1
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 June 30, 1998
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)
255 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: 9,170,102 shares of the
Company's common stock ($1.00 par value) were outstanding as of July 31, 1998.
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AVATAR HOLDINGS INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997 ......................... 3
Consolidated Statements of Operations --
Six months and three months ended
June 30, 1998 and 1997 ...................................... 4
Consolidated Statements of Cash Flows --
Six months ended June 30, 1998 and 1997 ..................... 5
Notes to Consolidated Financial Statements .................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........... 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ....................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..... 18
ITEM 5. OTHER INFORMATION ....................................... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................ 20
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets - (Unaudited)
(Dollars in thousands)
June 30, December 31,
1998 1997
--------- -----------
ASSETS
Cash $ 41,718 $ 4,085
Restricted cash 5,926 4,690
Contracts and mortgage notes receivables, net 18,955 24,319
Other receivables, net 7,995 6,186
Land and other inventories 167,248 161,161
Property, plant and equipment, net 188,467 188,602
Other assets 23,541 19,448
Regulatory assets 3,088 3,318
Assets of discontinued operations 29,179 27,559
--------- ---------
Total Assets $ 486,117 $ 439,368
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes, mortgage notes and other debt:
Corporate $ 130,000 $ 44,506
Notes collateralized by contracts and mortgage notes receivable 12,950 23,566
Real Estate 20,080 39,163
Utilities 39,346 39,216
Estimated development liability for sold land 8,585 8,697
Accounts payable 4,994 6,081
Accrued and other liabilities 39,118 36,918
Deferred customer betterment fees 19,159 18,667
Minority interest in consolidated subsidiaries 5,471 7,268
Liabilities of discontinued operations 20,032 18,662
--------- ---------
Total Liabilities 299,735 242,744
Commitments and contingent liabilities
Contributions in aid of construction 60,661 61,582
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share
Authorized: 15,500,000 shares
Issued: 9,170,102 shares 9,170 9,170
Additional paid-in capital 151,422 151,422
Accumulated deficit (34,871) (25,550)
--------- ---------
Total Stockholders' Equity 125,721 135,042
--------- ---------
Total Liabilities and Stockholders' Equity $ 486,117 $ 439,368
========= =========
See notes to consolidated financial statements.
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AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Six and Three Months Ended June 30, 1998 and 1997
(Unaudited)
(Dollars in thousands except per share data)
Six Months Three Months
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES
Real estate sales $ 46,021 $ 42,746 $ 24,728 $ 22,595
Deferred gross profit 2,280 2,075 1,147 1,047
Utility revenues 18,323 17,911 9,499 8,877
Interest income 3,069 2,922 1,462 1,407
Trading account profit, net -- 207 -- 115
Other 264 384 100 185
-------- -------- -------- --------
Total revenues 69,957 66,245 36,936 34,226
EXPENSES
Real estate expenses 47,451 45,355 25,399 22,995
Utility expenses 13,647 12,892 6,962 6,457
General and administrative expenses 5,142 4,778 2,664 2,194
Interest expense 8,315 5,185 4,047 2,879
Other 274 355 124 164
-------- -------- -------- --------
Total expenses 74,829 68,565 39,196 34,689
-------- -------- -------- --------
Loss from continuing
operations before income taxes (4,872) (2,320) (2,260) (463)
Discontinued operations:
(Loss) income from operations, less
income tax expense of $0
(141) 752 14 882
Estimated loss on disposal, less
income tax expense of $0 (2,000) -- (2,000) --
-------- -------- -------- --------
(Loss) income before extraordinary item (7,013) (1,568) (4,246) 419
-------- -------- -------- --------
Extraordinary item:
Loss on early extinguishment of debt,
less income tax expense of $0 (2,308) -- -- --
-------- -------- -------- --------
Net (loss) income $ (9,321) $ (1,568) $ (4,246) $ 419
======== ======== ======== ========
Basic and Diluted EPS:
Loss from continuing operations $ (0.53) $ (0.25) $ (0.24) $ (0.05)
(Loss) income from discontinued operations $ (0.02) $ 0.08 -- $ 0.10
Estimated loss on disposal $ (0.22) -- $ (0.22) $ --
Loss from extraordinary item $ (0.25) -- -- --
Net (loss) income $ (1.02) $ (0.17) $ (0.46) $ 0.05
See notes to consolidated financial statements.
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AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 1998 and 1997
(Dollars in Thousands)
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net loss $ (9,321) $ (1,568)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 5,131 5,539
Loss on early extinguishment of debt 2,308 --
Estimated loss on disposal of discontinued operations 2,000 --
Deferred gross profit (2,280) (2,075)
Cost of homesite sales not requiring cash 877 1,554
Trading account profit, net -- (207)
Changes in operating assets and liabilities:
Restricted cash (1,236) (60)
Investments trading -- 530
Principal payments on contracts receivable 5,656 7,225
Receivables 1,988 2,530
Other receivables (1,809) 1,176
Inventories (7,076) (12,826)
Other assets (4,160) (1,212)
Assets/liabilities from discontinued operations, net (2,250) (2,637)
Accounts payable and accrued and other liabilities 1,605 (2,689)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (8,567) (4,720)
INVESTING ACTIVITIES
Investment in property, plant and equipment (5,917) (4,483)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (5,917) (4,483)
FINANCING ACTIVITIES
Proceeds from issuance of 7% Convertible Subordinated Notes 115,000 --
Net proceeds from revolving lines of credit and
long-term borrowings 7,130 33,620
Principal payments on revolving lines of credit and
long-term borrowings (68,213) (23,721)
Redemption of 9% preferred stock of subsidiary (1,800) (1,800)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,117 8,099
--------- ---------
INCREASE (DECREASE) IN CASH 37,633 (1,104)
Cash at beginning of period 4,085 7,567
--------- ---------
CASH AT END OF PERIOD $ 41,718 $ 6,463
========= =========
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AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) -- continued
For the Six Months Ended June 30, 1998 and 1997
(Dollars in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
1998 1997
------ ------
Cash paid during the period for:
Interest - Continuing operations (net of amount
capitalized of $120 and $1,569
in 1998 and 1997, respectively) $5,433 $2,807
------ ------
Interest - Discontinued operations (net of amount
capitalized of $109 and $0 in 1998
and 1997, respectively) 783 536
====== ======
Income taxes $ -- $ --
====== ======
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
1998 1997
------ ------
Contributions in aid of construction $1,253 $2,374
====== ======
See notes to consolidated financial statements.
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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 June 30, 1998 and December 31,
1997 and the related consolidated statements of operations for the six month and
three month periods ended June 30, 1998 and 1997 and the consolidated statements
of cash flows for the six month periods ended June 30, 1998 and 1997 have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 the Company's other accounting policies,
refer to Avatar Holdings Inc.'s 1997 Annual Report on Form 10-K and the notes to
Avatar's consolidated financial statements included therein.
RECLASSIFICATIONS
Certain 1997 financial statement items have been reclassified to
conform to the 1998 presentation.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
shares outstanding of 9,170,102 for the six and three months ended June 30, 1998
and 9,095,102 for the six and three months ended June 30, 1997. For computing
earnings per share for the six and three months ended June 30, 1998, the
conversion of the Notes and employee stock options was not assumed, as the
effect of both would be antidilutive. There is no difference between basic and
diluted earnings per share for 1998 and 1997.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company 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
$5,926 and $4,690 as of June 30, 1998 and December 31, 1997, respectively. These
balances are comprised of housing deposits, that will become available to the
Company when the housing contracts close, and utilities deposits from water
utilities customers.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." Statement No. 123
allows companies to measure compensation cost in connection with employee stock
compensation plans using a fair value
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
STOCK OPTIONS - continued
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). The Company 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
generally accepted accounting principles 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.
RELATED - PARTY TRANSACTIONS
During 1997, a subsidiary of the Company entered into a joint venture
and construction management agreement with a subsidiary of Brookman-Fels for
the development of certain parcels at Harbor Islands. In November 1997, the
Company's subsidiary, Avatar Properties Inc., acquired certain assets of
Brookman-Fels and employed, as officers, the three partners. On June 1, 1998,
Avatar paid $1,995,000 to acquire certain assets from its joint venture partner
at Harbor Islands, and the joint venture and construction management agreements
were modified whereby Avatar's subsidiary will receive a 6% construction
management fee to manage construction at Harbor Islands. The purchase price
approximated the estimated fair value of the acquired assets, therefore, no
goodwill was recorded in conjunction with this transaction.
On June 1, 1998, a newly formed Avatar subsidiary and Brookman-Fels at
Presidential Estates formed a joint venture and entered into a construction
management agreement for Presidential Estates. Avatar's subsidiary will receive
a 6% construction management fee to manage construction at Presidential Estates.
Avatar paid $588,000 for a 49% interest in the joint venture and a 50% interest
in the profits in the form of a promissory note, bearing interest at an annual
rate of 8%, payable, together with accrued interest, upon closing of agreed upon
units.
CONTRACTS AND MORTGAGE NOTES RECEIVABLES
Contracts and mortgage notes receivables are summarized as follows:
June 30, December 31,
1998 1997
-------- -----------
Contracts and mortgage notes receivable $ 31,534 $ 40,478
-------- --------
Less:
Market valuation reserve -- 43
Deferred gross profit 12,885 15,659
Other (306) 457
-------- --------
12,579 16,159
-------- --------
$ 18,955 $ 24,319
======== ========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
LAND AND OTHER INVENTORIES
Inventories consist of the following:
June 30, December 31,
1998 1997
-------- ------------
Land developed and in process of development $ 95,632 $ 98,407
Land held for future development or sale 31,552 31,552
Dwelling units completed or under construction 39,339 30,334
Other 725 868
-------- --------
$167,248 $161,161
======== ========
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
Minority interest in consolidated subsidiaries is represented by
preferred stock of Avatar Utilities' subsidiaries. Total preferred stock
outstanding is as follows:
June 30, December 31,
1998 1997
-------- ------------
9% Cumulative preferred stock $5,400 $7,200
Other 71 68
------ ------
$5,471 $7,268
====== ======
Avatar's utilities subsidiary's 9% cumulative preferred stock issue
provides for redemption of a minimum of $1,800 of the preferred stock per annum
beginning in 1997. During each of the first quarters of 1998 and 1997, Avatar
redeemed $1,800 of the preferred stock. A redemption of all outstanding shares
shall occur no later than March 1, 2001.
Charges to operations included in "Other expenses" relate to preferred
stock dividends of subsidiaries for the six months ended June 30, 1998 and 1997,
which amount to $274 and $355, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
NOTES, MORTGAGE NOTES AND OTHER DEBT
On February 2, 1998 the Company issued $115 million principal amount of
7% Convertible Subordinated Notes due 2005 (the "Notes"). The Notes are
convertible into common stock of Avatar at the option of the holder at any time
at or before maturity, unless previously redeemed, at a conversion price of
$31.80 per share. These Notes are designed to enhance the Company's liquidity
resources and to give it increased operating and financial flexibility. The
Notes are subordinated to all present and future senior indebtedness of Avatar
and are effectively subordinated to all indebtedness and other liabilities of
subsidiaries of Avatar. The net proceeds of $111,550 after deducting expenses
were used to repay $33,000 aggregate amount of 8% Senior Debentures due 2000 and
9% Senior Debentures due 2000. The remaining proceeds will be used to implement
the development of the Company's new active adult communities, to expand its
homebuilding operations, to reduce higher interest rate borrowings, to provide
additional working capital and for other corporate purposes. The early
extinguishment of the 8% and 9% Senior Debentures resulted in an extraordinary
loss of $2,308 pertaining to the unamortized portion of discounts associated
with these debentures.
INCOME TAXES
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. Significant
components of the Company's deferred income tax assets and liabilities as of
June 30, 1998 and 1997 are as follows:
1998 1997
-------- --------
Deferred income tax assets
Net operating loss carryforward $ 21,000 $ 20,000
Tax over book basis of land inventory 32,000 31,000
Unrecoverable land development costs 3,000 3,000
Tax over book basis of depreciable assets 5,000 5,000
Alternative minimum tax and investment tax credit carryforward 4,000 5,000
Other 2,000 2,000
-------- --------
Total deferred income taxes 67,000 66,000
Valuation allowance for deferred income tax assets (53,000) (51,000)
-------- --------
Deferred income tax assets after valuation allowance 14,000 15,000
Deferred income tax liabilities
Book over tax income recognized on homesite sales (2,000) (2,000)
Book over tax income recognized on vacation ownership sales (4,000) (4,000)
Deferred carrying charges on utilities plant (2,000) (2,000)
Other (6,000) (7,000)
-------- --------
Total deferred income tax liabilities (14,000) (15,000)
-------- --------
Net deferred income taxes $ 0 $ 0
======== ========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
INCOME TAXES - continued
A reconciliation of income tax expense from continuing operations to
the expected income tax expense (credit) at the federal statutory rate of 34%
for the six months ended June 30, 1998 and 1997 is as follows:
1998 1997
------- -------
Income tax expense (credit) computed at statutory rate $(1,656) $ (533)
Income tax effect of non-deductible dividends
on preferred stock of subsidiary 93 121
State income tax (credit), net of federal effect (179) (45)
Other, net (258) 457
Change in valuation allowance on deferred tax assets 2,000 --
------- -------
Provision for income taxes $ 0 $ 0
======= =======
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 position.
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
the Company. 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 June 17,
1998. The rates implemented in January 1996 are reflected in the financial
statements and will remain in effect, subject to refund plus interest, pending
the ultimate outcome of this matter. FCWC believes that there is a reasonable
basis it will prevail.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
DISCONTINUED OPERATIONS
During 1997, the Company developed a formal plan for the disposition of its
timeshare business. During the second quarter of 1998, the Company entered into
a non-binding letter of intent with an unaffiliated third-party for the sale of
the timeshare business; however, there is no assurance that the transaction will
be consumated. The Company has revised the estimate of the net realizable value
of the discontinued timeshare operations based on current business conditions
and potential market price for the timeshare operations. As a result, an
estimated loss on the disposal of the operations amounting to $2,000 was
recorded at June 30, 1998. Net assets and liabilities of the timeshare business
have been segregated from the continuing operations in the accompanying balance
sheets, and operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows.
Consolidated operating results relating to the discontinued operations
for the six and three months ended June 30, 1998 and 1997 are as follows:
Six Months Three Months
--------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
REVENUES
Real estate sales $ 5,410 $ 6,896 $ 3,294 $ 4,343
Interest income 1,174 749 575 390
Other 491 (237) 249 (209)
------- ------- ------- -------
Total revenues 7,075 7,408 4,118 4,524
EXPENSES
Real estate expenses 6,174 5,958 3,611 3,279
Interest expense 1,042 698 493 363
------- ------- ------- -------
Total expenses 7,216 6,656 4,104 3,642
======= ======= ======= =======
Net (loss) income from discontinued operations $ (141) $ 752 $ 14 $ 882
======= ======= ======= =======
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
DISCONTINUED OPERATIONS - CONTINUED
The net assets and liabilities of the discontinued operations included
in the accompanying consolidated balance sheets as of June 30, 1998 and December
31, 1997 are as follows:
June 30, December 31,
1998 1997
-------- -----------
ASSETS
Cash and cash equivalents $ 152 $ 49
Restricted cash 491 322
Contracts and mortgage notes receivables, net 17,086 15,197
Other receivables, net 677 691
Land and other inventories 9,890 8,903
Property, plant and equipment, net 251 238
Other assets 2,632 2,159
Reserve on estimated loss on disposal (2,000) --
-------- --------
Total Assets $ 29,179 $ 27,559
======== ========
LIABILITIES
Notes, mortgage notes and other debt:
Notes, collateralized by contracts and mortgage notes receivable $ 13,257 $ 12,952
Real estate 6,307 4,568
Accounts payable 119 694
Accrued and other liabilities 349 448
-------- --------
Total Liabilities $ 20,032 $ 18,662
======== ========
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 the Company'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.
Operations for the six and three month periods ended June 30, 1998
resulted in a net loss of $9,321 or $1.02 per share and $4,246 or $0.46 per
share, respectively, compared to a net loss of $1,568 or $0.17 per share and net
income of $419 or $0.05 per share, respectively, for the same period of 1997.
The decrease in operating results for the six and three months ended June 30,
1998 was primarily attributable to an increase in interest expense and general
and administrative expenditures, a decrease in the discontinued vacation
ownership operations and an estimated loss on the disposal of discontinued
operations. Also contributing to the decrease in operating results for the six
months ended June 30, 1998 was a decrease in utilities operating results, as
well as an extraordinary loss on the early extinguishment of debt as compared to
the same period in 1997. The decrease in operations for the six months ended
June 30, 1998 was partially offset by an improvement in real estate operating
results compared to the same period in 1997.
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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
Avatar's real estate revenues for the six and three months ended June
30, 1998 increased $3,275 or 7.7% and $2,133 or 9.4%, respectively, while real
estate expenses increased $2,096 or 4.6% and $2,404 or 10.5%, respectively, when
compared to the same periods of 1997. The increase in real estate revenues for
the six and three months ended June 30, 1998 is generally a result of increased
housing revenues partially offset by a decrease in commercial and industrial
land sales. The increase in real estate expenses for the six and three months
ended June 30, 1998, when compared to the same periods of 1997, is essentially a
result of related costs associated with the increased sales volume.
Data from homebuilding operations for the six and three months ended
June 30, 1998 and 1997 is summarized as follows:
Six Months Three Months
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
UNITS CLOSED
Number of units 232 214 122 106
Aggregate dollar volume $32,802 $27,868 $17,871 $13,885
Average price per unit $ 141 $ 130 $ 146 $ 131
UNITS SOLD, NET
Number of units 267 339 132 146
Aggregate dollar volume $51,215 $43,904 $29,807 $20,831
Average price per unit $ 192 $ 130 $ 226 $ 143
BACKLOG June 30,
1998 1997
------- -------
Number of units 411 428
Aggregate dollar volume $75,456 $57,385
Average price per unit $ 184 $ 134
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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
Data from the national and international retail land sales programs,
terminated in the second quarter of 1996, is as follows:
June 30,
1998 1997
-------- --------
RETAIL LAND SALES OPERATIONS DATA
Deferred gross profit $ 2,280 $ 2,075
Interest income 1,739 2,794
Loss on contract cancellations (31) (646)
Contract servicing expense (302) (350)
Interest expense (785) (1,513)
BALANCE SHEET DATA
Contracts and mortgage notes receivable, net 18,955 30,520
Debt collateralized by contracts and mortgages receivable 12,950 30,138
Contract servicing expense and loss on contract cancellations are included under
the caption real estate expenses on the consolidated statement of operations.
Utilities revenues for the six and three months ended June 30, 1998,
increased $412 or 2.3% and $622 or 7.0%, respectively, when compared to the same
period in 1997. The increase in utilities revenues for the six and three months
ended June 30, 1998, is primarily attributable to customer growth and increased
contract services. Utilities expenses for the six and three months ended June
30, 1998, increased $755 or 5.9% and $505 or 7.8%, respectively, when compared
to the same periods of 1997. The increase in utilities expenses for the six and
three months ended June 30, 1998, is primarily attributable to increases in
maintenance and other operational expenses.
General and administrative expenses for the six and three months ended
June 30, 1998 increased by $364 or 7.6% and $470 or 21.4%, respectively,
compared to the same periods in 1997. The increase is primarily attributed to
increased executive compensation and professional fees.
Interest expense for the six and three months ended June 30, 1998
increased $3,130 or 60.4% and $1,168 or 40.6%, respectively, compared to the
same periods in 1997. The increase is primarily attributable to the interest
expense incurred from the Notes (described below) issued February 2, 1998. Also
contributing to the increase in interest expense is the reduction in capitalized
interest in 1998 compared to 1997.
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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
For the six and three months ended June 30, 1998 operating results from
discontinued vacation ownership operations decreased due to decreased sales
volume and changes in the product mix as compared to the same periods in 1997.
In addition, the Company revised the estimate of the net realizable value of the
discontinued timeshare operations based on current business conditions. As a
result, an estimated loss on the disposal of the operations amounting to $2,000
was recorded at June 30, 1998.
For the six months ended June 30, 1998, the Company recorded a $2,308
extraordinary loss due to the early extinguishment of the $33,000 aggregate
amount of 8% and 9% Senior Debentures due 2000. The extraordinary loss resulted
from the unamortized portion of the discounts associated with the $33,000
aggregate amount of 8% and 9% Senior Debentures due 2000 written off upon
extinguishment.
LIQUIDITY AND CAPITAL RESOURCES
Management implemented a new real estate business strategy in 1997 to
capitalize on the Company's distinct competitive advantages and emphasize higher
profit margin businesses. Under its new strategy, the Company intends to
concentrate on development and management of active adult and other planned
communities, construction of custom and semi-custom homes, and development and
acquisition of commercial and industrial properties. The Company does not
anticipate that its new real estate business strategy will achieve or sustain
profitability or positive cash flow until the year 2000 or later. The Company's
primary business activities are capital intensive in nature. Significant capital
resources are required to finance homebuilding construction in process,
infrastructure for roads, water and wastewater utilities, selling expenses and
working capital needs, including funding of debt service requirements, operating
deficits and the carrying cost of land. The Company 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. There is no assurance that the sale of certain non-core assets will
be achieved. However, the Company believes that the Notes (described below) will
enhance the Company's liquidity resources.
On February 2, 1998 the Company issued $115,000 principal amount of 7%
Convertible Subordinated Notes due 2005 (the "Notes"). The Notes are convertible
into common stock of Avatar at the option of the holder at any time at or before
maturity, unless previously redeemed, at a conversion price of $31.80 per share.
These Notes are designed to enhance the Company's liquidity resources and to
give it increased operating and financial flexibility. The Notes are
subordinated to all present and future senior indebtedness of Avatar and are
effectively subordinated to all indebtedness and other liabilities of
subsidiaries of Avatar. The net proceeds of $111,550 after deducting expenses
were used to repay, on March 13, 1998, $33,000 aggregate amount of 8% Senior
Debentures due 2000 and 9% Senior Debentures due 2000. The remaining proceeds
will be used to implement the development of the Company's new active adult
communities, to expand its homebuilding operations, to reduce higher interest
rate borrowings, to provide additional working capital and for other corporate
purposes.
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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
For the six months ended June 30, 1998, net cash used in operating
activities amounted to $8,567 as a result of an increase in inventories, which
included expenditures from land development and housing operations of $7,076 and
an increase in other assets of $4,160, partially offset by principal payments
collected on contract receivables of $5,656. Net cash used in investing
activities of $5,917 resulted primarily from investments in property, plant and
equipment. Net cash provided by financing activities of $52,117 resulted
primarily from proceeds of $115,000 from the Notes after repayment of $33,000 of
the 8% and 9% Senior Debentures due 2000 and $35,213 in land, construction and
development loans.
For the six months ended June 30, 1997, net cash used by operating
activities amounted to $4,720 as a result of an increase in inventories, which
included expenditures from land development and housing operations of $12,826,
partially offset by principal payments collected on contract receivables of
$7,225. Net cash used in investing activities of $4,483 resulted primarily from
investments in property, plant and equipment. Net cash provided by financing
activities of $8,099 resulted primarily from net proceeds from revolving lines
of credit and long-term borrowings of $33,620 less principal payments on
revolving lines of credit and long-term borrowings of $23,721.
At June 30, 1998, the Company's secured real estate lines of credit,
exclusive of timeshare credit facilities, amounted to $12,950, all of which were
fully utilized. These real estate lines are secured by contracts and mortgage
receivables aggregating $14,358 and are due to mature in the second quarter of
1999. Corporate secured lines of credit were $20,000 at June 30, 1998, the
unused and available portions were $5,000, and mature in the second quarter of
1999.
At June 30, 1998, utilities unsecured lines of credit were $15,000 and
the unused and available portion was $12,892. The utilities lines mature in the
second quarter of 2000.
The Company believes that high levels of automation and technology are
essential to its operations and has invested considerable resources in computer
hardware, system applications and networking capabilities. The Company's systems
which integrate all major aspects of the Company's business, including inventory
control, planning, labor utilization and financial reporting were designed in
the early 1990's and are substantially "Year 2000" compliant. Since 1997, the
Company has been continually assessing the ability of the information systems to
handle the "Year 2000 Issue", and currently does not expect this issue to be
material to the Company's business based on its assessment of its own systems.
The Company is also in process of evaluating its vendors and suppliers to
determine what effect, if any, potential lack of compliance could have on the
Company's operations.
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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
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
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: the successful implementation of the Company's
new business strategy; shifts in demographic trends affecting active adult
communities and other real estate development; the level of immigration and
in-migration to the Company'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; the Company'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 the Company's filings with
the Securities and Exchange Commission, including its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information, which is set forth in the paragraph under the caption
"Contingencies" in the Notes to Consolidated Financial Statements (Unaudited)
in Item 1 of Part I of this report is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 28, 1998,
in Coral Gables, Florida, for the purpose of electing ten directors; approving a
proposal to amend and restate the Corporation's Certificate of Incorporation;
and approving the appointment of Ernst & Young LLP, independent accountants, as
auditors for the year ending December 31, 1998. Proxies were solicited from
holders of 9,170,102 outstanding shares of Common Stock as of the close of
business on March 31, 1998, as described in Registrant's Proxy Statement dated
April 28, 1998. All of management's nominees for directors were re-elected, the
amended and restated Certificate of Incorporation was approved, and the
appointment of Ernst & Young LLP was approved by the following votes:
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PART II -- OTHER INFORMATION - CONTINUED
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - CONTINUED
ELECTION OF DIRECTORS
NAME VOTES FOR WITHHELD
---- --------- --------
Leon Levy 7,514,768 56,620
Milton H. Dresner 7,515,573 55,815
Edwin Jacobson 7,511,042 60,346
Gerald Kelfer 7,516,235 55,153
Leon T. Kendall 7,514,583 56,805
Martin Meyerson 7,515,005 56,383
Gernot H. Reiners 7,516,240 55,148
Kenneth T. Rosen 7,518,157 53,231
Fred Stanton Smith 7,514,666 56,722
Henry King Stanford 7,511,740 59,648
APPROVAL OF THE RESTATED CERTIFICATE OF INCORPORATION
VOTES VOTES
VOTES FOR AGAINST ABSTAINED
--------- ------- ---------
7,509,552 30,757 31,079
APPOINTMENT OF AUDITORS
SHARES VOTED SHARES
SHARES VOTED FOR AGAINST ABSTAINED
- ---------------- ------------ ---------
7,545,076 6,480 19,832
ITEM 5. OTHER INFORMATION
On May 28, 1998, the Board of Directors of the Company approved an
amendment and restatement of the Company's By-Laws, which among other things,
(i) made certain changes to provisions relating to indemnification by the
Company and (ii) sets forth the procedures that stockholders must follow in
order to nominate directors or bring other business before an annual meeting of
stockholders.
Under the Amended and Restated By-Laws, if a stockholder wishes to
nominate directors or bring other business before the stockholders at an annual
meeting, in general, such stockholder must (i) notify the Secretary of the
Company not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting of the stockholders and (ii)
such notice must contain the specific information required by the
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PART II -- OTHER INFORMATION - CONTINUED
ITEM 5. OTHER INFORMATION - continued
Amended and Restated By-Laws. Accordingly, any notice received after March 29,
1999 or before February 28, 1999, with respect to the 1999 Annual Meeting of
Stockholders will be considered untimely. These conditions are separate from the
requirements of the Securities and Exchange Commission under Rule 14a-8 to have
a stockholder's proposal included in the Company's proxy statement.
If a stockholder requires more information regarding the Amended and
Restated By-Laws, you should contact the office of the Secretary, Avatar
Holdings Inc., P.O. Box 523000, Miami, FL 33152.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3(a) Certificate of Incorporation, as amended and restated May 28,
1998 (filed herewith).
3(b) By-laws, as amended and restated May 28, 1998 (filed
herewith).
27 Financial Data Schedule (filed herewith)
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1998.
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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: August 14, 1998 By: /s/ Charles L. McNairy
---------------------- ----------------------------------------
Charles L. McNairy
Executive Vice President, Treasurer and
Chief Financial Officer
Date: August 14, 1998 By: /s/ Michael P. Rama
---------------------- ----------------------------------------
Michael P. Rama
Chief Accounting Officer
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Exhibit Index
3(a) Certificate of Incorporation, as amended and restated May 28,
1998 (filed herewith)
3(b) By-laws, as amended and restated May 28, 1998 (filed herewith)
27 Financial Data Schedule (filed herewith)
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