AVATAR HOLDINGS INC.
201 ALHAMBRA CIRCLE
CORAL GABLES, FLORIDA 33134
July 14, 2006
BY EDGAR correspondence
Mr. John Cash
Senior Assistant Chief Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
Mail Stop 7010
100 F Street, N.E.
Washington, D.C. 20549
Re: Avatar Holdings Inc.
Response to Staff Comments on:
Form 10-K for the fiscal year ended December 31, 2005
Filed March 15, 2006
File No. 1-7395
Dear Mr. Cash:
On behalf of Avatar Holdings Inc. ("Avatar"), this letter responds to
your letter dated June 29, 2006, relating to comments of the staff of the U.S.
Securities and Exchange Commission (the "Commission") on the above-referenced
filing of Avatar. The responses to the Staff's comments are numbered to relate
to the corresponding comments in your letter.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
Note G. Notes, Mortgage Notes and Other Debt, page 64
1. WE HAVE REVIEWED YOUR RESPONSE TO OUR PRIOR COMMENT ONE IN OUR LETTER
DATED JUNE 7, 2006. BECAUSE YOUR 4.5% CONVERTIBLE SENIOR NOTES
AGREEMENT PROVIDES AN OPTION OF SETTLEMENT THAT INCLUDES A COMBINATION
OF SHARES OF COMMON STOCK AND CASH, THE INSTRUMENT WOULD NOT BE
CONSIDERED A CONVENTIONAL CONVERTIBLE INSTRUMENT. PLEASE PROVIDE US
WITH AN ANALYSIS OF HOW YOU CONSIDERED PARAGRAPH 12 THROUGH 32 OF EITF
00-19 IN EVALUATING THE CLASSIFICATION OF THE EMBEDDED DERIVATIVE
CONVERSION FEATURE.
Mr. John Cash
July 14, 2006
Page 2
The governing documents under which the 4.5% Convertible Senior Notes ("Notes")
were issued (herein collectively referred to as the "Contract") do not provide
for "net-share settlement" in accordance with EITF 00-19, i.e. delivery by the
party with a loss to the party with a gain of shares with a current fair value
equal to the gain. Determination of settlement in stock, cash or a combination
thereof is solely at the option of Avatar. In addition, "net-cash settlement"
could be applicable only under certain circumstances related to conversion of
the instrument and solely at the option of Avatar. Avatar has concluded that
even if it assumes that the Notes are not conventional convertible instruments,
the conversion option is not an embedded derivative since it is indexed to
Avatar's common stock and would be classified in stockholders' equity if it were
issued as a separate instrument. Therefore, bifurcation and separate accounting
of the conversion option is not required.
The following is our analysis of paragraphs 12 through 32 of EITF 00-19:
12. Contracts that include any provision that could require net-cash settlement
cannot be accounted for as equity of the company (that is, asset or liability
classification is required for those contracts), except in those limited
circumstances in which holders of the underlying shares also would receive cash
(see discussion in the last sentence of this paragraph and in paragraph 27,
below). Similarly, for SEC registrants, equity derivative contracts with any
provision that could require physical settlement by a cash payment to the
counterparty in exchange for the company's shares cannot be accounted for as
permanent equity (that is, temporary equity classification under ASR 268 would
be required unless net-cash settlement can be imposed on the company, in which
case, the contract would be classified as an asset or a liability). [NOTE: See
paragraph 74 of the STATUS section and the Subsequent Developments section in
Topic D-98.] Those conclusions do not allow for an evaluation of the likelihood
that an event would trigger cash settlement (whether net cash or physical),
except that if the payment of cash is only required upon the final liquidation
of the company, then that potential outcome need not be considered when applying
the consensuses in this Issue.
The Notes are accounted for as a liability of Avatar. There are no
provisions in the Notes that require net-cash settlement. In certain
circumstances related to conversion, Avatar may elect net-cash
settlement should it exercise its option to settle the Contract in
cash or in a combination of cash and shares. Otherwise, holders of the
Notes may only convert their Notes into shares of Avatar common stock
at a fixed conversion rate, which is 19.0006 shares per $1,000
principal amount of the Notes. Holders of the Notes do not have an
option to choose, in lieu of Avatar common stock, delivery of cash or
a combination of cash and common stock.
Mr. John Cash
July 14, 2006
Page 3
13. Because any contract provision that could require net-cash settlement
precludes accounting for a contract as equity of the company (except for those
circumstances in which the holders of the underlying shares would receive cash,
as discussed in paragraphs 27 and 28), all of the following conditions must be
met for a contract to be classified as equity:
See the following analysis of paragraphs 14 through 32.
THE CONTRACT PERMITS THE COMPANY TO SETTLE IN UNREGISTERED SHARES.
14. The events or actions necessary to deliver registered shares are not
controlled by a company and, therefore, except under the circumstances described
in paragraph 18, below, if the contract permits the company to net-share or
physically settle the contract only by delivering registered shares, it is
assumed that the company will be required to net-cash settle the contract. As a
result, the contract must be classified as an asset or a liability. Delivery of
unregistered shares in a private placement to the counterparty is within the
control of a company, as long as a failed registration statement (that is, a
registration statement that was filed with the SEC and subsequently withdrawn)
has not occurred within six months prior to the classification assessment date.
If a failed registration statement has occurred within six months of the
classification assessment date, whether a company can deliver unregistered
shares to the counterparty in a net-share or physical settlement is a legal
determination. Accordingly, assuming (a) a failed registration statement does
not preclude delivery of unregistered shares, (b) the contract permits a company
to net-share settle the contract by delivery of unregistered shares, and (c) the
other conditions in this Issue are met, the contract should be classified as a
permanent equity instrument.
Although the Registration Rights Agreement relating to the Notes
requires that Avatar use best efforts to effect registration of the
Notes and the common shares issuable upon conversion thereof, there is
no requirement that shares of Avatar common stock delivered upon
conversion must be registered. Consequently, issuance of unregistered
shares would be permitted upon conversion of the Notes.
15. A contract may specify that the value of the unregistered shares to be
privately placed under share settlement is to be determined by the counterparty
using "commercially reasonable means." That valuation is used to determine the
number of unregistered shares that must be delivered to the counterparty. The
term commercially reasonable means is sufficiently objective from a legal
perspective to prevent a counterparty from producing an unrealistic value that
would then compel a company to net-cash settle the contract. Similarly, a
contractual requirement to determine the fair value of unregistered shares by
obtaining market quotations is sufficiently objective and would not suggest that
the settlement alternatives have different economic values.
Mr. John Cash
July 14, 2006
Page 4
The number of shares to be issued (whether registered or unregistered)
is a fixed conversion rate of 19.0006 shares per $1,000 principal
amount of the Notes, subject to standard antidilution provisions which
are in the control of Avatar and designed to maintain the value of the
conversion option. The conversion price and the related number of
shares issuable upon conversion were determined at the time of the
pricing of the Notes. Accordingly, there are no provisions in the
Contract permitting a counterparty to specify the value of shares
delivered or to determine the value of unregistered shares. Moreover,
settlement alternatives do not have different economic values.
16. If a settlement alternative includes a penalty that would be avoided by a
company under other settlement alternatives, the uneconomic settlement
alternative should be disregarded in classifying the contract. In the case of
delivery of unregistered shares, a discount from the value of the corresponding
registered shares that is a reasonable estimate of the difference in fair values
between registered and unregistered shares (that is, the discount reflects the
fair value of the restricted shares determined using commercially reasonable
means) is not considered a penalty.
In the only circumstance in which Avatar would have a net cash
settlement option, there are no penalties associated with one
settlement option versus another under the Contract. While there was a
Registration Rights Agreement entered into contemporaneously with the
Contract providing for liquidated damages in the event a registration
statement was not filed or maintained for the Notes and the underlying
common stock under certain circumstances, Avatar has concluded that
the Registration Rights Agreement and the Contract should be accounted
for separately. Consequently, Avatar only analyzed the embedded
derivative contained in the Contract for determining classification
under EITF 00-19. Avatar's conclusion is based on the view that the
agreements are separate legal instruments with separate durations, and
that the Registration Rights Agreement does not affect the value of
the conversion option to the debt holder who whether or not liquidated
damages are applicable will receive the same number of shares, or if
Avatar exercises its cash option, the same amount of cash upon
conversion. Moreover, the Registration Rights Agreement does not
affect Avatar's determination to exercise its option to settle in cash
or shares since it will have the independent obligation to register
shares whether or not it settles a particular conversion in cash. As a
separate instrument, Avatar accounts for possible liquidated damages
under SFAS 5, "Accounting for Contingencies" and periodically assesses
whether events are such that a provision should be taken for
liquidated damages.
17. The Task Force observed that if (a) a derivative contract requires physical
or net-share settlement by delivery of registered shares and does not specify
any circumstances under which net-cash settlement would be permitted or required
and (b) the contract does not specify how the contract would be settled in the
event that the company is unable to deliver registered shares, then net-cash
settlement is assumed if the company is unable to deliver registered shares
(because it is unlikely that nonperformance would be an acceptable alternative).
Mr. John Cash
July 14, 2006
Page 5
Consequently, the derivative must be classified as an asset or a liability
(subject to the transition guidance in this Issue) because share settlement is
not within the company's control.
The Contract does not require physical or net-share settlement of
registered shares. In any event, as discussed above in Avatar's
analysis under paragraph 14, the Contract does not preclude issuance
of unregistered shares. Consequently, share settlement is within
Avatar's control.
18. The Task Force reached a consensus that if a derivative involves the
delivery of shares at settlement that are registered as of the inception of the
derivative transaction and there are no further timely filing or registration
requirements, the requirement of Issue 00-19 that share delivery be within the
control of the company is met, notwithstanding the Task Force's consensus in
paragraph 14, above.
This paragraph 18 is not applicable because as of the inception of the
derivative transaction (March 30, 2004), the shares issuable upon
conversion of the Notes were not registered.
THE COMPANY HAS SUFFICIENT AUTHORIZED AND UNISSUED SHARES AVAILABLE TO SETTLE
THE CONTRACT AFTER CONSIDERING ALL OTHER COMMITMENTS THAT MAY REQUIRE THE
ISSUANCE OF STOCK DURING THE MAXIMUM PERIOD THE DERIVATIVE CONTRACT COULD REMAIN
OUTSTANDING.
19. If a company could be required to obtain shareholder approval to increase
the company's authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company. Accordingly, a
company must evaluate whether a sufficient number of authorized and unissued
shares exists at the classification assessment date to control settlement by
delivering shares. In that evaluation, a company must compare (a) the number of
currently authorized but unissued shares, less the maximum number of shares that
could be required to be delivered during the contract period under existing
commitments (for example, outstanding convertible debt that is convertible
during the contract period, outstanding stock options that are or will become
exercisable during the contract period, or other derivative financial
instruments indexed to, and potentially settled in, a company's own stock) with
(b) the maximum number of shares that could be required to be delivered under
share settlement (either net-share or physical) of the contract. If the amount
in (a) exceeds the amount in (b) and the other conditions in this Issue are met,
share settlement is within the control of the company and the contract should be
classified as a permanent equity instrument. Otherwise, share settlement is not
within the control of the company and asset or liability classification is
required.
As of March 30, 2004, there were 50,000,000 shares of common stock
authorized, of which 8,251,386 shares were issued and outstanding and
2,293,022 shares were held in treasury, leaving 39,455,592 shares
authorized for issuance. Of the 39,455,592 shares authorized and
unissued, 886,980 shares were reserved for issuance under Avatar's
Mr. John Cash
July 14, 2006
Page 6
Incentive Plan and 2,280,068 shares were reserved for issuance upon
conversion of the Notes. As of March 31, 2006, there were 35,888,544
authorized and unissued and unreserved shares available in addition to
shares reserved to satisfy all existing commitments. Inasmuch as
shares issuable upon conversion of the Notes have been reserved
shareholder approval would not be required in order to physically
settle the Contract. The Contract does not provide for net-share
settlement.
THE CONTRACT CONTAINS AN EXPLICIT LIMIT ON THE NUMBER OF SHARES TO BE DELIVERED
IN A SHARE SETTLEMENT.
20. For certain contracts, the number of shares that
could be required to be delivered upon net-share settlement is essentially
indeterminate. For example, assume that a company writes a put option to a
counterparty that permits the counterparty to sell 100,000 of the company's
shares to the company at $100 per share. The contract permits the company to
net-share settle the contract. If the market price of the company's shares falls
to $1 as of the settlement date, the company would be required to deliver
9,900,000 shares. If the market price of the shares falls to $0.125, the company
would be required to deliver 79,900,000 shares. If the number of shares that
could be required to be delivered to net-share settle the contract is
indeterminate, a company will be unable to conclude that it has sufficient
available authorized and unissued shares and, therefore, net-share settlement is
not within the control of the company.
This paragraph 20 is not applicable to the Notes because the Contract
does not provide for net-share settlement, and the number of shares of
common stock issuable on conversion is fixed at 19.0006 shares per
$1,000 principal amount of the Notes, subject to standard antidilution
provisions within Avatar's control. Accordingly, the number of shares
issuable will be determinable by Avatar. Avatar has concluded as
discussed above that it has (and will have) sufficient authorized,
unissued and reserved shares available to settle the Contract.
21. If a contract limits or caps the number of shares to be delivered upon
expiration of the contract to a fixed number, that fixed maximum number can be
compared to the available authorized and unissued shares (the available number
after considering the maximum number of shares that could be required to be
delivered during the contract period under existing commitments as addressed in
paragraph 19 of this Issue and including top-off or make-whole provisions as
discussed in paragraph 26 of this Issue) to determine if net-share settlement is
within the control of the company. A contract termination trigger alone (for
example, a provision that requires that the contract will be terminated and
settled if the stock price falls below a specified price) would not satisfy this
requirement because, in that circumstance, the maximum number of shares
deliverable under the contract is not known with certainty unless there is a
stated maximum number of shares.
For each $1,000 principal amount of the Notes, a holder is entitled to
receive 19.0006 shares of Avatar's common stock for a maximum of
2,280,068 shares. As noted in paragraph 19, as of March 30, 2004
Mr. John Cash
July 14, 2006
Page 7
there were 39,455,592 shares authorized and unissued, of which 886,980
shares were reserved for issuance under Avatar's Incentive Plan and
2,280,068 shares were reserved for issuance upon conversion of the
Notes. There are no provisions in the Notes that require the Contract
to be terminated and settled if Avatar's stock price falls below a
specified level. Therefore, the maximum number of shares deliverable
is knowable with certainty.
22. The Task Force discussed a proposed contract structure that would include a
cap on the number of shares that must be delivered upon net share settlement but
would also provide that any contract valued in excess of that capped amount may
be delivered to the counterparty in cash or by delivery of shares (at the
company's option) when authorized, unissued shares become available. The
proposed structure would require the company to use its best efforts to
authorize sufficient shares to satisfy the obligation. It is assumed that under
the proposed structure, the number of shares specified in the cap is less than
the company's authorized, unissued shares less the number of shares that are
part of other commitments (see paragraph 19, above).
This paragraph 22 is not applicable because there are no such
provisions in the Contract.
23. The Task Force concluded that use of the company's best efforts to obtain
sufficient authorized shares to settle the contract is within the company's
control. Accordingly, the Task Force reached a consensus that if the contract
provides that the number of shares required to settle the excess obligation is
fixed on the date that net-share settlement of the contract occurs, the excess
shares need not be considered when determining whether the company has
sufficient, authorized, unissued shares to net-share settle the contract
pursuant to paragraph 19, above. However, the contract may provide that the
number of shares that must be delivered to settle the excess obligation is equal
to a dollar amount that is fixed on the date of net share settlement (which may
or may not increase based on a stated interest rate on the obligation) and that
the number of shares to be delivered will be based on the market value of the
stock at the date the excess amount is settled. In that case, the excess
obligation represents stock-settled debt and would preclude equity
classification of the contract (or, if partial net-share settlement is permitted
under the contract pursuant to paragraph 11, above, would preclude equity
classification of the portion represented by the excess obligation).
This paragraph 23 is not applicable because there are no such
provisions in the Contract.
24. As discussed in paragraphs 53-56, a company may have existing derivative
contracts as of September 20, 2000, that are not subject to the consensuses in
paragraphs 10-32 of this Issue until June 30, 2001 (if they remain outstanding
at that date), and that do not have a limit on the number of shares that could
be delivered in a net-share settlement. Therefore, the number of shares that
Mr. John Cash
July 14, 2006
Page 8
could be delivered under those derivative contracts in a net-share settlement is
essentially indeterminate. The Task Force observed that if one of those
contracts is outstanding at the date the company enters into a new contract
subject to this Issue, the company could be precluded from concluding that it
has sufficient shares authorized and unissued to net-share settle the new
contract as a result of the absence of a cap in the preexisting contract. The
Task Force reached a consensus that, until June 30, 2001, contracts outstanding
as of the date of the consensuses in paragraphs 10-32 (September 20, 2000) that
do not include a cap should be deemed to have a cap equal to the number of
shares that would be required to net-share settle the contract on September 20,
2000, as if the contract matured on that date. That deemed cap is the number of
shares that should be considered in determining whether there are sufficient
authorized, unissued shares to permit net-share or physical settlement of new
contracts entered into after September 20, 2000. If on June 30, 2001, those
preexisting contracts remain outstanding, the deemed cap no longer applies.
After that date, if the absence of the deemed cap causes share settlement of
contracts to be outside the control of the company, those preexisting contracts
and any new contracts entered into after September 20, 2000 that were classified
as equity instruments must be reclassified to assets or liabilities on June 30,
2001. Refer to the transition discussion in paragraph 53 for guidance on how the
reclassification should be accounted for.
As of March 30, 2004, Avatar did not have any other derivative
contracts outstanding that were issued as of September 20, 2000.
Therefore, the provisions of this paragraph 24 do not apply.
THERE ARE NO REQUIRED CASH PAYMENTS TO THE COUNTERPARTY IN THE EVENT THE COMPANY
FAILS TO MAKE TIMELY FILINGS WITH THE SEC.
25. The Task Force reached a consensus that the ability to make timely SEC
filings is not within the control of the company. Accordingly, if a contract
permits share settlement but requires net-cash settlement in the event that the
company does not make timely filings with the SEC, that contract must be
classified as an asset or a liability.
There are no provisions in the Contract that require net-cash
settlement in the event Avatar fails to make timely filings with the
SEC.
THERE ARE NO REQUIRED CASH PAYMENTS TO THE COUNTERPARTY IF THE SHARES INITIALLY
DELIVERED UPON SETTLEMENT ARE SUBSTANTIALLY SOLD BY THE COUNTERPARTY AND THE
SALES PROCEEDS ARE INSUFFICIENT TO PROVIDE THE COUNTERPARTY WITH FULL RETURN OF
THE AMOUNT DUE (THAT IS, THERE ARE NO CASH SETTLED "TOP-OFF" OR "MAKE-WHOLE"
PROVISIONS).
26. Some contracts include top-off or make-whole provisions. While the exact
terms of such provisions vary, they generally are intended to reimburse the
counterparty for any losses it incurs or to transfer to the company any gains
the counterparty recognizes on the difference between the settlement date value
Mr. John Cash
July 14, 2006
Page 9
and the value received by the counterparty in subsequent sales of the securities
within a specified time after the settlement date. If such a provision can be
net-share settled and the maximum number of shares that could be required to be
delivered under the contract (including "top-off" or "make-whole" provisions) is
fixed and less than the number of available authorized shares (authorized and
unissued shares less the maximum number of shares that could be required to be
delivered during the contract period under existing commitments as discussed in
paragraph 19, above), a top-off or make-whole provision would not preclude
equity classification. If those conditions are not met, equity classification
would be precluded. [NOTE: See paragraphs 71-77 of the STATUS section.]
There are no provisions in the Contract that are intended to reimburse
the counterparty for any losses it incurs or to transfer to Avatar any
gains the counterparty recognizes on the difference between the
settlement date value and the value received by the counterparty in
subsequent sales of the securities within a specified time after the
settlement date. Consequently, the paragraph is inapplicable to the
Contract.
THE CONTRACT REQUIRES NET-CASH SETTLEMENT ONLY IN SPECIFIC CIRCUMSTANCES IN
WHICH HOLDERS OF SHARES UNDERLYING THE CONTRACT ALSO WOULD RECEIVE CASH IN
EXCHANGE FOR THEIR SHARES.
27. Generally, if an event that is not within the company's control could
require net-cash settlement, then the contract must be classified as an asset or
a liability. However, if the net-cash settlement requirement can only be
triggered in circumstances in which the holders of the shares underlying the
contract also would receive cash, equity classification would not be precluded.
For example, an event that causes a change in control of a company is not within
the company's control and, therefore, if a contract requires net-cash settlement
upon a change in control, the contract generally must be classified as an asset
or a liability. However, if a change-in-control provision requires that the
counterparty receive, or permits the counterparty to deliver upon settlement,
the same form of consideration (for example, cash, debt, or other assets) as
holders of the shares underlying the contract, permanent equity classification
would not be precluded as a result of the change-in-control provision. In that
case, if the holders of the shares underlying the contract were to receive cash
in the transaction causing the change in control, the counterparty to the
contract could also receive cash based on the value of its position under the
contract. If instead of cash, holders of the shares underlying the contract
receive other forms of consideration (for example, debt), the counterparty also
must receive debt (cash in an amount equal to the fair value of the debt would
not be considered the same form of consideration as debt). Similarly, a
change-in-control provision could specify that if all stockholders receive stock
of an acquiring company upon a change in control, the contract will be indexed
to the shares of the purchaser (or issuer in a business combination accounted
for as a pooling of interests) specified in the business combination agreement,
without affecting classification of the contract.
Mr. John Cash
July 14, 2006
Page 10
There are no provisions or events in the Contract that would require
net-cash settlement other than at Avatar's option in certain
circumstances related to conversion. The Contract provides that Avatar
will not consolidate with or merge into any other entity or sell,
convey, transfer, lease or otherwise dispose of all or substantially
all of its properties and assets unless (i) the entity formed by such
consolidation or into which Avatar is merged or the entity which
acquires or leases all or substantially all of Avatar's properties and
assets is a corporation organized and existing under the laws of the
United States of America or any state thereof or the District of
Columbia, and expressly assumes by supplemental indenture, all of
Avatar's obligations under the Notes and under the indenture; (ii)
immediately after giving effect to such transactions, no Event of
Default (as defined) or Default (as defined) shall have occurred and
be continuing; and (iii) Avatar has delivered to the trustee an
officer's certificate and an opinion of counsel each stating that such
merger or consolidation, or such sale, conveyance, transfer, lease or
other disposition, complies with the requirements of the indenture and
that all conditions precedent relating to such transactions have been
complied with. If a successor corporation assumes Avatar's
obligations, the successor will succeed to and be substituted for
Avatar under the indenture and the Notes.
28. The Task Force was advised that, in the event of nationalization, cash
compensation would be the consideration for the expropriated assets and, as a
result, a counterparty to the contract could receive only cash, as is the case
for a holder of the stock underlying the contract. Because the contract
counterparty would receive the same form of consideration as a stockholder, a
contract provision requiring net-cash settlement in the event of nationalization
does not preclude equity classification of the contract.
This paragraph 28 is not applicable because Avatar is a duly organized
corporation of the United States of America, is not a foreign entity
and does not conduct operations in any foreign country; and is,
therefore, not subject to nationalization.
THERE ARE NO PROVISIONS IN THE CONTRACT THAT INDICATE THAT THE COUNTERPARTY HAS
RIGHTS THAT RANK HIGHER THAN THOSE OF A SHAREHOLDER OF THE STOCK UNDERLYING THE
CONTRACT.
29. To be classified as equity, a contract cannot give the counterparty any of
the rights of a creditor in the event of the company's bankruptcy. Because a
breach of the contract by the company is within its control, the fact that the
counterparty would have normal contract remedies in the event of such a breach
does not preclude equity classification.
Mr. John Cash
July 14, 2006
Page 11
Except insofar as holders of Notes have rights as creditors as holders
of debt instruments, such holders do not have the rights of a creditor
in bankruptcy (i.e. such holders do not have rights as a creditor as a
result of the conversion feature of the Notes).
30. As a result of the requirement described in the preceding paragraph, a
contract cannot be classified as equity if the counterparty's claim in
bankruptcy would receive higher priority than the claims of the holders of the
stock underlying the contract. The Task Force was advised that, generally, based
on existing law, a net-share settled derivative that a company has a right to
settle in shares even upon termination could be net-share settled in bankruptcy.
The Task Force also was advised that if the contract is not net-share settled,
the claim of the counterparty would not have priority over those of the holders
of the underlying stock, even if the contract specified cash settlement in the
event of bankruptcy. The Task Force was advised that in federal bankruptcy
proceedings, a debtor cannot be compelled to affirm an existing contract that
would require it to pay cash to acquire its shares (which could be the case, for
example, with a physically settled forward purchase or written put). As a
result, even if the contract requires that the company (debtor) pay cash to
settle the contract, the company could not be required to do so in bankruptcy.
As indicated in our analysis with respect to paragraph 29, holders of
Notes do not have rights of creditors simply by virtue of the
conversion feature in the Contract. Accordingly, Avatar would not
expect them to receive higher priority than its common stockholders.
31. Because of the complexity of federal bankruptcy law and related case law,
and because of the differences in state laws affecting derivative contracts, it
is not possible to address all of the legal issues associated with the status of
the contract and the claims of the counterparty in the event of bankruptcy. A
contract provision requiring net-cash settlement in the event of bankruptcy
would not preclude equity classification if it can be demonstrated that,
notwithstanding the contract provisions, the counterparty's claims in bankruptcy
proceedings in respect of the company could be net-share settled or would rank
no higher than the claims of the holders of the stock underlying the contract.
Determination of the status of a claim in bankruptcy is a legal determination.
Determination of this issue would be made by the courts in the event
of bankruptcy.
THERE IS NO REQUIREMENT IN THE CONTRACT TO POST COLLATERAL AT ANY POINT OR FOR
ANY REASON.
32. A requirement to post collateral of any kind (other than the company's
shares underlying the contract, but limited to the maximum number of shares that
could be delivered under the contract) under any circumstances is inconsistent
with the concept of equity and, therefore, would preclude equity classification
of the contract.
There are no provisions in the Contract that require Avatar to post
collateral at any point or for any reason.
Mr. John Cash
July 14, 2006
Page 12
Note O. Financial Information Relating to Industry Segments, page 73
- --------------------------------------------------------------------
2. WE HAVE REVIEWED YOUR RESPONSE TO OUR PRIOR COMMENT TWO. IF YOUR
ARIZONA OPERATIONS BECOME MORE SIGNIFICANT TO YOUR RESULTS OR IF YOU
EXPAND YOUR OPERATIONS TO OTHER GEOGRAPHIC REGIONS, WE REMIND YOU THAT
YOU SHOULD REGULARLY REASSESS THE AGGREGATION CRITERIA SET FORTH IN
PARAGRAPH 17 OF SFAS 131.
We will continue to reassess the aggregation criteria set forth in paragraph 17
of SFAS 131 if our Arizona operations become more significant or we expand our
operations to other geographic regions.
If you have any questions or would like additional information, please
contact the undersigned at (305) 442-7000.
Very truly yours,
AVATAR HOLDINGS INC.
By: /s/ Charles L. McNairy
------------------------
Charles L. McNairy
Executive Vice President, Chief
Financial Officer and Treasurer