable | $ | 7,916 | $ | 10,369 | |||||
| Less: | |||||||||
| Deferred gross profit | 3,419 | 4,657 | |||||||
| Other reserves | 472 | 651 | |||||||
| 3,891 | 5,308 | ||||||||
| $ | 4,025 | $ | 5,061 | ||||||
9
Notes to Consolidated Financial Statements (Unaudited) — continued
Other Assets
Other assets are summarized as follows:
| September 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
| Prepaid expenses | $ | 5,907 | $ | 1,411 | ||||
| Goodwill | 2,815 | 3,941 | ||||||
| Deposits | 8,020 | 320 | ||||||
| Other | 4,410 | 7,007 | ||||||
| $ | 21,152 | $ | 12,679 | |||||
Land and Other Inventories
Inventories consist of the following:
| September 30, | December 31, | |||||||
| 2001 | 2000 | |||||||
| Land developed and in process of development | $ | 81,050 | $ | 79,908 | ||||
| Land held for future development or sale | 22,313 | 25,524 | ||||||
| Dwelling units completed or under construction and community development in process | 71,883 | 65,988 | ||||||
| Other | 617 | 486 | ||||||
| $ | 175,863 | $ | 171,906 | |||||
Income Taxes
The components of income tax expense (benefit) from continuing operations for the nine and three months ended September 30, 2001, and 2000 are as follows:
| Nine Months | Three Months | ||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||
| Current | |||||||||||||||||
| Federal | $ | 5,326 | $ | (249 | ) | $ | 1,302 | $ | 55 | ||||||||
| State | 901 | (42 | ) | 220 | 10 | ||||||||||||
| Total current | 6,227 | (291 | ) | 1,522 | 65 | ||||||||||||
| Deferred | |||||||||||||||||
| Federal | (2,387 | ) | 500 | (425 | ) | 1,107 | |||||||||||
| State | (404 | ) | 85 | (72 | ) | 188 | |||||||||||
| Total deferred | (2,791 | ) | 585 | (497 | ) | 1,295 | |||||||||||
| Total income tax expense | $ | 3,436 | $ | 294 | $ | 1,025 | $ | 1,360 | |||||||||
10
Notes to Consolidated Financial Statements (Unaudited) — continued
Income Taxes — continued
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Additional paid in capital was credited for $465 representing the benefit of utilizing deferred income tax assets, which were generated in years prior to reorganization on October 1, 1980. Significant components of Avatar’s deferred income tax assets and liabilities as of September 30, 2001 and December 31, 2000 are as follows:
| September 30, | December 31, | |||||||||
| 2001 | 2000 | |||||||||
| Deferred income tax assets | ||||||||||
| Tax over book basis of land inventory | $ | 21,000 | $ | 21,000 | ||||||
| Unrecoverable land development costs | 1,000 | 1,000 | ||||||||
| Tax over book basis of depreciable assets | 3,000 | 4,000 | ||||||||
| Other | 5,446 | 5,412 | ||||||||
| Total deferred income tax assets | 30,446 | 31,412 | ||||||||
| Valuation allowance for deferred income tax assets | (26,000 | ) | (26,000 | ) | ||||||
| Deferred income tax assets after valuation allowance | 4,446 | 5,412 | ||||||||
| Deferred income tax liabilities book over tax income recognized on homesite sales | (1,000 | ) | (1,000 | ) | ||||||
| Unrealized gain on marketable securities | — | (3,000 | ) | |||||||
| Total deferred income tax liabilities | (1,000 | ) | (4,000 | ) | ||||||
| Net deferred income taxes | $ | 3,446 | $ | 1,412 | ||||||
A reconciliation of income tax expense to the expected income tax expense at the federal statutory rate of 35% for the nine months ended September 30, 2001 and 2000 is as follows:
| 2001 | 2000 | |||||||
| Income tax expense computed at statutory rate | $ | 2,978 | $ | 3,700 | ||||
| State income tax, net of federal effect | 306 | 380 | ||||||
| Other, net | 152 | 214 | ||||||
| Change in valuation allowance on deferred tax assets | — | (4,000 | ) | |||||
| Income tax expense | $ | 3,436 | $ | 294 | ||||
11
Notes to Consolidated Financial Statements (Unaudited) — continued
Contingencies
Avatar is involved in various pending litigation matters primarily arising in the normal course of its business. Although the outcome of these and the following matter cannot be determined, management believes that the resolution of these matters will not have a material effect on Avatar’s business or financial statements.
The following case is considered closed, as final refunds of $279 were issued by the FCWC to the office of the Comptroller on October 16, 2001. In May 1995, a wastewater rate increase was filed for the North Fort Myers Division of Florida Cities Water Company (FCWC), a utilities subsidiary of Avatar. In November 1995, the Florida Public Service Commission (FPSC) issued an order authorizing a rate increase of approximately 18% (an annualized revenue increase of approximately $378). Following a challenge to the order by the Office of Public Counsel (the customer advocate) and certain customers, FCWC requested implementation of the rates granted in the order. After a hearing, the FPSC issued a new order in September 1996 authorizing final rates, which were approximately 5% lower than rates in effect prior to the rate increase filing. FCWC filed an appeal with the District Court of Appeal of Florida, First District (DCA) and in January 1998, DCA reversed and remanded the September 1996 order. By order dated April 14, 1998, the FPSC ordered the record reopened and scheduled a hearing in December 1998 to take testimony on one issue remanded by the DCA. FCWC’s challenge of this FPSC action was denied by the DCA on September 17, 1998 and the remand hearing was held on December 8 and 9, 1998. On April 8, 1999, the FPSC rendered its Final order, which did not reflect a material change in its position on the issue in dispute. On April 15, 1999, FCWC sold the plant assets, which are the subject of this rate matter, however, this sale did not jeopardize FCWC’s right to appeal the FPSC Final order. On May 10, 1999, FCWC filed a notice of appeal of the FPSC Final Order to the DCA dated December 6, 1998. The rates implemented in January 1996 were collected by FCWC until April 15, 1999 and approximately $1,030 (including interest of $183) is subject to refund pending ultimate resolution of this matter. After the sale of the plant assets, which are the subject of this matter, FCWC recorded a reserve on its balance sheet to cover refunds and interest liability applicable thereto. FCWC appealed the order, which was affirmed by the DCA by opinion dated December 22, 2000. Through October 15, 2001, the FCWC had refunded $751 (including interest of $133).
Financial Information Relating To Industry Segments
Avatar is primarily engaged in real estate operations in Florida and Arizona. The principal real estate operations are conducted at Poinciana in central Florida near Orlando, Harbor Islands on Florida’s east coast and Rio Rico, south of Tucson, Arizona. Avatar owns and develops land, primarily in various locations in Florida and Arizona. Current and planned real estate operations include the following segments: the development, sale and management of active adult communities; the development and sale of residential communities (including construction of upscale custom and semi-custom homes, mid-priced single- and multi-family homes); the development, leasing and management of improved commercial and industrial properties; operation of amenities and resorts; cable television operations; and property management services.
12
Notes to Consolidated Financial Statements (Unaudited) — continued
Financial Information Relating To Industry Segments — continued
The following table summarizes Avatar’s information for reportable segments for the nine and three months ended September 30, 2001 and 2000:
| Nine Months | Three Months | |||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||||
| Revenues: | ||||||||||||||||||
| Segment revenues | ||||||||||||||||||
| Residential communities | $ | 61,156 | $ | 78,149 | $ | 14,647 | $ | 25,420 | ||||||||||
| Active adult communities | 24,678 | 1,950 | 10,179 | 1,853 | ||||||||||||||
| Resorts | 4,806 | 5,646 | 1,282 | 1,617 | ||||||||||||||
| Commercial and industrial | 11,874 | 6,431 | 10,612 | 5,722 | ||||||||||||||
| Rental, leasing, cable and other real estate operations | 5,267 | 4,150 | 1,966 | 1,352 | ||||||||||||||
| All other | 3,158 | 9,890 | 1,046 | 4,696 | ||||||||||||||
| 110,939 | 106,216 | 39,732 | 40,660 | |||||||||||||||
| Unallocated revenues | ||||||||||||||||||
| Deferred gross profit | 1,154 | 1,592 | 383 | 478 | ||||||||||||||
| Interest income | 4,875 | 5,563 | 1,717 | 1,712 | ||||||||||||||
| Trading account profit, net | 6,829 | 5,200 | — | 11,165 | ||||||||||||||
| Other | 160 | 279 | 9 | 109 | ||||||||||||||
| Total revenues | $ | 123,957 | $ | 118,850 | $ | 41,841 | $ | 54,124 | ||||||||||
| Operating income (loss): | ||||||||||||||||||
| Segment operating income (loss) | ||||||||||||||||||
| Residential communities | $ | 8,572 | $ | 10,871 | $ | 557 | $ | 3,548 | ||||||||||
| Active adult communities | (7,008 | ) | (7,886 | ) | (2,029 | ) | (3,000 | ) | ||||||||||
| Resorts | (1,011 | ) | (328 | ) | (612 | ) | (365 | ) | ||||||||||
| Commercial and industrial | 6,640 | 4,184 | 6,197 | 3,711 | ||||||||||||||
| Rental, leasing, cable and other real estate operations | 1,067 | 649 | 300 | 224 | ||||||||||||||
| All other | 1,391 | 6,781 | 312 | 3,810 | ||||||||||||||
| 9,651 | 14,271 | 4,725 | 7,928 | |||||||||||||||
| Unallocated income (expenses) | ||||||||||||||||||
| Deferred gross profit | 1,154 | 1,592 | 383 | 478 | ||||||||||||||
| Interest income | 4,875 | 5,563 | 1,717 | 1,712 | ||||||||||||||
| Trading account profit | 6,829 | 5,200 | — | 11,165 | ||||||||||||||
| General and administrative expenses | (7,542 | ) | (7,726 | ) | (2,500 | ) | (2,500 | ) | ||||||||||
| Interest expense | (3,771 | ) | (4,816 | ) | (1,000 | ) | (1,850 | ) | ||||||||||
| Other | (2,688 | ) | (3,512 | ) | (741 | ) | (1,446 | ) | ||||||||||
| Income before income taxes | $ | 8,508 | $ | 10,572 | $ | 2,584 | $ | 15,487 | ||||||||||
13
Notes to Consolidated Financial Statements (Unaudited) — continued
Financial Information Relating To Industry Segments — continued
| September 30, | December 31, | ||||||||
| Assets: | 2001 | 2000 | |||||||
| Segment assets | |||||||||
| Residential communities | $ | 55,386 | $ | 55,976 | |||||
| Active adult communities | 88,239 | 88,763 | |||||||
| Resorts | 4,742 | 5,360 | |||||||
| Commercial and industrial | 9,599 | 9,194 | |||||||
| Rental, leasing, cable and other real estate operations | 4,460 | 4,651 | |||||||
| Unallocated assets | 214,316 | 205,248 | |||||||
| Total assets | $ | 376,742 | $ | 369,192 | |||||
| (a) | Avatar’s businesses are primarily conducted in the United States. | |
| (b) | Identifiable assets by segment are those assets that are used in the operations of each segment. | |
| (c) | No significant part of the business is dependent upon a single customer or group of customers. | |
| (d) | Bulk land sales, Arizona utilities and the cost to carry land do not qualify individually as separate reportable segments and are included in “All Other”. Also included in “All Other” for the nine and three months ended September 30, 2001, are results of management services and water facility operating results, which Avatar retained in Florida. | |
| (e) | There is no interest expense from residential communities, active adult communities, resorts and rental/leasing in segment profit/(loss) for the nine and three months ended September 30, 2001 and 2000. | |
| (f) | Included in operating profit/(loss) for the nine months ended in 2001 is depreciation expense of $202, $1,246, $560, $529 and $81 from residential communities, active adult communities, resorts, rental/leasing and unallocated corporate, respectively. Included in operating profit/(loss) for the nine months ended in 2000 is depreciation expense of $143, $227, $473, $460 and $137 from residential communities, active adult communities, resorts, rental/leasing and unallocated corporate, respectively. Included in operating profit/(loss) for the three months ended in 2001 is depreciation expense of $68, $419, $187, $177 and $30 from residential communities, active adult communities, resorts, rental/leasing and unallocated corporate, respectively. Included in operating profit/(loss) for the three months ended in 2000 is depreciation expense of $12, $227, $161, $155 and $52 from residential communities, active adult communities, resorts, rental/leasing and unallocated corporate, respectively. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data)
RESULTS OF OPERATIONS
The following discussion of Avatar’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.
Data from primary residential and active adult communities homebuilding operations for the nine and three months ended September 30, 2001 and 2000 are summarized as follows:
| Nine Months | Three Months | ||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||
| Units closed | |||||||||||||||||
| Number of units | 521 | 383 | 189 | 124 | |||||||||||||
| Aggregate dollar volume | $ | 84,396 | $ | 79,295 | $ | 24,380 | $ | 26,996 | |||||||||
| Average price per unit | $ | 162 | $ | 207 | $ | 129 | $ | 218 | |||||||||
| Units sold, net | |||||||||||||||||
| Number of units | 715 | 408 | 218 | 166 | |||||||||||||
| Aggregate dollar volume | $ | 113,972 | $ | 60,335 | $ | 32,845 | $ | 24,314 | |||||||||
| Average price per unit | $ | 159 | $ | 148 | $ | 151 | $ | 146 | |||||||||
| September 30, | ||||||||
| Backlog | 2001 | 2000 | ||||||
| Number of units | 587 | 364 | ||||||
| Aggregate dollar volume | $ | 101,076 | $ | 71,361 | ||||
| Average price per unit | $ | 172 | $ | 196 | ||||
For the nine and three months ended September 30, 2001, 221 and 71 contracts were written with an aggregate sales volume of $36,920 and $11,701, respectively, at Solivita, Avatar’s active adult community in Poinciana. For the nine and three months ended September 30, 2001, 159 and 64 homes closed generating revenues from homebuilding operations of $23,459 and $9,880, respectively. For the nine and three months ended September 30, 2000, 119 and 70 contracts were written with an aggregate sales volume of $17,287 and $10,348, respectively, at Solivita. For the nine and three months ended September 30, 2000, 12 homes closed generating revenues from homebuilding operations of $1,648. Backlog at September 30, 2001 and 2000 totaled 214 units at $35,135 and 107 units at $15,639, respectively.
Sales results at Solivita for the three months ended September 30, 2001, although substantially the same as the comparable period of 2000, were lower than anticipated. Sales during July and August 2001 exceeded sales during July and August 2000 by 14%, but declined in September 2001 compared to September 2000. Conversely, sales results for primary homebuilding at Poinciana exceeded expectations. Management believes that improved results at Poinciana are due to the development of Solivita and road and community enhancements which have made Poinciana a more desirable location, as well as the introduction late in 2000 of scattered lot homebuilding programs.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data) -continued
RESULTS OF OPERATIONS — continued
Net income for the nine and three months ended September 30, 2001 was $5,072 or $0.60 per share and $1,559 or $0.18 per share, respectively, compared to a net income of $10,278 or $1.22 basic EPS (or $1.17 diluted EPS) and $14,127 or $1.68 basic EPS (or $1.29 diluted EPS) for the same periods of 2000. The decrease in net income for the nine and three months ended September 30, 2001 is primarily attributable to decreases in other revenues, partially mitigated by an increase in real estate operating results and a decrease in interest expense. In addition, the decrease in net income for the three months ended September 30, 2001 is due to a decline in trading account profit from investments in marketable securities.
Avatar’s real estate revenues for the nine and three months ended September 30, 2001 increased $10,713 or 11.0% and $2,694 or 7.5%, respectively, while real estate expenses increased by $9,563 or 10.3% and $1,868 or 5.6% when compared to the same periods of 2000. The increase in real estate revenues and expenses for the nine and three months ended September 30, 2001, is primarily attributable to results from operations at Solivita and the property asset sale of the Natoma tract, located in Woodland Hills, California; partially mitigated by reduced closings at Harbor Islands and decreased resort revenues. The increase in real estate margins for the nine and three months ended September 30, 2001 is due to the gain from the Woodland Hills property sale partially offset by a decrease in operating income from residential communities and resort operating results. For the nine and three months ended September 30, 2001, operating income from residential communities decreased $2,542 or 23.4% and $3,236 or 91.2%, respectively. This decrease in operating income for the nine and three month periods is primarily due to decreased closings at Harbor Islands partially mitigated by increased closings at Poinciana. For the nine and three months ended September 30, 2001, active adult operating losses decreased $878 or 11.1% and $971 or 32.4%, respectively. The decreases in losses for the nine and three month periods is due to the increased closings at Solivita for the comparable periods.
Interest income for the nine months ended September 30, 2001 decreased $688 or 12.4% when compared to the same period in 2000. The decrease is attributable to lower interest rates on cash and cash equivalents and lower interest income earned on declining principal balances of contracts receivable.
General and administrative expenses for the nine months ended September 30, 2001 decreased $184 or 2.4% as compared to the same period in 2000. This decrease was primarily due to reductions in professional fees and rental expense partially mitigated by $518 in executive compensation related to the restricted stock units granted pursuant to the Amended and Restated 1997 Incentive and Capital Accumulation Plan, as amended.
Trading account profits of $6,829 and $0 were recognized during the nine and three months ended September 30, 2001, respectively, as compared to trading account profits of $5,200 and $11,165 during the nine and three months ended September 30, 2000. Trading account profits or losses represent realized and unrealized gains or losses related to the trading account investment portfolio, and include commissions payable to investment brokers.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data) -continued
RESULTS OF OPERATIONS — continued
Other revenues and expenses for the nine months ended September 30, 2001 decreased $6,109 and $1,163, respectively; and decreased $3,722 and $398 for the three months ended September 30, 2001. These decreases are primarily attributable to the decline in operating revenues and expenses associated with the management services and water facility operations that Avatar retained in Florida, and also to non-recurring revenues recorded in 2000 of $1,475 associated with the sale of certain utilities assets, $1,761 due to the reduction of eligible employees under the utilities non-contributory benefit postretirement plan that provides medical and life insurance benefits to employees after retirement, and $1,480 recognized and earned from escrowed funds associated with the Florida Utilities sale that closed on April 15, 1999.
Income taxes were provided for at an effective tax rate of 40.4% and 39.7% for the nine and three months ended September 30, 2001, respectively, as compared to the effective tax rate of 2.8% and 8.8% for the nine and three months ended September 30, 2000. For the nine and three months ended September 30, 2000, Avatar decreased the valuation allowance for deferred income tax assets by $4,000 and $5,000, respectively. This decrease is the primary cause for the change in the effective tax rate. Reference is made to the Income Taxes note to the Consolidated Financial Statements included in Item 1 of Part I of this Report.
LIQUIDITY AND CAPITAL RESOURCES
Avatar’s current real estate business strategy is designed to capitalize on its distinct competitive advantages and emphasize higher profit margin businesses by concentrating on the development and management of active adult communities, upscale custom and semi-custom homes and communities, and commercial and industrial properties in its existing community developments. Avatar also seeks to identify additional sites that are suitable for development consistent with its business strategy and anticipates that it will acquire or develop them directly or through joint venture or management arrangements. Avatar’s primary business activities are capital intensive in nature. Significant capital resources are required to finance planned active adult communities, homebuilding construction in process, community infrastructure, selling expenses and working capital needs, including funding of debt service requirements, operating deficits and the carrying cost of land. Avatar expects to fund its operations and capital requirements through a combination of cash, operating cash flows, proceeds from the sale of certain non-core assets and external borrowings.
Avatar’s portfolio consists of held-to-maturity securities and trading securities. Held-to-maturity securities include debt securities with the intent and ability to hold to maturity and are measured at amortized cost. During 2000, Avatar invested in U.S. Government issues, which mature in one year or less. The amortized cost balance at September 30, 2001 and December 31, 2000 was $20,999 and $41,968, respectively. The decrease in the held-to-maturity securities is due to the maturity of a U.S. Government issue. Trading securities include debt and marketable equity securities held for resale in anticipation of earning profits from short-term movements in market prices. Trading account securities are measured at fair market value and both realized and unrealized gains and losses are included in net trading account profit in the accompanying consolidated statements of operations. Fair values for actively traded debt securities and equity securities are based on quoted market prices on national markets.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data) -continued
LIQUIDITY AND CAPITAL RESOURCES — continued
During the second quarter of 2001, Avatar sold substantially all of its trading securities investment portfolio for $34,806. The aggregate purchase price of the trading securities sold was $19,393 producing a total pre-tax realized gain of $15,413, which includes a pre-tax realized gain of $6,829 for the nine months ended September 30, 2001.
For the nine months ended September 30, 2001, net cash used in operating activities amounted to $7,835, mainly as a result of an increase in other assets and inventories of $9,668 and $4,170, respectively. Net cash provided by investing activities of $53,384 resulted from proceeds from marketable securities of $55,806 partially offset by investments in property, plant and equipment of $2,422. Net cash used in financing activities of $1,193 resulted from the repayment of real estate notes payable.
For the nine months ended September 30, 2000, net cash used in operating activities amounted to $27,617, primarily as a result of a decrease in accounts payable and accrued and other liabilities of $22,590, and expenditures on land development and housing operations of $15,772, partially offset by principal payments collected on contract receivables of $3,998. Net cash used in investing activities of $21,476 resulted from investments in property, plant and equipment of $15,661 and marketable securities of $5,815. Net cash used in financing activities of $4,608 resulted from the repayment of real estate notes payable.
On January 27, 2000, Avatar’s Board of Directors authorized the expenditure of up to $20,000 to purchase, from time to time, shares of its common stock and/or the Notes in the open market, through privately negotiated transactions or otherwise, depending on market and business conditions and other factors. As of September 30, 2001, none of these authorized expenditures had been made.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievement of results, to differ materially from any future results, performance or achievement expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: the successful implementation of Avatar’s business strategy; shifts in demographic trends affecting active adult communities and other real estate development; the level of immigration and in-migration to Avatar’s regional market areas; national and local economic conditions and events, including employment levels, interest rates, consumer confidence, the availability of mortgage financing and demand for new and existing housing; Avatar’s access to future financing; competition; changes in, or the failure or inability to comply with, government regulations; and such other factors as are described in greater detail in Avatar’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
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PART II — OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
None
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter-ended September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AVATAR HOLDINGS INC. | ||||
| Date: November 14, 2001 | By: | /s/ Charles L. McNairy | ||
| Charles L. McNairy Executive Vice President, Chief Financial Officer and Treasurer | ||||
| Date: November 14, 2001 | By: | /s/ Michael P. Rama | ||
| Michael P. Rama Controller |
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