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, California, and Tennessee, include: development, construction and sale of single family and multifamily housing communities; development, sale and management of vacation ownership intervals; development and sale of improved and unimproved homesites and commercial/industrial land tracts; operations of amenities and resorts; 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 1994, approximately 65% and 35% of total revenues were generated through real estate and utility operations, respectively.
Avatar's business strategy emphasizes housing sales, 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 various stages of completion.
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, California and Tennessee. In its Florida communities of Harbor Islands, Poinciana, Barefoot Bay, Cape Coral, Golden Gate and Leisure Lakes,as well as in its Arizona community of Rio Rico and at its newly-acquired property in Tennessee, Avatar's activities include the construction and sale of single family and multifamily housing, the construction, sale and management of vacation ownership units and homesite and industrial/commercial land sales, with the types of activities varying from community to community. Avatar owns other sites including Banyan Bay in Martin County, Florida; Ocala Springs in Marion County, Florida; and Woodland Hills in Los Angeles County, California.
The Harbor Islands Project encompasses 192 acres, including 30 acres conveyed to the City of Hollywood for future parks, adjoining the Intra-coastal Waterway in Hollywood, Florida. During 1994, the City of Hollywood and Avatar reached a settlement agreement allowing the Company to build up to 2,400 residential units, including single family homes, townhomes, villas and mid and high-rise condominium units in this water-oriented community. During the fourth quarter of 1994, construction was completed on bridges, and earthwork commenced for the project's initial phases. Preliminary construction also was completed on the project's 196-boat slip marina. In 1994, refundable reservation deposits were received for 30 single family homes and 10 estate homesites with a combined sales value of approximately $12,535,000. Avatar expects to deliver these homes during 1995.
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 16,100 of which are owned by Avatar. This planned community development includes subdivisions for single family, multifamily and
Item 1. Business -- Continued
manufactured housing, and commercial/industrial areas. Since 1971, 21,730 homesites have been sold and approximately 4,519 housing units, primarily single family houses and townhouses, have been constructed by Avatar and other non- affiliated builders. As of December 31, 1994, approximately 16,600 developed and undeveloped single family homesites remained in inventory at Poinciana. Approximately 4,800 acres of land zoned for industrial/commercial/institutional and multifamily use also remained in inventory. Avatar's housing programs in Poinciana include its communities of Regency Pointe, Crescent Lakes and Cypress Woods, as well as a scattered lot housing program. Regency Pointe, a 96 home community, is expected to be completely sold during 1995 and the grand opening of Crescent Lakes, a community of 904 homes, occurred in February 1995. Platting, design and engineering was begun for Cypress Woods during 1994. At December 31, 1994, Avatar had firm contracts at Poinciana to construct 29 single family units with a related sales value of approximately $2,427,000. Avatar also owns and operates a 31,100 square foot shopping center at Poinciana that was 100 % occupied at December 31, 1994. 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.
Avatar's real estate activities at Poinciana also include the construction, sale and management of vacation ownership intervals. As of December 31, 1994, 1,769 unit weeks had been sold and 1,143 unit weeks remained in inventory at Avatar's Alhambra at Poinciana. During 1994, Avatar began the design and development of additional vacation ownership units in Poinciana. In 1994, Avatar also acquired approximately nine acres of land and has deposits on an additional fifteen acres in Pigeon Forge, Tennessee for the development, construction and sale of vacation ownership intervals. Avatar expects to begin marketing the additional Poinciana and Pigeon Forge products during mid-1995.
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, 1994, Avatar had firm contracts to construct nine housing units with a related sales value of approximately $876,000. Avatar owns and operates a 13,420 square foot shopping center in Barefoot Bay that was 90% occupied at December 31 1994, an 18-hole executive golf course, a community center, swimming pools, tennis courts, a private beach and a fishing pier. Avatar also owns 58 acres of land held for future development, sale or other use, adjacent to Barefoot Bay.
Cape Coral is a 60,700-acre community, of which approximately 3,800 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 86,000 in 1994. Avatar owns and operates the Camelot Isles Shopping Center, a 70,000 square foot retail center that opened in February 1992, which was 100% occupied at December 31, 1994. Remaining inventory at December 31, 1994 included approximately 3,300 single family homesites and approximately 2,100 acres of land zoned for commercial, industrial and multifamily use. Avatar's housing programs in Cape Coral include: Emerald Cove, a 102 home community; The Hermitage, an upscale gated waterfront community consisting of 19 oversized homesites; and a scattered lot program. 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 will 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 with an 18-hole championship golf course, a 9-hole executive golf course, eight tennis courts and a 100-room motel.
Item 1. Business -- Continued
Golden Gate City, located east of Naples in southwest Florida, had remaining inventory at December 31, 1994 of 38 single family and duplex homesites, 51 acres of land zoned for multifamily use and 12 acres zoned for commercial use.
Golden Gate Estates includes 2,497 acres of land subdivided into 5,800 homesites. Remaining inventory as of December 31, 1994 includes 211 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.
Avatar's land holdings in Leisure Lakes, located near the city of Lake Placid in South Central Florida, consist of 3,239 homesites in inventory at December 31, 1994. 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 5,400 residents,consists of single family homes and townhouses and includes several areas zoned for commercial and industrial development. Avatar owns and operates a 180-room hotel complex, which recently underwent a $2,000,000 renovation, an 18-hole Robert Trent Jones designed championship golf course and a 36,800 square foot shopping center, which was 82% occupied as of December 31, 1994. Remaining inventory at Rio Rico at December 31, 1994 included approximately 3,700 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.
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, is comprised of approximately 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, 4,500 single family homesites on 1/4 to 1/2 acre lots, 400 homesites for manufactured housing and 1,000 multifamily condominium units. Avatar also plans on constructing an 18-hole golf course, and more than 130 acres will be used 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 350 acres of land. Conceptual planning for this tract has been completed for 66 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.
Item 1. Business -- Continued
Utilities
Avatar's water and wastewater treatment facilities include 14 water treatment facilities and 11 wastewater treatment facilities serving 6 communities in Florida (including Poinciana, Barefoot Bay and Golden Gate) and Rio Rico in Arizona. These facilities provide for the treatment, distribution and sale of water for public and private use, and the treatment and disposal of wastewater. At December 31, 1994, Avatar's utility operations had approximately 38,000 water customers and 30,000 wastewater customers.
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, 1994, Avatar employed approximately 1,069 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, including matters such as planning, zoning, design, construction of improvements, environmental considerations and sales activities, are regulated by various local, regional, state and federal agencies, including the Federal Trade Commission (FTC). For its community developments in Florida, Tennessee 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, Tennessee 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.
Avatar is subject to various federal, state, and local environmental laws and regulations. The Company does not anticipate that it will incur material capital expenditures for environmental matters for 1995 and 1996.
The Company believes it is in compliance with applicable laws and regulations in all material respects.
Item 1. Business -- Continued
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 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 intervals 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 developed and in the process of being developed, or held for investment and/or future development, has an aggregate cost of approximately $115,359,000 as of December 31, 1994.
Avatar's utility operations include water and wastewater plants and equipment located in Florida and Arizona. Such properties have a net book value of $147,311,530 at December 31, 1994.
Avatar's corporate headquarters are located at 255 Alhambra Circle, Coral Gables, Florida, in 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 cannot be determined, management believes 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 v. 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. Based upon the information currently available to it, Avatar believes that there are mitigating facts as well as 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
Item 3. Legal Proceedings -- continued
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 responded in writing to the Department. No further action has since been taken by the Department against Avatar in connection with the ROD.
On November 1, 1994, certain private parties filed a civil action against Avatar in Rock County Circuit Court, Wisconsin. (Alderman, et al v. Avatar Holdings Inc., et al, Civil Action Case No. 94 CV 675). The plaintiffs allege that Avatar and other named defendants disposed of various substances at the Site, thereby causing contamination of the groundwater source used by the plaintiffs. The plaintiffs are seeking compensatory damages, attorneys fees, costs and other disbursements. A number of factual and legal defenses are available to Avatar with respect to the Department's letter and the Alderman litigation, which if successful, would eliminate or substantially reduce Avatar's potential liability.
Item 4.
Item 4. Submission of Matters to a Vote of 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 25, 1995.
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 25, 1995) when they are reappointed or their successors are elected, or until their earlier resignation or removal.
Name Age Office and Business Experience
Leon Levy 69 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, and S.G. Warburg & Co., Ltd. (Jersey Funds).
Edwin Jacobson 65 President and Chief Executive Officer since February 1994, and Chairman of the Executive Committee since June 1992; President and Chief Executive Officer of Chicago Milwaukee Corporation, an open-end management investment company, since June 1985; President and Chief Executive Officer of CMC Heartland Partners, an operating general partnership of a public limited partnership engaged in the real estate business, 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 50 Executive Vice President since March 1984. Senior Vice President from September 1981 to March 1984 and General Counsel since September 1981.
Charles L. McNairy 48 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 48 Vice President and Secretary since September 1980.
Executive Officers of the Registrant -- continued
G. Patrick Settles 46 Vice President since November 1986 and Assistant General Counsel since September 1983.
Jeffrey A. Sopshin 32 Assistant Vice President since April 1993 and Controller since June 1994. Formerly Audit Manager, Ernst & Young LLP from 1986 to 1993.
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, 1995, was 5,500.
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) During 1993, the sale of the midwest water utilities was completed. See 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, 1994, 1993 and 1992 resulted in a pre-tax (loss) gain before the changes in accounting methods and extraordinary item of ($14,621), $18,236 and ($4,342), respectively. The decline in pre-tax income during 1994 compared to 1993 is primarily attributable to a pre-tax gain of $21,822 in 1993 on the sale of the midwest water utilities, a reduction in the estimated development liability for sold land of $4,532 resulting from the purchase of Rio Rico Utilities in 1993, and an overall decline in revenues and profit contribution from utility operations in 1994 resulting from the sale of the midwest utilities. The improvement in pre-tax results of operations in 1993 compared to 1992 was primarily attributable to a pre-tax gain of $21,822 on the sale of the midwest water
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
RESULTS OF OPERATIONS -- continued
utilities and an adjustment of $4,532 to the estimated development liability for sold land as a result of the purchase of Rio Rico Utilities.
The financial statements for the year ended December 31, 1994 include the following amounts recorded in the fourth quarter: a loss of $1,402 due to the decline in market value of investments, a loss of $1,500 due to the write down to net realizable value of a certain inventory tract adjacent to Avatar's Barefoot Bay community and a provision of $1,000 due to an increase in the accrual related to pending litigation.
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 shift from selling predominantly Avatar-owned homesites to providing a diversified mix of products and services, including introducing additional housing products, expanding vacation ownership operations, developing amenities and support facilities, expanding property management services and converting land holdings into income producing operations. Avatar's business plan also includes the goal of maintaining or slightly increasing its current homesite sales volume. The 1994 average selling prices of housing and homesites were consistent with 1993 levels.
Gross real estate revenues increased 9.7% during 1994 when compared to 1993 and 15% during 1993 when compared to 1992. The increase in real estate revenues for 1994 when compared to 1993 is primarily a result of a bulk land sale and increased homesite and vacation ownership sales volume. Real estate expenses increased $3,082 or 6.5% in 1994 when compared to 1993 and $2,594 or 5.8% in 1993 when compared to 1992. The increase in real estate expenses for 1994 when compared to 1993 is primarily a result of a write-down of a parcel of land adjacent to Avatar's Barefoot Bay community and an overall increase in cost of products sold due to the increased volume 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 bulk, homesite and vacation ownership sales for 1994 when compared to 1993. The increase in real estate revenues and expenses for 1993 when compared to 1992 is primarily a result of increased housing and homesite sales.
Utility revenues decreased $17,293 or 37.6% during 1994 when compared to 1993 and $7,252 or 13.6% during 1993 when compared to 1992. Utility expenses decreased $10,130 or 29.1% during 1994 when compared to 1993 and decreased $1,991 or 5.4% during 1993 when compared to 1992. Utility revenues and expenses decreased in 1994 and 1993 as a result of the sale of the midwest water utilities which closed on August 31, 1993. A comparison of the remaining utility operations held at December 31, 1994 to the prior period indicates that revenues increased $2,257 or 8.5% in 1994 when compared to 1993 and expenses increased $4,169 or 20.5% in 1994 when compared to 1993. The increase in expenses is primarily a result of a full year of utility operations in Arizona, amounts accrued for pending litigation, and the amortization of rate case costs.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
RESULTS OF OPERATIONS -- continued
Interest income decreased $2,860 or 20.5% during 1994 when compared to 1993 and $2,411 or 14.7% during 1993 when compared to 1992. The declines in interest income are primarily attributable to lower average aggregate balances of the Company's contract and mortgage notes receivable portfolio. The average balance of Avatar's receivable portfolio was $109,265, $127,909 and $153,053 for 1994, 1993 and 1992, respectively. Additionally, during 1993 interest income of $409 was earned on proceeds from the sale of the midwest water utilities. These earnings have now been classified as trading account profit, net.
A pre-tax gain on sale of subsidiaries of $21,822 in 1993 was the result of the sale of the midwest water utilities, which generated net proceeds of approximately $59,400.
Trading account profit, net for 1994 of $342 represents interest income and realized and unrealized gains and losses related to the trading investment portfolio, net of commissions payable to investment advisors. These investments were acquired during the fourth quarter of 1993.
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 $1,604 or 18.6% in 1994 when compared to 1993 and $811 or 10.4% in 1993 when compared to 1992. The increase for 1994 when compared to 1993 is primarily attributable to an increase in professional fees and the cost of a legal settlement. The increase in 1993 when compared to 1992 was primarily a result of incentive compensation recorded for executive officers and an increase in professional fees.
Interest expense decreased $4,449 or 28.4% in 1994 when compared to 1993 and $2,822 or 15.3% in 1993 when compared to 1992. The decrease for 1994 when compared to 1993 is primarily attributable to the capitalization of interest associated with development and construction costs of approximately $1,625 and an overall decrease in the outstanding balance of notes, mortgage notes and other debt as a result of the sale of the midwest water utilities. The decrease for 1993 was attributable to an overall decrease in notes, mortgage notes and other debt outstanding during 1993.
LIQUIDITY AND CAPITAL RESOURCES
Avatar's primary business activities, which include housing, vacation ownership, retail land sales, land development, resort operations 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 1994, net cash provided by operating activities amounted to $7,711 and resulted primarily from operations including principal payments on contracts receivable of $20,043. Net cash used in investing activities of $15,530 in 1994 resulted from investments in property, plant and equipment. Net cash provided by financing activities of $5,406 resulted from net proceeds from revolving lines of credit and long-term borrowings of $26,584 less principal payments on revolving lines of credit and long-term borrowings of $21,178.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
LIQUIDITY AND CAPITAL RESOURCES -- continued
In 1993, net cash used in operating activities was $40,075 which resulted primarily from purchases of investments-trading of $50,000 offset by principal payments on contracts receivable of $21,249. Net cash provided by investing activities of $64,823 resulted primarily from the proceeds of the sale of subsidiaries of $59,371 and proceeds from the sale of securities of $17,444 offset by investment in property, plant and equipment of $11,567. 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, the purchase of treasury stock of $27,000, less net proceeds from revolving lines of credit, long-term borrowings of $26,121 and proceeds of $30,340 from the issuance of common stock in conjunction with the redemption/conversion of Avatar's 5 1/4% convertible-purchase subordinated debentures due May 1, 2007.
Avatar renegotiated certain of its existing bank credit lines and established a new credit line, thereby increasing its secured lines of credit from $45,534 at December 31 1993, to $59,819 at December 31, 1994. Avatar's unsecured credit lines were unchanged at $15,000 for December 31, 1994 and 1993. The unused portions of these credit lines were $15,100, and $8,275 for the secured and unsecured lines, respectively, at December 31, 1994. Included in these lines of credit is a line of credit secured by investments, which had an outstanding balance at December 31, 1994 of $31,900 and will mature May 31, 1996. Also included is a line of credit with a balance outstanding at December 31, 1994 of $11,684, collateralized by certain contracts receivable and due May 31, 1996. During the fourth quarter of 1994, Avatar negotiated a line of credit of $14,000 due May 31, 1996, collateralized by certain contracts receivable, which had no outstanding balance at December 31, 1994.
Avatar has planned utility construction for 1995 totaling approximately $16,850. The Company also has planned land development expenditures of $10,900 during 1995, which will result in additional homesite inventory and preservation of development permits. Avatar anticipates that land development and utility construction expenditures for 1995 will be funded by operating cash flow and borrowings from external sources.
As of December 31, 1994, Avatar had approximately $51,582 in investments which are all 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 Avatar's cash requirements necessitate the use or partial use of the portfolio proceeds. As of December 31, 1994, $44,999 of the investments served as collateral for a secured line of credit with an outstanding balance of $31,900. See Note C to the Consolidated Financial Statements.
Avatar's Board of Directors has authorized expenditures for the purchase of Avatar's common stock and 8% and 9% senior debentures. As of December 31, 1994, the remaining authorization for such expenditures was $4,301.
Management does not anticipate a significant change in interest rates for 1995 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
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) -- continued
LIQUIDITY AND CAPITAL RESOURCES -- continued
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 1995 will be insignificant.
IMPACT OF TAX INSTALLMENT METHOD
In years 1988 through 1993, 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.
Item 8.
Item 8. Financial Statements and Supplementary Data
Report of Independent Certified Public Accountants.. 19
Consolidated Balance Sheets -- December 31, 1994 and 1993................................................ 20
Consolidated Statements of Operations -- For the years ended December 31, 1994, 1993 and 1992............................................ 21
Consolidated Statements of Stockholders' Equity -- For the years ended December 31, 1994, 1993 and 1992................................................ 22
Consolidated Statements of Cash Flows -- For the years ended December 31, 1994, 1993 and 1992............................................ 23
Notes to Consolidated Financial Statements.......... 25
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, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 schedule 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents 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 LLP
Miami, Florida February 24, 1995
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)
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 ACTIVITIES
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
See notes to consolidated financial statements.
AVATAR HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1994 (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, vacation ownership intervals 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 intervals. 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.
Income Taxes:
Effective January 1, 1993, the Company adopted Financial Accounting Standards Board 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 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 or $.13 per share. 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 -- trading:
In 1993, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" , which among other things requires that companies classify certain debt and equity securities as "held to maturity", "available for sale" or "trading". The Company classifies 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 $51,582 at December 31, 1994, and $51,184 at December 31, 1993. Subsequent to the adoption of Statement No. 115, gains and losses, both realized and unrealized are included in net trading account profit. The cumulative effect for the year ended December 31, 1993 of adopting Statement No. 115 was an increase in net income of $388 (net of deferred 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/Loss Per Common Share:
For 1994, net loss per common share is computed on the basis of the weighted average number of shares outstanding of 9,095,102.
For 1993 and 1992, 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, the Company redeemed and converted all of the 5 1/4% convertible-purchase subordinated debentures into 2,688,276 shares of common stock.
Reclassifications:
Certain 1993 and 1992 financial statement items have been reclassified to conform with 1994 presentations.
NOTE B - REAL ESTATE SALES
The components of real estate sales are as follows:
NOTE C - INVESTMENTS -- TRADING
The Company classifies 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 market value and both realized and unrealized gains and losses are included in net trading account profit. 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.
Avatar's investment portfolio at December 31, 1994 and 1993 included corporate bonds rated B- or above by Moody's and/or Standard and Poor's, non-rated bonds of companies which are in bankruptcy and have defaulted as to payments of principal and interest on such bonds, equity securities, money market accounts and U.S. Government and Agency securities. At December 31, 1993, the portfolio also included an unsecured claim on a company in bankruptcy which was sold during 1994. The non-rated bonds are thinly traded and may require 60 to 90 days to liquidate. The portfolio also includes obligations for securities which have been sold that the Company does not own and will, therefore, be obligated to purchase at a future date. Such obligation has been recorded at the fair market value of the securities. There is an element of market risk in that, if the securities increase in value, it will be necessary to purchase the securities at a cost in excess of the fair market value price.
The following table sets forth the fair values of investments (including securities sold short which are valued at the cost to purchase):
NOTE C - INVESTMENTS -- TRADING -- continued
The portfolio also includes certain forward foreign exchange contracts used by portfolio managers to hedge the foreign currency risk associated with certain bonds denominated in foreign currency. As of December 31, 1994, the fair value (carrying amount) of these forward foreign exchange contracts was $2,450. The average fair value during 1994 of forward foreign exchange contracts was $3,025.
NOTE D - CONTRACTS, MORTGAGE NOTES AND OTHER RECEIVABLES
Contracts, mortgage notes and other receivables are summarized 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, 1994, 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%). The Company generally requires that customers pledge their homesites as collateral for contracts and mortgages receivable and such collateral can be repossessed by the Company in the event of a default. 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, 1994 and 1993 were $11,207 or 11.1% and $13,442 or 11.5%, respectively. Estimated maturities for the five years subsequent to 1994 are: 1995 - $16,656; 1996 - $19,145; 1997 - $18,574; 1998 - $15,634 and 1999 - $10,788.
NOTE E - LAND AND OTHER INVENTORIES
Inventories consist of the following:
NOTE F - ESTIMATED DEVELOPMENT LIABILITY FOR SOLD LAND
The estimated development liability for sold land consists of required land and utility improvements in all areas designated for homesite sales and 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' water and wastewater treatment division, therefore making the portions of the existing agreements relating to water and wastewater extensions irrelevant, and leaving only the electrical portion.
Avatar may be obligated to expend approximately $8,620 (current costs) to complete water and wastewater utility facilities at its Poinciana subdivision. These potential 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 $25,554 are estimated to be $10,732 in 1995, $5,366 in 1996, and $9,456 thereafter. Because the timing of the expenditures after 1996 is dependent upon certain future occurrences beyond Avatar's control, projection by year after 1996 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 1994, 1993 and 1992 was $5,655, $6,524 and $7,607, respectively, net of amortization of contributions in aid of construction of $2,798, $2,917 and $2,632 during 1994, 1993 and 1992, 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, 1994, Avatar had unsecured bank credit lines of $15,000 and secured bank credit lines of $59,819. The unused portions of the unsecured and secured lines were $8,275 and $15,100, respectively. Interest rates for borrowings under these lines range from 7.46% to 8.5% on the unsecured bank credit lines and from 7.6% to 12.25% on the secured bank credit lines at December 31, 1994. Certain credit lines also provide for fixed rate borrowing pursuant to Eurodollar interest rates. Under the terms of these agreements, Avatar is restricted from paying dividends and is required to maintain a minimum net worth as defined. The secured lines are collateralized by certain contracts and mortgage notes receivable of $16,914 and investments of $44,999 at December 31, 1994.
In 1992, Avatar issued $51,160 of 7% Mortgage Trust Notes, rated "A" by Standard & Poor's Corporation, 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 during the third quarter of 1996 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, 1994 was $20,249.
Maturities of notes, mortgage notes and other debt at December 31, 1994, are as follows:
Maturities for 1995 include approximately $803 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 1994, 1993 and 1992 amounted to $1,625, $381 and $772, respectively.
Property, plant and equipment and inventory pledged as collateral for notes, mortgage notes and other indebtedness had a net book value of approximately $146,000 at December 31, 1994.
NOTE I - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
As of December 31, 1994 and 1993, preferred stock outstanding is as follows:
NOTE I - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES -- continued
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.
Charges to operations recorded as "Other Expenses" relating to preferred stock dividends of subsidiaries amounted to $811 in 1994, $1,261 in 1993 and $1,544 in 1992.
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, 1994, 1993 and 1992 and the retirement expense recognized in the consolidated statements of income for the years then ended.
The actuarial assumptions used in determining the present value of the projected benefit obligation were: weighted average discount rate of 7 1/2% in 1994 and 8% in 1993 and 1992, rate of increase in future compensation levels of 5% in 1994 and 6% in 1993 and 1992 and expected long-term rate of return on plan assets of 8% in 1994, 1993 and 1992.
At December 31, 1994 and 1993, the plan assets are invested in a group annuity contract with a major insurance company. Plan assets are invested in the general asset fund of the insurance company, which is composed primarily of fixed income securities, 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 following table sets forth the plan's status as of December 31, 1994 and 1993:
For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits assumed for 1994 and 1993 was 12% and 13%, respectively; the rate of increase was assumed to decrease gradually to 6% by 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, 1994 by $752 and the aggregate of the service and interest cost components of net periodic postretirement benefit for the year then ended by $133.
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 1994, 1993 and 1992 were $1,235, $1,186 and $1,513, respectively. Minimum rental commitments under noncancelable operating leases as of December 31, 1994 were as follows: 1995 - $1,073; 1996 - $1,024; 1997-$760; 1998 - $579; 1999 -$556 and thereafter - $84.
NOTE M - ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities are summarized as follows:
As of December 31, 1994, the Company had incentive compensation agreements with certain individuals providing for a cash payment (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 individual will vest in the rights to this incentive compensation with respect to one-fifth thereof as of the first through fifth anniversaries, subject to certain terms and conditions of the contracts. For the years ended December 31, 1994 and 1993, the Company recorded incentive compensation of $763 and $469, respectively, associated with these agreements. The liability for incentive compensation included in other liabilities at December 31, 1994 and 1993 is $996 and $754, respectively.
NOTE N - INCOME TAXES
Under the installment method of tax reporting for homesite sales, Avatar anticipates that its 1994 consolidated federal income tax return will reflect a net operating loss carryforward of approximately $27,000, which expires in years 2003 through 2009. The net operating loss carryforward was generated primarily 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 1995 to 2001. These carryforwards have not been examined by the Internal Revenue Service.
The Company has recorded a valuation allowance of $38,000 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.
NOTE N - INCOME TAXES - continued
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred income tax assets and liabilities as of December 31, 1994 and 1993 are as follows:
The provision for income taxes consists of the following:
NOTE N - INCOME TAXES - continued
A reconciliation of income tax expense (credit) to the expected income tax expense (credit) at the federal statutory rate of 34% (35% for 1993) for the twelve months ended December 31 is as follows:
In years 1988 through 1993, 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
The Company closed on the sale of its midwest water utilities, located in Indiana, Missouri, Ohio and Michigan, on August 31, 1993, with an aggregate selling price of $62,000, resulting in a pre-tax gain of $21,822.
NOTE P - REDEMPTION/CONVERSION OF 5 1/4% CONVERTIBLE-PURCHASE SUBORDINATED DEBENTURES
During 1993, the Company redeemed 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 through the redemption date. 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. 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 cannot be determined, management believes 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 v. 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 1992. The government is seeking the statutory maximum civil penalties of $25 per day, per violation based upon the allegations. Based upon the information currently available to it, Avatar believes that there are mitigating facts as well as 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 responded in writing to the Department. No further action has since been taken by the Department against Avatar in connection with the ROD.
On November 1, 1994, certain private parties filed a civil action against Avatar in Rock County Circuit Court, Wisconsin. (Alderman, et al v. Avatar Holdings Inc., et al, Civil Action Case No. 94 CV 675). The plaintiffs allege that Avatar and other named defendants disposed of various substances at the Site, thereby causing contamination of the groundwater source used by the plaintiffs. The plaintiffs are seeking compensatory damages, attorneys fees, costs and other disbursements. A number of factual and legal defenses are available to Avatar with respect to the Department's letter and the Alderman litigation, which if successful, would eliminate or substantially reduce Avatar's potential liability.
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, all of which are held for purposes other than trading except for investments, are as follows at December 31:
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 - trading: The carrying amount in the balance sheet for investments is at fair market value. (See Notes A and C)
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 and short term development and construction loans approximate their fair value. The fair values of the Company's mortgage obligations, mortgage bonds and promissory notes
NOTE T- FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Senior and subordinated debentures: The fair values of the Company's senior and subordinated debentures are estimated based on quoted market prices.
Mortgage trust notes: The fair value amount of the Company's mortgage trust notes are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rate.
NOTE U - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1994 and 1993 is as follows:
The financial statements for the year ended December 31, 1994 include the following amounts recorded in the fourth quarter: (a) a loss of $1,402 (or $.15 per share) due to the decline in market value of investments (b) a loss of $1,500 (or $.16 per share) due to the write down of a certain inventory tract to net realizable value (c) an expense of $1,000 (or $.11 per share) due to an increase in the accrual related to pending litigation
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable. PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
A. Identification of Directors
The information called for by this item is incorporated by reference from Avatar's 1995 definitive proxy statement (under the caption "Election of Directors"), to be filed with the Securities and Exchange Commission on or before April 30, 1995.
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.
C. Compliance with Section 16(a) of the Exchange Act
The information called for by this item is incorporated by reference from Avatar's 1995 definitive proxy statement (under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934"), to be filed with the Securities and Exchange Commission on or before April 30, 1995.
Item 11.
Item 11. Executive Compensation
The information called for by this item is incorporated by reference from Avatar's 1995 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, 1995.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated by reference from Avatar's 1995 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, 1995.
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
(a) The following documents are filed or incorporated by reference as part of this report:
(1) Financial Statements:
See Item 8,"Financial Statements and Supplementary Data," on Page 18 of this report.
(2) Schedules:
II - Valuation and Qualifying Accounts
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.
(3) 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 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1993).
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).
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).
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -- continued 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 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1993)
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 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1993).
10(j) *1 Incentive Compensation Agreement, dated as of September 9, 1993 by and between Avatar Holdings Inc. and Charles McNairy (previously filed as an exhibit to Form 10-K for the year ended December 31, 1993).
10(k) * Revolving Credit Agreement between Avatar Properties Inc. and BHF Bank dated November 30, 1993(previously filed as an exhibit to Form 10-K for the year ended December 31, 1993).
10(l) *1 Settlement Agreement dated July 22, 1994, between Lawrence Wilkov and Avatar Holdings Inc., et al (previously filed as an exhibit to Form 10-Q for the quarter ended June 30, 1994).
11 Statement Re: Computation of earnings per share (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
27 Financial Data Schedule (filed herewith).
* These exhibits are incorporated by reference and are on file with the Securities and Exchange Commission. 1 Employment and Compensation agreements.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -- continued
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December 31, 1994.
SCHEDULE II - 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.
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 28, 1995 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 28, 1995 By: ------------------------------------- J. Edward Houston, Director, Chairman of the Audit Committee and Executive Committee Member
Dated: March 28, 1995 By: /s/Edwin Jacobson -------------------------------------- Edwin Jacobson, Director, Chairman of the Executive Committee, President and Chief Executive Officer
Dated: March 28, 1995 By: /s/Leon T. Kendall -------------------------------------- Leon T. Kendall, Director and Audit Committee Member
Dated: March 28, 1995 By: /s/Leon Levy -------------------------------------- Leon Levy, Chairman of the Board of Directors and Executive Committee Member
Dated: March 28, 1995 By: /s/Martin Meyerson -------------------------------------- Martin Meyerson, Director and Audit Committee Member
Dated: March 28, 1995 By: /s/William Porter -------------------------------------- William Porter, Director and Audit Committee Member
Dated: March 28, 1995 By: /s/Kenneth T. Rosen -------------------------------------- Kenneth T. Rosen, Director
Dated: March 28, 1995 By: /s/Fred Stanton Smith -------------------------------------- Fred Stanton Smith, Director and Executive Committee Member
Dated: March 28, 1995 By: /s/Jeffrey A. Sopshin -------------------------------------- Jeffrey A. Sopshin, Assistant Vice President and Controller
Dated: March 28, 1995 By: /s/Henry King Stanford -------------------------------------- Henry King Stanford, Director
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 (previously filed as an exhibit to the Form 10-K for the year ended December 31, 1993)
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).
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 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1993)
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 (previously filed as an exhibit to Form 10-K for the year ended December 31, 1993).
10(j) *1 Incentive Compensation Agreement, dated as of September 9, 1993 by and between Avatar Holdings Inc. and Charles McNairy (previously filed as an exhibit to Form 10-K for the year ended December 31, 1993).
10(k) * Revolving Credit Agreement between Avatar Properties Inc. and BHF Bank dated November 30, 1993 (previously filed as an exhibit to the Form 10-K for the year ended December 31, 1993)
10(l) *1 Settlement Agreement dated July 22, 1994, between Lawrence Wilkov and Avatar Holdings Inc., et al (previously filed as an exhibit to Form 10-Q for the quarter ended June 30, 1994).
11 Statement Re: Computation of earnings per share (filed herewith)............................................. 53 21 Subsidiaries of the Registrant (filed herewith)....... 54
27 Financial Data Schedule (filed herewith).............. 56
* These exhibits are incorporated by reference and are on file with the Securities and Exchange Commission.
1 Employment and Compensation agreements.