Back to GetFilings.com

Table of Contents

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, 2002

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: 8,788,358 shares of Avatar’s common stock ($1.00 par value) were outstanding as of July 31, 2002.

Table of Contents

AVATAR HOLDINGS INC. AND SUBSIDIARIES

INDEX

2

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AVATAR HOLDINGS INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

3

Table of Contents

AVATAR HOLDINGS INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

4

Table of Contents

AVATAR HOLDINGS INC. AND SUBSIDIARIES

5

Table of Contents

AVATAR HOLDINGS INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

6

Table of Contents

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Basis of Statement Presentation and Summary of Significant Accounting Policies

     The consolidated balance sheets as of June 30, 2002 and December 31, 2001, and the related consolidated statements of operations for the six and three month periods ended June 30, 2002 and 2001 and the consolidated statements of cash flows for the six months ended June 30, 2002 and 2001 have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) 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 further information and a complete description of Avatar’s other accounting policies, refer to Avatar Holdings Inc.’s 2001 Annual Report on Form 10-K and the notes to Avatar’s consolidated financial statements included therein.

Reclassifications

     Certain 2001 financial statement items have been reclassified to conform to the 2002 presentation.

Earnings Per Share

     Earnings per share is computed based on the weighted average number of shares outstanding of 8,763,749 and 8,788,358 for the six and three months ended June 30, 2002, respectively; and 8,405,938 for the six and three months ended June 30, 2001. 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. In accordance with GAAP, the computation of earnings per share for the six and three months ended June 30, 2002 and 2001 did not assume the conversion of the 7% Convertible Subordinated Notes (Notes) and the exercise of employee stock options because the effect is not dilutive. There is no difference between basic and diluted earnings per share for these periods.

Exchange of Notes

     During the first quarter of 2002, Avatar exchanged 193,000 shares of its common stock for Notes with a face value of $4,667. Avatar realized a net gain of $41 on these transactions. These transactions were not induced exchanges.

7

Table of Contents

Notes to Consolidated Financial Statements (Unaudited) — continued

Goodwill

     In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. SFAS 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. These assets must be reviewed annually for impairment with this statement. Other intangible assets will continue to be amortized over their useful lives. The impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. Avatar performed the required impairment tests of goodwill as of January 1, 2002 and determined no impairment existed. Application of the provisions of SFAS No. 142 resulted in the elimination of goodwill amortization expense as of January 1, 2002. Results reported for the six and three months ended June 30, 2001 included goodwill amortization expense of $455 and $227, respectively.

Land and Other Inventories

     Inventories consist of the following:

Contingencies

     Avatar is involved in various pending litigation matters primarily arising in the normal course of its business. Although the outcome of these matters cannot be determined, management believes that the resolution thereof will not have a material effect on Avatar’s business or financial statements.

8

Table of Contents

Notes to Consolidated Financial Statements (Unaudited) — continued

Financial Information Relating To Industry Segments

     The following table summarizes Avatar’s information for reportable segments for the six and three months ended June 30, 2002 and 2001:

9

Table of Contents

RESULTS OF OPERATIONS

     In the preparation of its financial statements, Avatar applies accounting principles generally accepted in the United States of America. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. For a description of Avatar’s accounting policies, refer to Avatar Holdings Inc.’s Annual Report on Form 10-K.

     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 community homebuilding operations for the six and three months ended June 30, 2002 and 2001 are summarized as follows:

     Results for Avatar’s active adult community, Solivita, included in the above table for the six and three months ended June 30, 2002, are: 238 and 113 contracts written with an aggregate sales volume of $41,047 and $19,815, respectively; 135 and 53 homes closed, generating revenues from Solivita homebuilding operations of $22,034 and $9,047, respectively. Results for Solivita included in the above table for the six and three months ended June 30, 2001, are: 150 and 73 contracts written with an aggregate sales volume of $25,219 and $12,749, respectively; 95 and 54 homes closed, generating revenues from Solivita homebuilding operations of $13,579 and $7,728, respectively. Backlog at June 30, 2002 and 2001 totaled 289 units at $49,514 and 207 units at $33,314, respectively.

10

Table of Contents

RESULTS OF OPERATIONS — continued

     Net (loss) income for the six and three months ended June 30, 2002 was ($985) or ($0.11) per share and $720 or $0.08 per share, respectively, compared to net income of $3,513 or $0.42 per share and $2,431 or $0.29 per share for the same periods of 2001. The decreases in net income for the six and three month periods are primarily attributable to trading account profits in 2001 of $6,829 and $5,250, respectively; decreases in interest income and other revenues and increases in general and administrative expenses, partially mitigated by increases in real estate operating results and decreases in interest expense and other expenses.

     Real estate revenues for the six and three months ended June 30, 2002 increased $14,074 or 20.3% and $11,154 or 30.8%, respectively, when compared to the same periods of 2001. These increases are generally a result of increased revenues generated from active adult community operations, primary residential communities operations and commercial/industrial and other land sales. Revenues from active adult community operations for the six and three months ended June 30, 2002 increased $8,820 or 60.8% and $1,498 or 18.5%, respectively, when compared to the same periods of 2001, due to increased revenues from closings and amenity operations. Revenues from primary residential communities operations increased $3,759 or 8.0% and $7,742 or 31.8%, respectively, when compared to the same periods of 2001, due to increased closings at Poinciana and Rio Rico, as well as increased closings at Harbor Islands for the three months ended June 30, 2002. Closings at Harbor Islands, from sales of single-family detached homes and attached townhomes on parcels currently under development, commenced during March 2002.

     Real estate expenses for the six and three months ended June 30, 2002, increased by $13,032 or 19.3% and $8,126 or 22.8%, respectively, when compared to the same periods in 2001. These increases are generally a result of increased expenses generated from active adult community operations, primary residential communities operations and costs associated with commercial/industrial and other land sales.

     Trading account profit of $6,829 and $5,250 was recognized during the six and three months ended June 30, 2001, respectively. Trading account profits or losses represent realized and unrealized gains or losses related to the trading investment portfolio, and include commissions payable to investment brokers.

     Interest income for the six and three months ended June 30, 2002 decreased $1,381 or 43.7% and $658 or 40.4%, respectively, when compared to the same periods in 2001. These decreases are attributed to lower interest rates and lower interest income earned on a declining principal balance of contracts receivable.

     General and administrative expenses for the six and three months ended June 30, 2002 increased $796 or 15.8% and $339 or 11.6%, respectively, as compared to the same periods in 2001. These increases are primarily due to accruals for executive compensation related to the Cash Bonus Award Agreement pursuant to the Executive Incentive Compensation Plan and the restricted stock units granted pursuant to the Amended and Restated 1997 Incentive and Capital Accumulation Plan, as amended.

11

Table of Contents

RESULTS OF OPERATIONS — continued

     Interest expense for the six and three months ended June 30, 2002 decreased $1,369 or 49.4% and $804 or 60.8%, respectively, when compared to the same periods in 2001. These decreases are primarily attributable to an increase in capitalized interest and a reduction of the outstanding debt.

     Other revenues and expenses for the six months ended June 30, 2002 decreased $1,085 and $236, respectively, and for the three months ended June 30, 2002 decreased $633 and $141, respectively. These decreases were primarily attributable to the decline in management fees and expenses under a management agreement with water facility operations in Florida.

     Income tax (benefit) expense was provided for at an effective tax rate of 38.5% and 41.4% for the six and three months ended June 30, 2002, respectively, as compared to an effective tax rate of 40.7% and 41.4% for the six and three months ended June 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

     Avatar’s 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 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, partnership or management arrangements. Avatar’s primary business activities are capital intensive in nature. Significant capital resources are required to finance planned primary residential and 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.

     During the first quarter of 2002, Avatar exchanged $4,667 principal amount of its Notes for 193,000 shares of common stock, reducing the outstanding balance of the Notes to $103,064 as of June 30, 2002. Avatar may consider future exchanges, thereby further reducing the outstanding balance of the Notes. These transactions were not induced exchanges.

     Cash and cash equivalents as of June 30, 2002 was $114,683. We anticipate that after expenditures for completion of development of Solivita and expenditures related to development at Harbor Islands, we will have sufficient liquidity to enable us to realize opportunities on existing landholdings. Depending upon new real estate or other business opportunities we may identify, we may have sufficient liquidity or we may consider financing alternatives or external borrowings.

12

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES — continued

     For the six months ended June 30, 2002, net cash provided by operating activities amounted to $5,484, generally as a result of an increase in accounts payable and accrued and other liabilities of $2,806 and a decrease in inventories of $2,069, partially mitigated by an increase in other receivables of $1,157. Net cash used in investing activities of $1,908 resulted from investments in property, plant and equipment. Net cash used in financing activities of $666 resulted from the repayment of notes payable.

     For the six months ended June 30, 2001, net cash used in operating activities amounted to $9,468, primarily as a result of an increase in other assets of $9,957. Net cash provided by investing activities of $53,738 resulted from proceeds from marketable securities of $55,806 partially offset by investments in property, plant and equipment of $2,068. Net cash used in financing activities of $1,193 resulted from the repayment of 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 June 30, 2002, 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 constitutes “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 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 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, 2001.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

     There have been no material changes in Avatar’s market risk during the six months ended June 30, 2002. For additional information regarding Avatar’s market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in Avatar’s 2001 Annual Report on Form 10-K.

13

Table of Contents

PART II — OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

Avatar’s Annual Meeting of Stockholders was held on May 30, 2002, in Coral Gables, Florida, for the purpose of electing ten directors and approving the appointment of Ernst & Young LLP, independent accountants, as auditors for the year ending December 31, 2002; Proxies were solicited from holders of 8,788,358 outstanding shares of Common Stock as of the close of business on April 1, 2002, as described in Avatar’s Proxy Statement dated April 30, 2002. All of management’s nominees for directors were elected and the appointment of Ernst & Young LLP was approved by the following votes:

ELECTION OF DIRECTORS

APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Item 6. Exhibits and Reports on Form 8-K

Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended June 30, 2002.

14

Table of Contents

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.

15