Item 1. Business
Avatar Holdings Inc. (a Delaware corporation incorporated in 1970) and its subsidiaries (collectively, "Avatar" or the "Company") are engaged in two principal business activities: real estate and water and wastewater utilities operations. Avatar's real estate operations, which are located in the states of Florida, Arizona and California, include the development and sale of homesites; the development and sale of improved and unimproved homesites and commercial/industrial land tracts; the construction and sale of single family and multifamily housing; operations of amenities and resorts; development, sale and management of vacation ownership units in Avatar's Poinciana community; cable television operations and property management services. Avatar provides financing for a large portion of its homesite sales, mainly under a deed and mortgage arrangement. Avatar's utility operations consist of water and wastewater treatment plants which serve communities in Florida and Arizona. During 1993, approximately 56% and 44% of the total revenues were generated through real estate and utility operations, respectively, net of the gain on the sale of the midwest water utilities discussed below.
On August 31, 1993, the Company sold its water and wastewater utilities located in Indiana, Missouri, Ohio, and Michigan (the "Midwest Water Utilities") for an aggregate selling price of $62,000,000, resulting in a pre-tax gain of $21,822,000.
In the current year the Company has invested approximately $51,000,000 cash in an investment trading portfolio. (See Liquidity section)
Avatar's revised business strategy includes a shift away from homesite sales and toward housing, retail and industrial real estate development, sales of vacation ownership intervals and resort operations. Certain of Avatar's properties are being developed and such developments are at different stages of completion. In addition, Avatar is examining each of its remaining principal properties in an effort to determine the best long-term use or development.
Information regarding revenues, results of operations and assets of the two business segments noted above are included in Item 8 under the caption "Notes to Consolidated Financial Statements".
Real Estate
Avatar's assets include real estate inventory in the states of Florida, Arizona and California. In its Florida communities of Poinciana, Barefoot Bay, Cape Coral, Golden Gate and Leisure Lakes, as well as in its Arizona community of Rio Rico, Avatar's activities include homesite and industrial/commercial land sales, the construction and sale of single family and multifamily housing, and the construction, sale and management of vacation ownership units, with the types of activities varying from community to community. Avatar owns other sites including Harbor Islands in Hollywood, Florida; Banyan Bay in Martin County, Florida; Ocala Springs in Marion County, Florida; and Woodland Hills in Los Angeles County, California.
Poinciana, located in central Florida approximately 21 miles south of Orlando and 10 miles from Walt Disney World, encompasses 47,000 acres of land, approximately 15,500 of which are owned by Avatar. This planned community development includes subdivisions for single family, multifamily and manufactured housing, and commercial/industrial areas. Since 1971, 21,860 homesites have been sold and approximately 4,219 housing units, primarily single family houses and townhouses, have been
Item 1. Business -- Continued
constructed by Avatar and other non-affiliated builders. As of December 31, 1993, approximately 12,965 developed and undeveloped homesites remained in inventory at Poinciana. Additionally, approximately 4,456 acres of land zoned for industrial/commercial and multifamily use also remained in inventory. At December 31, 1993, Avatar had firm contracts at Poinciana to construct 49 single family units with a total sales volume of $3,726,488. Avatar's real estate activities at Poinciana also include the construction, sale and management of vacation ownership units. As of December 31, 1993, 1,606 unit weeks had been sold and 1,306 unit weeks remained in inventory at Poinciana. Avatar also owns and operates a 31,100 square foot shopping center at Poinciana that was 100% occupied at December 31, 1993. Recreational facilities owned and operated by Avatar at the Poinciana development include an 18-hole Devlin Von-Hagge championship golf course, tennis courts, a golf and racquet club with a swimming pool, a community center and a series of nature walks and trails.
Barefoot Bay is located on Florida's east coast, midway between Vero Beach and Melbourne. Avatar's operations at Barefoot Bay include the sale of manufactured homes and homesites. Since operations commenced in 1970, approximately 94% of the 5,020 available homesites have been sold. At December 31, 1993, Avatar had firm contracts to construct 8 housing units at a total selling price of $683,000. Recreational facilities owned and operated at Barefoot Bay by Avatar include an 18-hole executive golf course, a community center, swimming pools, tennis courts, a private beach and a fishing pier. Avatar also owns and operates a 13,420 square foot shopping center in Barefoot Bay that was 100% occupied at December 31, 1993.
Avatar also owns 268 acres adjacent to Barefoot Bay. Platting, design and engineering for this proposed golf course community of 630 conventional single-family and zero-lot line homesites commenced in 1989 and is continuing through 1994.
Cape Coral is a 60,700-acre community, of which approximately 3,727 acres are owned by Avatar, located on Florida's west coast seven miles west of Fort Myers. Its population has increased from 11,470 in 1970 to approximately 84,000 in 1993. To accommodate this increase, Avatar constructed, during 1991, the Camelot Isles Shopping Center, a 70,000 square foot retail center that opened in February 1992. At December 31, 1993, the shopping center was 89% occupied. Remaining inventory at December 31, 1993, included approximately 3,734 single family homesites and 2,700 acres of land zoned for commercial, industrial and multifamily use. Avatar's Tarpon Point Marina, which is located in Cape Coral, accommodates 175 vessels and features dockmaster facilities, a ship's store and fueling facilities. The Camelot Marina, for which the initial phase of construction was completed in 1991, will accommodate 76 vessels and feature 3,500 feet of boardwalk upon completion. Other amenities available to the residents of Cape Coral include Avatar's Cape Coral Golf and Tennis Resort that features an 18-hole championship golf course, a 9-hole executive golf course, eight tennis courts and a 100- room motel.
Golden Gate City, located east of Naples in southwest Florida, had remaining inventory as of December 31, 1993 which included 32 single family and duplex homesites, 43 acres of land zoned for multifamily use and 10 acres zoned for commercial use.
Golden Gate Estates comprises 2,497 acres of land subdivided into 5,800 homesites. Remaining inventory as of December 31, 1993, includes approximately 130 homesites of varying size, the majority of which are approximately 1 and 1-1/4 acre homesites, and 7,400 acres of land held for future use.
Item 1. Business -- Continued
Avatar's land holdings in Leisure Lakes, located near the city of Lake Placid in South Central Florida, consist of 3,244 homesites remaining in inventory at December 31, 1993. Amenities at Leisure Lakes include a 9-hole executive golf course, a small lakefront motel, tennis courts, shuffleboard courts, a swimming pool, a club house with pro shop, a coffee shop, a private beach, a boat ramp, a card room and various lakes available for water sports.
Rio Rico, a 55,000-acre community development in southern Arizona, is located 57 miles south of Tucson. This community, with a population of approximately 4,700 residents, consists of single family homes and townhouses and includes several areas zoned for commercial and industrial development. Avatar owns and operates a 175-room hotel complex, an 18-hole Robert Trent Jones designed championship golf course and a 36,800 square foot shopping center, which was 98% occupied as of December 31, 1993. Remaining inventory at Rio Rico at December 31, 1993 included approximately 3,575 single family homesites, 2,536 acres of land zoned for commercial, industrial and multifamily use, 4,762 acres of land held for future development, sale or other use, and 2,838 acres of undeveloped mountain range reserved for open space.
The Harbor Islands Project encompasses 191 acres, including 30 acres conveyed to the city of Hollywood for future parks, adjoining the Intra-coastal Waterway in Hollywood, Florida. An approved plan for this water-oriented community provides for 2,700 high-rise condominium units, 447 townhouses and triplex dwelling units, 28 single family homesites, 65,000 square feet of commercial space and a 150-room hotel. Additionally, permits have been obtained and preliminary construction completed on a 196-boat slip marina.
Banyan Bay, located in Martin County, Florida, comprises 251 acres of land. Future plans contemplate a medium-density residential development of two and four story condominiums.
Ocala Springs, located five miles northeast of Ocala in Marion County, Florida, comprises 4,600 acres of land. The concept plan for this project provides for 700 single family ranchettes on 1-1/4 to 1- 1/2 acre lots, 4,800 single family homesites on 1/4 to 1/2 acre lots, 400 homesites for manufactured housing and 1,000 multifamily condominium units. Also planned are an 18-hole golf course and more than 130 acres for commercial, industrial and service facilities. These plans have been reviewed by all appropriate state, regional and local governmental agencies and the plat for Phase I has been filed with and accepted by Marion County.
Woodland Hills, located in northwest Los Angeles County, California, consists of the Natoma tract that encompasses approximately 430 acres of land. Conceptual planning for this tract has been completed for 108 luxury homesites. An environmental impact report has been filed and is being reviewed by the City of Los Angeles.
In addition to the real estate holdings described above, Avatar owns approximately 2,500 acres of land in Florida that is being held for future development or bulk sales.
Utilities
Avatar's water and wastewater treatment facilities include 12 water treatment facilities and 10 wastewater treatment facilities serving 6 communities in Florida (including Poinciana, Barefoot Bay and Golden Gate). These facilities provide for the treatment, distribution and sale of water for public and
Item 1. Business -- Continued
private use, and the treatment and disposal of wastewater. At December 31, 1993, Avatar's utility operations had approximately 35,000 water customers and 29,000 wastewater customers.
On January 30, 1993, the Company entered into stock purchase agreements for the sale of its Midwest Water Utilities. The closing of the sale of the Midwest Water Utilities took place on August 31, 1993, for an aggregate selling price of $62,000,000, resulting in a pre-tax gain of $21,822,000.
An Avatar subsidiary provides consulting, data processing and other services to non-affiliated utility companies as well as to various Avatar subsidiaries. This subsidiary is beginning to operate water and wastewater systems under contracts with unaffiliated companies.
Employees
As of December 31, 1993, Avatar employed approximately 950 individuals on a full-time or part-time basis. In addition, Avatar utilizes on a daily basis such additional personnel as may be required to perform various land development activities. Avatar's relations with its employees are satisfactory and there have been no work stoppages.
Regulation
Avatar's real estate operations are regulated by various local, regional, state and federal agencies, including the Federal Trade Commission (FTC). The extent and nature of these regulations include matters such as planning, zoning, design, construction of improvements, environmental considerations and sales activities. For its community developments in Florida and Arizona, state laws and regulations may require the filing of registration statements, copies of promotional materials and numerous supporting documents, and the delivery of an approved disclosure report to purchasers, prior to the execution of a land sales contract. In addition to Florida and Arizona, certain states impose requirements relating to the inspection of properties, approval of sales literature, disclosures to purchasers of specified information, assurances of future improvements, approval of terms of sale and delivery to purchasers of a report describing the property. Federal regulations adopted pursuant to the Interstate Land Sales Full Disclosure Act provide for the filing or certification of a registration statement with the Office of Interstate Land Sales Regulation of the Department of Housing and Urban Development. Avatar's homesite installment sales activities are required to comply with the Federal Consumer Credit Protection ("Truth-in-Lending") Act.
Avatar's utility operations and rate structures are regulated by various federal, state and county agencies and must comply with federal and state treatment standards. All sources of water and wastewater effluent are required to be tested on a regular basis and purified in order to comply with governmental standards.
The Company believes it is in compliance with applicable laws and regulations in all material respects.
Competition
Avatar's real estate operations, particularly in the state of Florida, are highly competitive. In its sales of homesites and housing units, Avatar competes, as to price and product, with several land
Item 1. Business -- Continued
development companies for the discretionary income of individuals who desire eventually to relocate or establish a second home in Florida or Arizona. In recent years, there have been extensive land development projects in the geographical areas in which Avatar operates. The vacation ownership sales business is also highly competitive with companies throughout the United States and abroad selling vacation ownership unit weeks on terms similar to those offered by Avatar.
Item 2.
Item 2. Properties
Avatar's real estate operations are described in Item 1 above. Land in the process of being developed, or held for investment and/or future development, has an aggregate cost of approximately $113,623,000 as of December 31, 1993.
Avatar's utility operations include water and wastewater plants and equipment located in Florida. Such properties have a net book value of $150,812,206 at December 31, 1993.
Avatar's corporate headquarters are located at 255 Alhambra Circle, Coral Gables, Florida, in approximately 26,595 square feet of leased office space. For additional information concerning properties leased by Avatar, see Item 8, "Notes to Consolidated Financial Statements."
Item 3.
Item 3. Legal Proceedings
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 matters can not be determined, it is the opinion of management that the resolution of such matters will not have a material effect on Avatar's business or financial position.
On October 1, 1993, the United States, on behalf of the U.S. Environmental Protection Agency, filed a civil action against a utility subsidiary of Avatar in the U.S. District Court for the Middle District of Florida. (United States vs. Florida Cities Water Company, Civil Action No. 93-281-C1) The complaint alleges that the subsidiary's wastewater treatment plant in North Fort Myers, Florida, committed various violations of the Clean Water Act, 33 U.S.C. S1251 et seq., including (1) discharge of pollutants without an operating permit from October 1, 1988 to October 31, 1989; (2) discharging from an unpermitted discharge location from November 1, 1989 until July 14, 1992; and (3) discharging pollutants in excess of permit limitations at various times from July 1991 to June of 1992. The government is seeking the statutory maximum civil penalties of $25,000 per day, per violation based upon the allegations. The Subsidiary strongly believes that there are mitigating facts as well as valid legal defenses that could reduce or eliminate the imposition of monetary sanctions.
On March 1, 1994, the Wisconsin Department of Natural Resources (the "Department") sent Avatar notice that the Department had recently issued a second Record of Decision ("ROD") in connection with the Edgerton Sand & Gravel Landfill site (the "Site"). The ROD calls for the City of Edgerton's public water supply system to be extended to the owners of private wells in the vicinity of the Site. The ROD also states that other work related to soil and groundwater remedial action would be required at the Site. The Department demanded that all potentially responsible parties ("PRPs") associated with the Site organize into a PRP group to undertake the implementation of the ROD. Avatar was previously identified as a PRP by the Department. Avatar believes that it is not liable for any claims by any governmental or private party in connection with the Site.
Item 3. Legal Proceedings -- Continued
On February 25, 1994, Mr. Wilkov commenced a lawsuit against Avatar, Mr. Jacobson and Odyssey Partners, L.P. ("Odyssey"), in the Circuit Court of Eleventh Judicial Circuit in and for Dade County Florida, claiming damages arising out of Mr. Wilkov's termination of his employment purportedly for "Good Reason" (as defined in his employment agreement). Mr. Wilkov also seeks to recover damages from Avatar for libel and slander and from Odyssey and Mr. Jacobson based on their alleged malicious interference with his employment agreement. Avatar denies that Mr. Wilkov had Good Reason to terminate his employment agreement. Avatar, Odyssey and Mr. Jacobson do not believe there is any valid basis for Mr. Wilkov's claims, and various affirmative defenses have been asserted. Avatar also has asserted counterclaims against Mr. Wilkov for breach of contract, promissory estoppel and improper inducement in connection with amendments to Mr. Wilkov's employment agreement.
Item 4.
Item 4. Submission of Matters to a Vote Security Holders
None
Executive Officers of the Registrant
Pursuant to General Instruction G (3) to Form 10-K, the following list is included as an unnumbered item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 26, 1994.
The following is a list of names and ages of all of the executive officers of Avatar, indicating all positions and offices with Avatar held by each such person and each such person's principal occupation(s) or employment during the past five years unless otherwise indicated. All such persons have been elected to serve until the next annual election of officers (which is expected to occur on May 26, 1994) when they are reappointed or their successors are elected, or until their earlier resignation or removal.
Name Age Office and Business Experience
Leon Levy 68 Chairman of the Board since January 1981; General Partner, Odyssey Partners, L.P., a private partnership engaged in investment, trading and related activities; Chairman of the Board of Oppenheimer Funds; former Chairman of the Board (1974-1985) of Oppenheimer Management Corp.; Director of: Electra Investment Trust PLC, Mercury Assets Management, Ltd., and S.G. Warburg & Co., Ltd. (Jersey Funds).
Edwin Jacobson 64 President and Chief Executive Officer since February 1994; Chairman of the Executive Committee since June 1992; President and Chief Executive Officer of Chicago Milwaukee Corporation since June 1985; President and Chief Executive Officer of CMC Heartland Partners since September 1990, and President and Chief Executive Officer, since June 1985, of Milwaukee Land Company, a non- diversified, closed-end management investment company, publicly traded since July 1993.
Dennis J. Getman 49 Executive Vice President since March 1984. Senior Vice President from September 1981 to March 1984 and General Counsel since September 1981.
Charles L. McNairy 47 Executive Vice President since September 1993 and Treasurer and Chief Financial Officer since September 1992. Senior Vice President from September 1992 to September 1993. Vice President - Finance from January 1985 to September 1992, except from April 1987 to September 1988.
Juanita I. Kerrigan 47 Vice President and Secretary since September 1980.
Executive Officers of the Registrant -- continued
G. Patrick Settles 45 Vice President since November 1986 and Assistant General Counsel since September 1983.
John J. Yanopoulos 37 Vice President -- Finance and Controller since September 1992. Assistant Vice President from May 1990 to September 1992 and Corporate Controller since May 1989. Formerly Senior Audit Manager, Kenneth Leventhal and Company from 1986 to 1989.
The above executive officers have held their present positions with Avatar for more than five years, except as otherwise noted.
No director or executive officer of Avatar has any family relationship with any other director or executive officer of Avatar.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Common Stock of Avatar Holdings Inc. is traded through the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol AVTR. The approximate number of record holders of Common Stock at February 28, 1994, was 9,100.
High and low quotations, as reported, for the last two years were:
Avatar has not declared any cash dividends on Common Stock since its issuance and has no present intention to pay cash dividends. Avatar is subject to certain restrictions on the payment of dividends as set forth in Item 8, "Notes to Consolidated Financial Statements".
Item 6.
Item 6. Selected Financial Data
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA Dollars in thousands (except per-share data)
(1) The Company adopted the installment method for homesite sales effective January 1, 1989. Prior to 1989, Avatar used the full accrual method of profit recognition for homesite sales. During 1993, the sale of the Midwest Water Utilities was completed. (See Results of Operations.)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands)
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant factors that have affected Avatar during the periods included in the accompanying consolidated statements of operations.
A summary of the period to period changes in the items included in the consolidated statements of income is shown below.
Operations for the years ended December 31, 1993, 1992 and 1991 resulted in a pre-tax gain (loss) before the changes in accounting methods and extraordinary item of $18,236, ($4,342) and ($12,307), respectively. The improvement in pre-tax income during 1993 compared to 1992 is primarily attributable to the sale of the Midwest Water Utilities for $62,000 which resulted in a pre-tax gain of $21,822 and an adjustment to the estimated development liability for sold land as a result of the purchase of Rio Rico Utilities of $4,532. The improvement in pre-tax results of operations in 1992 compared to 1991 was primarily attributable to higher profit contributions from the Company's utility operations and lower real estate selling expenses.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
RESULTS OF OPERATIONS -- continued
Avatar uses the installment method of profit recognition for homesite sales. Under the installment method the gross profit on recorded homesite sales is deferred and recognized in income of future periods, as principal payments on contracts are received. Fluctuations in deferred gross profit result from deferred gross profit on current homesite sales less recognized deferred gross profit on prior years' homesite sales.
In accordance with the Company's business plan, the Company continued its gradual transition from selling predominantly Avatar- owned homesites to providing a diversified mix of products and services including introducing additional housing products, developing amenities and support facilities, expanding vacation ownership operations, expanding property management services and converting land holdings into income producing operations. Avatar's business plan also established objectives of modifying the Company's historic homesite sales program with the goal of maintaining or slightly increasing homesite sales volume. A slight improvement in consumer confidence and the economy combined to enable the Company to achieve budgeted levels for homesite sales volume in 1993. The 1993 average selling prices of housing and homesites were comparable to 1992 levels.
Gross real estate revenues increased 15% during 1993 when compared to 1992 and decreased 7.9% during 1992 when compared to 1991. The increase in real estate revenues for 1993 when compared to 1992 is primarily a result of increased housing and homesite sales volume. Real estate expenses increased $2,594 or 5.8% in 1993 when compared to 1992 and decreased $7,831 or 14.9% in 1992 when compared to 1991. The increase in real estate expenses for 1993 when compared to 1992 is primarily a result of an increase in cost of products sold due to the increase in real estate sales. Margins have improved based on a reduction in related costs as a percentage of real estate sales and a more profitable sales mix of increased homesite and housing sales for 1993 when compared to 1992. The decline in real estate revenues and expenses for 1992 when compared to 1991 resulted primarily from decreased homesite and housing sales during 1992.
Utility revenues decreased $7,252 or 13.6% during 1993 when compared to 1992 and increased $4,078 or 8.3% during 1992 when compared to 1991. Utility expenses decreased $1,991 or 5.4% during 1993 when compared to 1992 and increased $1,173 or 3.3% during 1992 when compared to 1991. Utility revenues decreased in 1993 as a result of the sale of the Midwest Water Utilities which closed on August 31, 1993. Utility expenses did not decline correspondingly primarily due to increased expenses relating to postretirement benefit costs. The increases for 1992 when compared to 1991 are due to increases in Avatar's customer base and rate increases. In comparing the remaining utility subsidiaries, revenues increased $1,565 or 6.4% in 1993 when compared to 1992 and expenses increased $4,699 or 38.9% in 1993 when compared to 1992. The increase in expenses is primarily a result of postretirement benefit costs, the amortization of rate case costs, and the accrual of professional fees.
Interest income decreased $2,411 or 14.7% during 1993 when compared to 1992 and $2,686 or 14.1% during 1992 when compared to 1991. The declines in interest income are attributable to lower average aggregate balances of the Company's contract and mortgage notes receivable portfolio. The
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
RESULTS OF OPERATIONS -- continued
average balance of Avatar's receivable portfolio was $127,909, $153,053 and $181,550 for 1993, 1992 and 1991, respectively. This decrease in interest income was partially offset by earnings from Avatar's investment securities of $903, $479 and $927 for 1993, 1992 and 1991, respectively.
Pre-tax gain on sale of subsidiaries of $21,822 in 1993 is a result of the sale of the Midwest Water Utilities which generated net proceeds of approximately $59,371.
Other revenues for 1993 includes a reduction of the estimated development liability for sold land of $4,532 as a result of the purchase of Rio Rico Utilities.
General and administrative expenses increased $811 or 10.4% in 1993 compared to 1992 and $196 or 2.6% during 1992 when compared to 1991. The increases in 1993 and 1992 are primarily a result of incentive compensation recorded for senior officers and an increase in professional fees. Additionally, an increase in real estate revenue contributed to the increase for 1993.
Interest expense decreased $2,822 or 15.3% in 1993 when compared to 1992 and $738 or 3.8% during 1992 when compared to 1991. These decreases are attributable to an overall decrease in notes, mortgage notes and other debt outstanding during 1993 and lower interest rates during 1992 than in 1991.
LIQUIDITY AND CAPITAL RESOURCES
Avatar's primary business activities, which include homesite sales, land development and utility services, are capital intensive in nature. Avatar expects to fund its operations and capital requirements through a combination of cash and investment securities on hand, operating cash flows and external borrowings.
In 1993, net cash provided by operating activities amounted to $9,925 and resulted primarily from operations including principal payments on contracts receivable of $21,249. Net cash provided by investing activities of $14,823 in 1993 resulted from the proceeds from the sale of subsidiaries of $59,371 and proceeds from the sale of securities of $17,444 reduced by investments in property, plant and equipment of $11,567 and investments in securities of $50,425. Net cash used in financing activities of $20,214 resulted primarily from the principal payment on revolving lines of credit and long-term borrowings of $48,538 and the purchase of treasury stock of $27,000 less net proceeds from revolving lines of credit and long-term borrowings of $26,121 and proceeds from the issuance of common stock in conjunction with the redemption/conversion of the 5-1/4% Debentures (as defined below) of $30,340.
Avatar renegotiated certain of its existing bank credit lines and established a new credit line, thereby increasing its secured lines of credit from $36,200 at December 31, 1992, to $45,534 at December 31, 1993. Avatar's unsecured credit lines were decreased from $44,500 at December 31, 1992, to $15,000 at December 31, 1993. The unused portions of these credit lines were $17,000 and $10,325 for the secured and unsecured lines, respectively, at December 31, 1993. Included in these lines of credit is a new line of credit entered into during 1993, secured by investments, which had
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
LIQUIDITY AND CAPITAL RESOURCES -- continued
an outstanding balance at December 31, 1993 of $13,000 and will mature during the fourth quarter of 1994. Also included is an amended and restated line of credit with a balance outstanding at December 31, 1993 of $15,534 collateralized by certain contracts receivables and due May 31, 1995.
Avatar has planned utility construction for 1994 totaling approximately $22,000. Additionally, the Company has planned land development expenditures of $9,700 during 1994, which will result in additional homesite inventory and preservation of development permits. It is anticipated that land development and utility construction expenditures for 1994 will be funded by operating cash flow and borrowings from external sources.
On June 4, 1993 the Company called for the redemption of all its outstanding 5-1/4% convertible-purchase subordinated debentures due May 1, 2007 (the ``5-1/4% Debentures ) at a redemption price of 100% of the principal amount plus accrued and unpaid interest from January 15, 1993 through the redemption date of July 4, 1993. The principal purpose of the redemption was to reduce the Company's annual interest expense, improve its liquidity and increase its stockholders' equity. Holders were entitled to convert their 5-1/4% Debentures into shares of the Company's common stock at a conversion price of $23.00 per share provided they paid in cash an amount equal to the principal amount of the 5-1/4% Debentures being converted, for which they received additional shares of common stock equal to the number issued on conversion. A total of $30,917 principal amount of the 5-1/4% Debentures were converted and 2,688,276 shares of common stock were issued. The remaining $57 principal amount of 5-1/4% Debentures were redeemed as of July 4, 1993. The net result of this transaction, after expenses, was an increase in cash of $30,340, a decrease in debt of $30,973 and an increase in stockholders' equity of $60,835.
The closing of the sale of the Midwest Water Utilities took place on August 31, 1993, with an aggregate selling price of $62,000, resulting in a pre-tax gain of $21,822.
The Company has invested approximately $51,000 in investment securities which are classified as trading. The Company intends to continue to actively trade such securities in an effort to generate profits and will reinvest such profits until such time as the Company 's cash requirements necessitate the use or partial use of the portfolio proceeds. Avatar's investment portfolio at December 31, 1993 includes $20,045 invested in corporate bonds rated B- or above by Moody's and/or Standard and Poor's and $12,775 invested in non-rated bonds of companies which are in bankruptcy and have defaulted as to payments of principal and interest on such bonds. These bonds are thinly traded and may require sixty to ninety days to liquidate. The portfolio also includes an unsecured claim on a company in bankruptcy of $5,689 which is not readily marketable, $7,020 of equity securities, $1,661 of money market accounts and $3,994 of U.S. Goverment and Agency securities. As of December 31, 1993, $39,932 of the investments serves as collateral for a secured line of credit with an outstanding balance of $13,000.
On September 30, 1993 the Company purchased 1,000,000 shares of the Company's common stock from the estate of Peter J. Sharp for $27.00 per share resulting in a decrease in cash of $27,000 and a corresponding decrease in stockholders' equity. These shares are being held in the Company's treasury for future corporate purposes.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
LIQUIDITY AND CAPITAL RESOURCES -- continued
Avatar's Board of Directors has authorized expenditures for the purchase of Avatar's 8% and 9% senior debentures. During 1993, Avatar expended $31 for the purchase of its 8% senior debentures and $1,106 for the purchase of its 9% debentures. As of December 31, 1993, the remaining authorization for such expenditures was $4,301.
As a result of the proceeds received from the sale of the Midwest Water Utilities and the redemption/conversion of the 5-1/4% Debentures, net of the funds expended for the stock repurchase, the Company believes it has sufficient capital resources to satisfy anticipated liquidity requirements.
Management does not anticipate a significant change in interest rates for 1994, and accordingly, does not expect Avatar's primary business activities to be adversely affected by interest rates. Avatar's homesite sales are not dependent upon the customer obtaining third party financing. A high interest rate environment would be likely to adversely affect Avatar's real estate results of operations and liquidity because certain of Avatar's debt obligations are tied to prevailing interest rates. Increases in interest rates affecting the Company's utility operations generally are passed on to the consumer through the regulatory process.
EFFECTS OF INFLATION AND ECONOMIC CONDITIONS
Inflation has had a minimal impact on Avatar's operations over the past several years, and management believes its effect has been neither significant nor greater than its effect to the industry as a whole. It is anticipated that the impact of inflation on Avatar's operations for 1994 will not be significant.
IMPACT OF TAX INSTALLMENT METHOD
In 1992, 1991, 1989 and 1988, the Company elected the installment method for recording a substantial amount of its homesite sales in its federal income tax return, which deferred taxable income into future fiscal periods. As a result of this election, the Company may be required to pay compound interest on certain federal income taxes in future fiscal periods attributable to the taxable income deferred under the installment method. The Company believes that the potential interest amount, if any, will not be material to its financial position and results of operations of the affected future periods.
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". The Company adopted this statement in 1993, as required. This statement requires the accrual of postretirement benefits (such as health care benefits) during the years an employee provides services. These benefits for retirees are currently provided only to the employees of the Company's utility subsidiaries. The costs of these benefits were previously expensed on a pay-as-you-go basis. The accrual for postretirement benefit costs at December 31, 1993 amounted to $712.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
RETIREMENT PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--continued
As discussed in Notes J and K to the consolidated financial statements, the weighted average discount rate used in determining both the projected benefit obligation for the Company's defined benefit pension plan and the accumulated postretirement benefit obligation for its postretirement benefit plan is 8%. If the Company were to lower the discount rate by 1/2% in 1994, it would result in an increase in the obligation. To illustrate, a decrease in the discount rate from 8% to 7-1/2% in determining the projected benefit obligation for the Company's defined benefit pension plan, would increase the obligation by approximately $275 and pension expense by approximately $44. The same change in discount rate in estimating the accumulated postretirement benefit obligation for the Company's defined benefit postretirement plan, would increase the obligation by approximately $200. Because the Company has elected to record the transition obligation for postretirement benefits over 20 years, as allowed by Statement No. 106, the effect of reducing the discount rate from 8% to 7-1/2% in 1994 would be less than $30.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Independent Certified Public Accountants.......... 20
Consolidated Balance Sheets -- December 31, 1993 and 1992... 21
Consolidated Statements of Operations -- For the years ended December 31, 1993, 1992, 1991.............................. 22
Consolidated Statements of Stockholders' Equity -- For the years ended December 31, 1993, 1992, 1991................. 23
Consolidated Statements of Cash Flows -- For the years ended December 31, 1993, 1992, 1991............................... 24
Notes to Consolidated Financial Statements.................. 26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors Avatar Holdings Inc.
We have audited the accompanying consolidated balance sheets of Avatar Holdings Inc. and subsidiaries as of December 31, 1993, and 1992, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and related schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avatar Holdings Inc. and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, in 1993 the Company changed its methods of accounting for income taxes, investments and postretirement benefits other than pensions.
/s/ ERNST & YOUNG
Miami, Florida February 23, 1994, except for the third paragraph of Note R, as to which the date is March 1, 1994
AVATAR HOLDINGS INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands)
See notes to consolidated financial statements.
AVATAR HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Operations (Dollars in thousands except per share data)
See notes to consolidated financial statements.
AVATAR HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands except per-share data)
(a) $1 par value per share; 15,500,000 shares authorized and 12,715,448, 10,026,956, and 10,020,827, shares issued at December 31, 1993, 1992 and 1991, respectively, including treasury stock. (b) Retained earnings is subsequent to the October 1, 1980 Plan of Reorganization. (c) Treasury stock included 3,620,346 shares at December 31, 1993 and 2,620,346 shares at December 31, 1992 and 1991.
There are 5,000,000 authorized shares of preferred stock, none of which are issued.
See notes to consolidated financial statements.
AVATAR HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in Thousands)
AVATAR HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows -- continued (Dollars in Thousands)
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
See notes to consolidated financial statements.
AVATAR HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1993 (Dollars in thousands except per-share data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include Avatar Holdings Inc. and its subsidiaries ("Avatar"). All significant intercompany accounts and transactions have been eliminated in consolidation.
General:
Avatar is principally engaged in the business of developing and selling improved and unimproved real estate, single and multifamily residential housing and providing water and wastewater utility services.
Restricted Cash:
Restricted cash represents collections of monthly payments on pledged mortgage notes receivable. These collections will be applied to reduce the related mortgage trust notes (See Note H).
Land Inventories:
Land inventories are stated at the lower of cost or estimated net realizable value. Cost includes expenditures for acquisition, construction, development and carrying charges. Interest costs incurred during the period of land development, when applicable, are capitalized as part of the cost of such projects. Land acquisition costs are allocated to individual land parcels based upon the relationship that the estimated sales prices of specific parcels bear to the total sales price of the entire community. Construction and development costs are added to the value of the specific parcels for which the costs are incurred.
Revenues:
The Company uses the installment method of profit recognition for sales of homesites and vacation ownership units. Under the installment method, the gross profit on recorded sales is deferred and recognized in income of future periods as principal payments on related contracts are received. Under the installment method, deferred profit is included in the balance sheet, as a reduction of contracts receivable, until recognized.
Sales of housing units are recognized in full upon the transfer of title to a purchaser. Revenues from commercial land and bulk land sales are recognized in full at closing, provided the purchaser's initial investment is adequate, all financing is considered collectible, and Avatar is not obligated to perform significant future activities.
Utility revenues are recorded as the service is provided.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and depreciation is computed principally by the straight line method over the estimated useful lives of the assets. Depreciation, maintenance and operating expenses of equipment utilized in the development of land are capitalized as land inventory cost.
Property Held for Sale:
Property held for sale consists principally of utility property, plant and equipment related to certain water and wastewater utilities which were held for sale at December 31, 1992, and which were sold during 1993. Such assets are reflected at historical cost.
Income Taxes:
Effective January 1, 1993, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under Statement No. 109, the liability method is used in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. Prior to the adoption of Statement No. 109, income tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rates in effect in the year the difference originated (deferred method).
As permitted by Statement No. 109, the Company has elected not to restate the financial statements of any prior years. The cumulative effect of adopting Statement No. 109 resulted in a charge to net income during the first quarter of 1993 of $964. The cumulative effect of adopting Statement No. 109 for Avatar's utility subsidiaries was not credited or charged to net income, but was recorded as a regulatory liability or regulatory asset in accordance with accounting procedures applicable to regulated enterprises. The regulatory liabilities and regulatory assets will generally be amortized to income or expense over the useful life of the utility system and reflect probable future revenue reductions or increases from ratepayers. The effect of the change on income from continuing operations for the year ended December 31, 1993 was not material.
Deferred Customer Betterment Fees:
Amounts collected from customers for utility improvements are classified as "Deferred Customer Betterment Fees". These fees will be reclassified to "Contributions in Aid of Construction" when service to the customer begins.
Contributions in Aid of Construction:
Advances from real estate developers and other direct contributions to utility subsidiaries for plant construction are recorded as "Contributions in Aid of Construction". To the extent required by regulatory agencies, the account balance is amortized over the depreciable life of the utility plant as an offset to depreciation expense.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- continued
Investments:
In May 1993, the FASB issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which, among other things, requires companies to classify certain debt and equity securities as "held to maturity", "available for sale" or "trading."
The Company elected to adopt Statement No. 115 as of December 31, 1993, and has classified all of its investment portfolio as trading. This category is defined as including debt and marketable equity securities held for resale in anticipation of earning profits from short-term movements in market prices. Trading account securities are carried at fair value which was $51,184 at December 31, 1993. Subsequent to the initial adoption of Statement No. 115, both realized and unrealized gains and losses will be included in net trading account profit. The cumulative effect as of December 31, 1993 of adopting Statement No. 115 was an increase in net income of $388 (net of income taxes of $238) or $.04 per share.
Postretirement Benefits:
In 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This statement requires the accrual of postretirement benefits (such as health care benefits) during the years an employee provides services. These benefits for retirees currently are provided only to the employees of the Company's utility subsidiaries. The costs of these benefits were previously expensed on a pay-as-you-go basis.
Net Income Per Common Share:
Net income per common share is computed on the basis of the weighted average number of shares outstanding plus common stock equivalents, if any, that would result from the dilutive effect of the assumed conversion (and associated purchase) of the 5-1/4% convertible-purchase subordinated Debentures. In 1993, $30,917 of the Company's 5-1/4% convertible-purchase subordinated Debentures were converted into 2,688,276 shares of common stock. The result of this redemption and conversion was dilutive for the year ended December 31, 1993. The primary and fully diluted computations assume the actual conversion occurred at the beginning of the year.
Reclassifications:
Certain 1992 and 1991 financial statement items have been reclassified to conform with 1993 presentation.
NOTE B - REAL ESTATE SALES
The components of real estate sales are as follows:
NOTE C - INVESTMENTS
Avatar's investment portfolio at December 31, 1993 includes $20,045 invested in corporate bonds rated B- or above by Moody's and/or Standard and Poor's and $12,775 invested in non-rated bonds of companies which are in bankruptcy and have defaulted as to payments of principal and interest on such bonds. These bonds are thinly traded and may require sixty to ninety days to liquidate. The portfolio also includes an unsecured claim on a company in bankruptcy of $5,689 which is not readily marketable, $7,020 of equity securities, $1,661 of money market accounts and $3,994 of U.S. Government and Agency securities.
Fair values for actively traded debt securities and equity securities are based on quoted market prices on national markets. Fair values for thinly traded investment securities are generally based on prices quoted by investment brokerage companies.
At December 31, 1992 investments securities consisted of U.S. Treasury Notes and Bills. Investments securities at December 31, 1992 are carried at cost which approximates market value.
NOTE D - CONTRACTS, MORTGAGE NOTES AND OTHER RECEIVABLES
Contracts, mortgage notes and other receivables are summarized as as follows:
Contracts and mortgage notes receivable are generated through the sale of homesites at various sales offices located throughout the northeast, midwest and west coast of the United States. A significant portion of the contracts and mortgage notes receivable at December 31, 1993, resulted from sales made to customers in the northeast. Contracts receivable are collectible primarily over a ten year period and bear interest at rates primarily ranging from 7 1/2% to 12% per annum (weighted average rate 9.9%). A contract receivable is considered delinquent if the scheduled installment payment remains unpaid 30 days after its due date. Delinquent principal amounts of contracts and mortgage notes receivable at December 31, 1993, and 1992 were $13,442 or 11.5% and $18,365 or 13.3%, respectively. Scheduled maturities for the five years subsequent to 1993 are: 1994 - $16,072; 1995 - $19,289; 1996 - $20,209; 1997 - $19,546 and 1998 - $16,285.
NOTE E - LAND AND OTHER INVENTORIES
Inventories consist of the following:
NOTE F - ESTIMATED DEVELOPMENT LIABILITY FOR SOLD LAND
The estimated cost to complete required land and utility improvements in all areas designated for homesite sales is summarized as follows:
These estimates are based on engineering studies of quantities of work to be performed based on current estimated costs. These estimates are reevaluated annually and adjusted accordingly.
A major portion of the estimated development liability for sold land relates to utility extensions for homesites at Avatar's Arizona community (Rio Rico) which were sold prior to 1980. At Rio Rico, Avatar entered into various service and construction agreements with Citizens Utilities Company (Citizens), a non-related company, generally providing for Avatar to construct certain utility facilities and deed them to Citizens. Avatar's expenditures, related to the construction of some of these facilities, are expected to be reimbursed from Citizens' present and future customers. Some of these reimbursable amounts are determined by specific formulas. The recovery of these expenditures is dependent upon the community attaining an occupancy and/or usage level sufficient to allow reimbursement prior to the expiration of the agreements. During 1993, Avatar purchased Citizens Utilities' water and wastewater treatment division thereby eliminating the portion of the existing agreement relating to water and wastewater extensions, leaving only the electrical portion.
Avatar may be obligated to advance to its utility subsidiary approximately $9,200 (current costs) to complete water and wastewater utility facilities at its Poinciana subdivision. These possible future obligations are based on internal engineering studies and are not included in the estimated development liability discussed above. As such, past and future expenditures are expected to be recovered from customers' fees and future revenues.
Expenditures, net of recoveries, for homesite improvement costs totaling $29,933 are estimated as follows: 1994-$8,967, 1995-$8,381 and $12,585 thereafter. Because the timing of the expenditures after 1995 is dependent upon certain future occurrences beyond Avatar's control, projection by year after 1995 is not presently practicable.
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and accumulated depreciation consist of the following:
Depreciation charged to operations during 1993, 1992 and 1991 was $6,524, $7,607 and $6,373, respectively, net of amortization of contributions in aid of construction of $2,917, $2,632 and $2,532, during 1993, 1992 and 1991, respectively.
NOTE H - NOTES, MORTGAGE NOTES AND OTHER DEBT Notes, mortgage notes and other debt are summarized as follows:
NOTE H - NOTES, MORTGAGE NOTES AND OTHER DEBT - continued
At December 31, 1993, Avatar had unsecured bank credit lines of $15,000 and secured bank credit lines of $45,534. The unused portions of the unsecured and secured lines were $10,325 and $17,000, respectively. Interest rates for borrowings under these lines range from 4 1/2% to 6% on the unsecured bank credit lines and from 4 3/4% to 6 1/4% on the secured bank credit lines at December 31, 1993. Additionally, certain credit lines provide for fixed rate borrowing pursuant to Eurodollar interest rates. Under the terms of these agreements Avatar is restricted from paying dividends with certain exceptions and is required to maintain a minimum net worth as defined. The secured lines are collateralized by certain contracts and mortgage notes receivable of $20,712 and investment securities of $39,932 at December 31, 1993.
In July 1992, Avatar issued $51,160 of 7% Mortgage Trust Notes, pursuant to the securitization of a portion of its homesite receivables. The notes mature on December 15, 2002, however, the Company expects the notes to be repaid in approximately 36 months through the collection of principal payments, including principal prepayments and late collections and all interest payments, net of servicing fee and other adjustments on the mortgage loans. Additionally, all liquidation proceeds with respect to the mortgage loans, proceeds from the sale of property acquired through foreclosure or deed-in-lieu of foreclosure proceedings and proceeds from the purchase of mortgage loans by the issuer are required to be applied to these notes. The balance of these notes at December 31, 1993 was $32,439.
Maturities of notes, mortgage notes and other debt at December 31, 1993, are as follows:
Maturities for 1994 include approximately $15,633 related to the Company's bank credit lines. There is no assurance that Avatar will be able to obtain satisfactory extensions or refinancing of these or other credit lines.
Interest capitalized during 1993, 1992 and 1991 amounted to $381, $772, and $746, respectively.
Property, plant and equipment and inventory pledged as collateral for notes, mortgage notes and other indebtedness had a net book value of approximately $151,000 at December 31, 1993.
NOTE I - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
As of December 31, 1993 and 1992, preferred stock outstanding is as follows:
Avatar's utility subsidiary's 9% cumulative preferred stock issue provides for redemption to occur no earlier than March 1, 1997, in whole or in part; however, a minimum of $1,800 of the preferred stock must be redeemed per annum beginning in 1997. A redemption of all outstanding shares shall occur no later than March 1, 2001.
Maturities of preferred stock are as follows: 1997-$1,800, 1998 - $1,800 and $5,458 thereafter.
Charges to operations recorded as "Other Expenses" relating to preferred stock dividends of subsidiaries amounted to $1,261 in 1993, $1,544 in 1992, and $1,231 in 1991.
NOTE J - RETIREMENT PLANS
Avatar has two defined contribution savings plans that cover substantially all employees. Under one of the savings plans, Avatar contributes to the plan based upon specified percentages of employees' voluntary contributions. The other savings plan does not provide for contributions by Avatar.
Avatar's non-contributory defined benefit pension plan covers substantially all employees of its subsidiary, Avatar Utilities Inc. The benefits are based on years of service and the employees' compensation during the highest 5 out of the last 10 years of employment. Avatar's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974.
NOTE J - RETIREMENT PLANS - continued
The following table sets forth the defined benefit plan's funded status as of December 31, 1993, 1992 and 1991 and the retirement expense recognized in the consolidated statements of income for the years then ended.
The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8% and 6%, respectively, at December 31, 1993, 1992 and 1991. The expected long-term rate of return on plan assets for 1993, 1992 and 1991 was 8%.
At December 31, 1993, and 1992, the plan assets are invested in a group annuity contract with a major insurance company. Approximately 70% and 80%, respectively, of the plan assets at December 31, 1993 and 1992, are invested in a general asset fund of the insurance company that is comprised primarily of fixed income securities. The remaining assets are invested in equity securities, public bonds and cash equivalents in the insurance company's separate accounts.
NOTE K - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Avatar's utility subsidiary sponsors a defined benefit postretirement plan that provides medical and life insurance benefits to both salaried and nonsalaried employees after retirement. The postretirement medical and life insurance plan is non-contributory.
Avatar's utility subsidiary's funding policy for its postretirement plan is to fund on a pay-as-you-go basis. Prior to 1993, the expense was also measured on this basis. In 1993, the Company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires accounting for postretirement benefits on an accrual basis. The effect of adopting Statement No. 106 increased net periodic postretirement benefit expense by $712 for 1993. Postretirement expense for 1992 and 1991 has not been restated.
The following table sets forth the plan's status as of December 31, 1993:
For measurement purposes, a 13% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1993; the rate of increase was assumed to decrease gradually to 6% for the year 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $626 and the aggregate of the service and interest cost components of net periodic postretirement benefit for the year then ended by $122.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation is 8%.
NOTE L - LEASE COMMITMENTS
Avatar leases the majority of its administration and sales offices under operating leases that expire at varying times through 1999. Rental expenses for the years 1993, 1992 and 1991 were $1,186, $1,513, and $2,037, respectively. Minimum rental commitments under noncancelable operating leases as of December 31, 1993 were as follows: 1994 - $954; 1995 - $929; 1996 - $923; 1997-$746; 1998 - $618; and thereafter - $1,512.
NOTE M - ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities are summarized as follows:
As of December 31, 1993, the Company had agreements with four executive officers providing as incentive compensation a cash payment to each officer (to the extent vested), within ten days following the respective fifth anniversary date of the respective agreement (or the termination date, if earlier), in an amount equal to the excess of a formula amount based upon the closing prices of Avatar common stock during a specified period prior to the respective fifth anniversary date (or termination date, if earlier) over the closing price of Avatar common stock on the date of the respective agreement. Each of these executive officers will vest in the rights to this incentive compensation with respect to one-fifth thereof on each of the first through fifth anniversaries, subject to certain terms and conditions of the contracts should their employment status change prior to the fifth anniversary. For the year ended December 31, 1993, the Company recorded incentive compensation of $469 associated with these agreements. The liability for incentive compensation included in other liabilities at December 31, 1993 and 1992 is $754 and $285, respectively. (See Note R - Contingencies)
NOTE N - INCOME TAXES
Avatar Holdings Inc. is the successor in interest to GAC Corporation. GAC, together with certain of its subsidiaries, was reorganized pursuant to Chapter X of the Federal Bankruptcy Act of 1898. The Bankruptcy Court confirmed the Trustees' Plan of Reorganization and issued a final decree on October 16, 1981, discharging the Trustees from their duties.
Under the installment method of tax reporting for homesite sales, Avatar anticipates that its 1993 consolidated federal income tax return will reflect a net operating loss carryforward of approximately $18,000, which expires in years 2003 through 2004. The net operating loss carryforward was generated after the reorganization as a result of electing the installment method of reporting homesite sales for tax purposes. In addition, investment tax credits and alternative minimum tax credit carryforwards of approximately $5,000 are available, a portion of which expires in years 1994 to 2001. These
NOTE N - INCOME TAXES - continued
carryforwards have not been examined by the Internal Revenue Service. The Company has recorded a valuation allowance of $33,000 with respect to the deferred income tax assets which remain after offset by the deferred income tax liabilities. Included in the valuation allowance for deferred income tax assets is approximately $9,000 which, if utilized, will be credited to additional paid-in capital.
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 December 31, 1993 are as follows:
The provision for income taxes consists of the following:
Deferred income tax credits result from timing differences in the recognition of certain expenses for tax and financial reporting purposes. For the years ended December 31, 1992 and 1991, the principal components of deferred income tax credits are the theoretical income tax related to the interest discount
NOTE N - INCOME TAXES - continued
on debentures issued as part of the reorganization and the deferred income tax attributable to the difference between book and income tax depreciation on certain utility assets with long useful lives.
A reconciliation of income tax expense (credit) to the expected income tax expense (credit) at the federal statutory rate of 35% for the twelve months ended December 31 is as follows:
In 1992, 1991, 1989 and 1988, the Company elected the installment method for recording a substantial amount of its homesite sales in its federal income tax return, which deferred taxable income into future fiscal periods. As a result of such election, the Company may be required to pay compound interest on certain federal income taxes in future fiscal periods attributable to the taxable income deferred under the installment method. The Company believes that the potential interest amount, if any, will not be material to its financial position and results of operations of the affected future periods.
NOTE O - SALE OF SUBSIDIARIES
On January 30, 1993, the Company entered into stock purchase agreements for the sale of its Midwest Water Utilities located in Indiana, Missouri, Ohio, and Michigan. The closing of the sale of the midwest water utilities took place on August 31, 1993, with an aggregate selling price of $62,000, resulting in a pre-tax gain of $21,822, subject to post-closing adjustments.
NOTE P - REDEMPTION/CONVERSION OF 5-1/4% CONVERTIBLE-PURCHASE SUBORDINATED DEBENTURES
On June 4, 1993 the Company called for the redemption of all its outstanding 5-1/4% convertible-purchase subordinated Debentures due May 1, 2007 at a redemption price of 100% of the principal amount plus accrued and unpaid interest from January 15, 1993 through the redemption date, July 4, 1993. Holders were entitled to convert their 5-1/4% Debentures into shares of the Company's common stock at a conversion price of $23.00 per share provided they paid in cash an amount equal to the principal amount of the 5-1/4% Debentures being converted, for which they received additional shares of common stock equal to the number issued on conversion. A total of $30,917 principal amount of the 5-1/4% Debentures were converted and 2,688,276 shares of common stock were
NOTE P - REDEMPTION/CONVERSION OF 5-1/4% CONVERTIBLE-PURCHASE SUBORDINATED DEBENTURES - continued
issued. The remaining $57 principal amount of 5-1/4% Debentures were redeemed as of July 4, 1993. The net result of this transaction, after expenses, was an increase in cash of $30,340, a decrease in debt of $30,973 and an increase in stockholders' equity of $60,835.
NOTE Q - TREASURY STOCK PURCHASE
On September 30, 1993 the Company purchased 1,000,000 shares of the Company's common stock from the estate of Peter J. Sharp at a purchase price of $27.00 per share. These shares are being held in the Company's treasury for future corporate purposes.
NOTE R - 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 matters can not be determined, it is the opinion of management that the resolution of these matters will not have a material effect on Avatar's business or financial position.
On October 1, 1993, the United States, on behalf of the U.S. Environmental Protection Agency, filed a civil action against a utility subsidiary of Avatar in the U.S. District Court for the Middle District of Florida. (United States vs. Florida Cities Water Company, Civil Action No. 93-281-C1) The complaint alleges that the subsidiary's wastewater treatment plant in North Fort Myers, Florida, committed various violations of the Clean Water Act, 33 U.S.C. S1251 et seq., including (1) discharge of pollutants without an operating permit from October 1, 1988 to October 31, 1989; (2) discharging from an unpermitted discharge location from November 1, 1989 until July 14, 1992; and (3) discharging pollutants in excess of permit limitations at various times from July 1991 to June of 1992. The government is seeking the statutory maximum civil penalties of $25,000 per day, per violation based upon the allegations. The Subsidiary strongly believes that there are mitigating factors as well as valid legal defenses that could reduce or eliminate the imposition of monetary sanctions.
On March 1, 1994, the Wisconsin Department of Natural Resources (the "Department") sent Avatar notice that the Department had recently issued a second Record of Decision ("ROD") in connection with the Edgerton Sand & Gravel Landfill site (the "Site"). The ROD calls for the City of Edgerton's public water supply system to be extended to the owners of private wells in the vicinity of the Site. The ROD also states that other work related to soil and groundwater remedial action would be required at the Site. The Department demanded that all potentially responsible parties ("PRP's") associated with the Site organize into a PRP group to undertake the implementation of the ROD. Avatar was previously identified as a PRP by the Department. Avatar believes that it is not liable for any claims by any governmental or private party in connection with the Site.
On February 25, 1994, the Company's former President and Chief Executive Officer commenced a lawsuit against Avatar and others claiming damages arising out of his termination of his employment purportedly for "Good Reason" (as defined in his employment agreement.) He also seeks to recover damages from Avatar for libel and slander and from the other defendants based on their alleged malicious interference with his employment agreement. Avatar denies that he had Good Reason to terminate his employment agreement. Avatar does not believe there is any valid basis for his claims, and various affirmative defenses have been asserted. Avatar also has asserted counterclaims against him for breach of contract, promissory estoppel and improper inducement in connection with amendments to his employment agreement.
NOTE S - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
NOTE S - FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS -- continued
(a) Avatar's businesses are primarily conducted in the United States. (b) In computing operating profit, interest has been reflected separately. (c) Intersegment revenues contain primarily intercompany interest and management fees charged to affiliates. (d) Identifiable assets by segment are those assets that are used in the operations of each segment. General corporate assets are principally cash, receivables and investments. (e) No significant part of the business is dependent upon a single customer or group of customers. (f) Cable TV, mortgage and hotel and recreational operations which primarily serve Avatar communities do not qualify individually as separate reportable segments and are included in the real estate segment. (g) General corporate expenses are included in the real estate segment.
NOTE T- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments at December 31, 1993, are as follows:
The following methods and assumptions were used by the Company in estimating the fair value of financial instruments:
Cash and restricted cash: The carrying amount reported in the balance sheet for cash approximates its fair value.
Investments: The carrying amount in the balance sheet for investments is at fair market value which is generally determined by quoted market prices.
Contracts, mortgage notes and other receivables: The fair value amount of the Company's contracts, mortgage notes, and other receivables are estimated based on a discounted cash flow analysis.
Notes, mortgage notes and other debt: The carrying amounts of the Company's borrowings under its short-term bank credit lines approximate their fair value. The fair values of the Company's mortgage obligations, mortgage bonds, and promissory notes are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
NOTE T- FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
Senior debentures: The fair values of the Company's Senior and Subordinated debentures are estimated based on quoted market prices.
Mortgage trust notes: The carrying amount in the balance sheet for mortgage trust notes approximates its fair value. The current market rate for similar types of borrowing arrangements approximates the rate of the mortgage trust notes.
NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1993 and 1992 is as follows:
(1) Net revenues include homesite sales which are recorded on the installment method of profit recognition.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.
Not applicable. PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
A. Identification of Directors
The information called for in this item is incorporated by reference to Avatar's 1994 definitive proxy statement (under "Election of Directors") to be filed with the Securities and Exchange Commission on or before April 30, 1994.
B. Identification of Executive Officers
For information with respect to the executive officers of Avatar, see "Executive Officers of the Registrant" at the end of Part I of this report.
Item 11.
Item 11. Executive Compensation
The information called for by this item is incorporated by reference to Avatar's 1994 definitive proxy statement (under the caption "Executive Compensation and Other Information") to be filed with the Securities and Exchange Commission on or before April 30, 1994.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated by reference to Avatar's 1994 definitive proxy statement (under the captions "Principal Stockholders" and "Security Ownership of Management") to be filed with the Securities and Exchange Commission on or before April 30, 1994.
Item 13.
Item 13. Certain Relationships and Related Transactions
None
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Schedules:
See Item 8 "Financial Statements and Supplementary Data" on Page 17 of this report.
Schedules:
I - Marketable Securities and Other Investments V - Property, Plant and Equipment VI - Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment VIII - Valuation and Qualifying Accounts IX - Short-Term Borrowings X - Supplementary Income Statement Information
Schedules other than those listed above are omitted, since the information required is not applicable or is included in the financial statements or notes thereto.
Exhibits:
3(a) * Certificate of Incorporation, as amended (previously filed as an exhibit to the Form 10-K for the year ended December 31, 1986).
3(b) By-laws, as amended through March 24, 1994 (filed herewith).
4(a) * Instruments defining the rights of security holders, including indenture for 8% senior debentures (previously filed as an exhibit to the Form 8-K dated as of September 12, 1980).
4(b) * Supplemental Indenture for 8% senior debentures dated as of December 19, 1992 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
4(c) * Indenture for 9% senior debentures dated as of December 19, 1992 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
4(d) * Indenture for 5-1/4% convertible-purchase subordinated debentures dated May 1, 1987 (previously filed as an exhibit to Form 10-Q for the period ended March 31, 1987).
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K -- continued
10(a) * Consulting Agreement, dated as of December 31, 1990, by and between Avatar Properties Inc. and John Sladkus (previously filed as an exhibit to Form 10-K for the year ended December 31, 1990).
Consulting Agreement, dated as of December 31, 1990, by and between Avatar Utilities Inc. and John Sladkus (previously filed as an exhibit to Form 10-K for the year ended December 31, 1990).
10(b) * 1 Employment Agreement, dated as of June 15, 1992, by and between Avatar Holdings Inc. and Lawrence Wilkov (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
10(c) * 1 Employment Agreement, dated as of June 15, 1992, by and between Avatar Holdings Inc. and Edwin Jacobson (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
10(d) 1 Amendment to Employment Agreement, dated as of March 1, 1994, by and between Avatar Holdings Inc. and Edwin Jacobson (filed herewith).
10(e) * Four separate Stock Purchase Agreements dated January 30, 1993, with respect to the sale of the Registrant's utilities located in Indiana, Missouri, Ohio and Michigan, respectively (previously filed as an exhibit to Form 8-K dated as of February 3, 1993).
10(f) * Agreement dated January 30, 1993, with respect to the transactions contemplated by the Stock Purchase Agreements (previously filed as an exhibit to Form 8-K dated as of February 3, 1993).
10(g) * Guarantee by the Registrant (previously filed as an exhibit to Form 8-K dated as of February 3, 1993).
10(h) * Guarantee by American Water Works Company, Inc. (previously filed as an exhibit to Form 8-K dated as of February 3, 1993).
10(i) 1 Incentive Compensation Agreement, dated as of January 18, 1993 by and between Avatar Holdings Inc. and Dennis Getman (filed herewith).
10(j) 1 Incentive Compensation Agreement, dated as of September 9, 1993 by and between Avatar Holdings Inc. and Charles McNairy (filed herewith).
10(k) Revolving Credit Agreement between Avatar Properties Inc. and BHF Bank dated November 30, 1993 (filed herewith).
11 Statement Re: Computation of per share earnings (filed herewith).
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K -- continued
22 Subsidiaries of the Registrant (filed herewith).
Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1993.
* These exhibits are incorporated by reference and are on file with the Securities and Exchange Commission.
1 Employment and compensation agreements.
SCHEDULE I - MARKETABLE SECURITIES AND OTHER INVESTMENTS AVATAR HOLDINGS INC. AND SUBSIDIARIES (Dollars in thousands, except number of shares)
(1) Corporation in Bankruptcy/Principal and Interest in Default
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT AVATAR HOLDINGS INC. AND SUBSIDIARIES (Dollars in thousands)
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPEMNT AVATAR HOLDINGS INC. AND SUBSIDIARIES (Dollars in thousands)
(1) The annual provisions for depreciation have been computed principally in accordance with the following ranges of rates:
Utility, plant and equipment 1.5% to 10% Other property, plant and equipment 5% to 20%
(a) Charged principally to estimated cost of development of land sold and amortization of contributions in aid of construction.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AVATAR HOLDINGS INC. AND SUBSIDIARIES (Dollars in thousands)
(1) Charged to operations as a reduction of revenues. (2) Uncollectible accounts written off (3) Credited principally to interest income or allowance for doubtful accounts upon write-off of uncollectible accounts. (4) Valuation allowance for deferred tax assets recorded in conjunction with the adoption of FASB Statement No. 109.
SCHEDULE IX - SHORT-TERM BORROWINGS AVATAR HOLDINGS INC. AND SUBSIDIARIES (Dollars in thousands)
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION AVATAR HOLDINGS INC. AND SUBSIDIARIES (Dollars in thousands)
Amounts for royalties not presented as such amounts are less than one percent of total revenue.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AVATAR HOLDINGS INC.
Dated: March 24, 1994 By: /s/Charles L. McNairy Charles L. McNairy, Executive Vice President, Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Dated: March 24, 1994 By: /s/Geoffrey C. Hazard, Jr. Geoffrey C. Hazard, Jr., Director and Audit Committee Member
Dated: March 24, 1994 By: /s/J. Edward Houston J. Edward Houston, Director, Chairman of the Audit Committee and Executive Committee Member
Dated: March 24, 1994 By: /s/Edwin Jacobson Edwin Jacobson, Director, Chairman of the Executive Committee, President and Chief Executive Officer
Dated: March 24, 1994 By: /s/Leon T. Kendall Leon T. Kendall, Director and Audit Committee Member
Dated: March 24, 1994 By: /s/Leon Levy Leon Levy, Chairman of the Board of Directors and Executive Committee Member
Dated: March 24, 1994 By: /s/Martin Meyerson Martin Meyerson, Director and Audit Committee Member
Dated: March 24, 1994 By: /s/William Porter William Porter, Director and Audit Committee Member
Dated: March 24, 1994 By: /s/Fred Stanton Smith Fred Stanton Smith, Director and Executive Committee Member
Dated: March 24, 1994 By: /s/Henry King Stanford Henry King Stanford, Director
Dated: March 24, 1994: By: Lawrence Wilkov, Director
Dated: March 24, 1994 By: /s/John J. Yanopoulos John J. Yanopoulos, Vice-President - Finance and Controller
Exhibit Index
3(a) * Certificate of Incorporation, as amended (previously filed as an exhibit to the Form 10-K for the year ended December 31, 1986).
3(b) By-laws, as amended through March 24, 1994 (filed herewith)........................................60
4(a) * Instruments defining the rights of security holders, including indenture for 8% senior debentures (previously filed as an exhibit to the Form 8-K dated as of September 12, 1980).
4(b) * Supplemental Indenture for 8% senior debentures dated as of December 19, 1992 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
4(c) * Indenture for 9% senior debentures dated as of December 19, 1992 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
4(d) * Indenture for 5-1/4% convertible-purchase subordinated debentures dated May 1, 1987 (previously filed as an exhibit to Form 10-Q for the period ended March 31, 1987).
10(a) * Consulting Agreement, dated as of December 31, 1990, by and between Avatar Properties Inc. and John Sladkus (previously filed as an exhibit to Form 10-K for the year ended December 31, 1990).
Consulting Agreement, dated as of December 31, 1990, by and between Avatar Utilities Inc. and John Sladkus (previously filed as an exhibit to Form 10-K for the year ended December 31, 1990).
10(b) * Employment Agreement, dated as of June 15, 1992, by 1 and between Avatar Holdings Inc. and Lawrence Wilkov (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
10(c) * Employment Agreement, dated June 15, 1992, by 1 and between Avatar Holdings Inc. and Edwin Jacobson (previously filed as an exhibit to Form 10-K for the year ended December 31, 1992).
10(d) Amendment to Employment Agreement, dated as of March 1, 1994, by and between Avatar Holdings Inc. and Edwin Jacobson (filed herewith).................80
10(e) * Four separate Stock Purchase Agreements dated January 30, 1993, with respect to the sale of the Registrant's utilities located in Indiana, Missouri, Ohio and Michigan, respectively (previously filed as an exhibit to Form 8-K dated as of February 3, 1993).
10(f) * Agreement dated January 30, 1993, with respect to the transactions contemplated by the Stock Purchase Agreements (previously filed as an exhibit to Form 8- K dated as of February 3, 1993).
Exhibit Index -- continued
10(g) * Guarantee by the Registrant (previously filed as an exhibit to Form 8-K dated as of February 3, 1993). 10(h) * Guarantee by American Water Works Company, Inc. (previously filed as an exhibit to Form 8-K dated as of February 3, 1993).
10(i) 1 Incentive Compensation Agreement, dated as of January 18, 1993 by and between Avatar Holdings Inc. and Dennis Getman (filed herewith)......................82
10(j) 1 Incentive Compensation Agreement, dated as of September 9, 1993 by and between Avatar Holdings Inc. and Charles McNairy (filed herewith)............... 93
10(k) Revolving Credit Agreement between Avatar Properties Inc. and BHF Bank dated November 30, 1993 (filed herewith)..........................................102
11 Statement Re: Computation of per share earnings (filed herewith)...................................138
22 Subsidiaries of the Registrant (filed herewith)..........................................139
* These exhibits are incorporated by reference and are on file with the Securities and Exchange Commission.
1 Employment and Compensation agreements.