<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AVATAR HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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DELAWARE 6552 23-1739078
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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255 ALHAMBRA CIRCLE
CORAL GABLES, FLORIDA 33134
(305) 442-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JUANITA I. KERRIGAN
VICE PRESIDENT AND SECRETARY
AVATAR HOLDINGS INC.
255 ALHAMBRA CIRCLE
CORAL GABLES, FLORIDA 33134
(305) 442-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies to:
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ROBERT TODD LANG HOWARD L. SHECTER
WEIL, GOTSHAL & MANGES LLP MORGAN, LEWIS & BOCKIUS LLP
767 FIFTH AVENUE 101 PARK AVENUE
NEW YORK, NEW YORK 10153 NEW YORK, NEW YORK 10178
(212) 310-8000 (212) 309-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with a dividend or
interest reinvestment plan, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER NOTE(2) PRICE(2) FEE(3)
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- --------------------------------------------------------------------------------------------------------------
% Convertible Subordinated Notes due
2005.................................... $115,000,000 N/A N/A $33,925
Common Stock, par value $1.00 per share... (4) N/A N/A
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(1) Includes $15,000,000 aggregate principal amount of Notes that may be issued
and sold to cover over-allotments, if any, by the Underwriter.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Calculated pursuant to Rule 457(i).
(4) Such indeterminate number of shares as shall be issuable upon conversion of
the Notes registered hereby, and such additional securities issuable as a
result of the "anti-dilution" provisions thereof.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1997
$100,000,000
AVATAR HOLDINGS INC.
% CONVERTIBLE SUBORDINATED NOTES DUE 2005
------------------------
The % Convertible Subordinated Notes due 2005 (the "Notes") offered
hereby (the "Offering") are convertible at any time prior to maturity at the
option of the holder, unless previously redeemed, into shares of Common Stock,
par value $1.00 per share (the "Common Stock"), of Avatar Holdings Inc.
("Avatar") at a conversion price of $ per share, subject to
adjustment in certain events. See "Description of the Notes -- Conversion
Rights". On December 8, 1997, the last reported sale price for the Common Stock
on The Nasdaq National Market (Symbol: AVTR) was $27 1/2 per share.
Interest on the Notes is payable on April 1 and October 1 of each year,
commencing on April 1, 1998. The Notes are not redeemable by Avatar prior to
April 1, 2001. On or after April 1, 2001, the Notes are redeemable, in whole or
in part, at the option of Avatar on at least 30 days' prior written notice, at
the redemption prices set forth herein, plus accrued and unpaid interest, to the
date of redemption. Upon the occurrence of a Change in Control (as defined),
holders of Notes can require Avatar to repurchase their Notes, in whole or in
part, at a purchase price equal to 100% of the principal amount thereof plus
accrued and unpaid interest through the date of repurchase. See "Description of
the Notes -- Certain Rights to Require Repurchase of Notes". The Notes are
unsecured obligations of Avatar and are subordinated in right of payment to all
Senior Indebtedness (as defined) of Avatar and are effectively subordinated to
all liabilities of Avatar's subsidiaries. As of September 30, 1997, Senior
Indebtedness of Avatar was $47.3 million, of which $33.0 million will be repaid
or retired with the net proceeds from the Offering, and the aggregate amount of
indebtedness and other balance sheet liabilities of Avatar's subsidiaries to
which the Notes are effectively subordinated was $116.2 million, which includes
$38.7 million of indebtedness of Avatar's utilities subsidiaries. See
"Capitalization" for a description of certain liabilities of Avatar and its
subsidiaries. The Indenture will not restrict the ability of Avatar or its
subsidiaries to incur any indebtedness or liabilities. See "Description of the
Notes -- Subordination."
Leon Levy, Chairman of the Board of Avatar and a general partner of Odyssey
Partners, L.P. (which is a principal stockholder of Avatar), has advised the
Company of his intention to purchase $20.0 million aggregate principal amount of
Notes offered hereby, net of underwriting fees and commissions.
Application will be made to qualify the Notes for quotation on The Nasdaq
Stock Market ("Nasdaq").
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS IN EVALUATING AN INVESTMENT IN THE NOTES,
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2)(3) COMPANY(1)(4)
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Per Note................................. 100% % %
Total(5)................................. $100,000,000 $ $
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(1) Plus accrued interest, if any, from the date of issuance.
(2) Avatar has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) The $20,000,000 aggregate principal amount of the Notes to be purchased by
Leon Levy will not be subject to any Underwriting Discount.
(4) Before deducting expenses of the Offering payable by Avatar estimated at
$ .
(5) The Underwriters have been granted an option, exercisable within 30 days of
the date hereof, to purchase from Avatar up to an additional $15,000,000
aggregate principal amount of Notes at the Price to Public less the
Underwriting Discount, for the purpose of covering over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Avatar will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The Notes are offered by the Underwriters when, as and if delivered to and
accepted by them, subject to their right to withdraw, cancel or reject orders in
whole or in part and subject to certain conditions. It is expected that delivery
of the Notes will be made against payment on or about ,
1998 at the offices of CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, One World
Financial Center, New York, New York 10281.
------------------------
CIBC OPPENHEIMER SBC WARBURG DILLON READ INC.
The date of this Prospectus is , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT WITHOUT
NOTICE. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, THE COMMON
STOCK, OR BOTH. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE OFFERING, MAY BID FOR AND PURCHASE THE NOTES, THE COMMON STOCK, OR BOTH, IN
THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS DURING AND AFTER THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING".
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") by Avatar (File No. 0-7616) pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), are incorporated by
reference in this Prospectus.
(i) Avatar's Annual Report on Form 10-K for the year ended December
31, 1996 (the "1996 10-K");
(ii) Avatar's Quarterly Reports on Form 10-Q for the period ended
September 30, 1997 (the "September 30 10-Q") and for the periods ended
March 31 and June 30, 1997;
(iii) Avatar's Proxy Statement dated April 29, 1997 in connection with
its Annual Meeting of Stockholders held on May 29, 1997; and
(iv) the description of Avatar's Common Stock contained in Avatar's
Registration Statement on Form 8-A filed with the Commission, pursuant to
Section 12 of the Exchange Act, on October 15, 1980, including any
amendment or report filed for the purpose of updating such description.
All documents and reports filed by Avatar pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or replaced,
to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. Copies of any such documents, other than exhibits
to such documents unless they are specifically incorporated by reference, are
available, without charge, to any person to whom this Prospectus is delivered,
upon written or oral request directed to Juanita I. Kerrigan, Vice President and
Secretary, Avatar Holdings Inc., 255 Alhambra Circle, Coral Gables, Florida
33134, telephone: (305) 442-7000 (ext. 229).
AVAILABLE INFORMATION
Avatar is subject to the informational requirements of the Exchange Act,
and, with respect to the indentures relating to Avatar's 8% Senior Debentures
due 2000 and 9% Senior Debentures due 2000, the Trust Indenture Act of 1939, as
amended, and in accordance therewith files reports, proxy statements and other
information with the Commission. The reports, proxy statements and other
information filed with the Commission, as well as the Registration Statement (as
defined below), may be inspected and copied at the public reference facilities
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048 and at
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<PAGE> 4
500 West Madison Street, Suite 1400, Chicago, Illinois 60601-2511. Copies of
such material also can be obtained by mail from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding reporting companies under
the Exchange Act including Avatar, at http://www.sec.gov.
Avatar has filed a Registration Statement on Form S-3 (the "Registration
Statement") with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus omits
certain information contained in the Registration Statement and incorporates by
reference certain additional information previously filed with the Commission.
Reference is hereby made to the Registration Statement and related exhibits for
further information with respect to Avatar and the Notes. Such additional
information can be inspected at and obtained from the Commission in the manner
set forth above. Statements contained in this Prospectus or in any document
incorporated by reference herein as to the terms of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "The Company," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
"Business" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of results to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors include, among
others: implementation of the Company's new business strategy; shifts in
demographic trends affecting retirement communities and other real estate
development; the level of immigration and in-migration to the Company's regional
market areas; national and local economic conditions and events, including
employment levels, interest rates, consumer confidence, the availability of
mortgage financing and demand for new and existing housing; the Company's access
to future financing; competition; changes in, or the failure or inability to
comply with, government regulations; and other factors referenced in this
Prospectus. See "Risk Factors."
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PROSPECTUS SUMMARY
The following is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
elsewhere in this Prospectus or incorporated herein by reference. Unless
otherwise noted, all financial information, share and per share data in this
Prospectus assume no exercise of the Underwriters' over-allotment option and no
issuance of shares of Common Stock covered by Avatar's options outstanding as of
the date hereof. Except as otherwise noted, as used in this Prospectus, the term
"Company" refers to Avatar and its consolidated subsidiaries.
THE COMPANY
GENERAL
The Company is engaged in two principal business activities: real estate
development and the ownership and operation of water and wastewater utilities.
The Company owns and develops land, primarily in various locations in Florida
and Arizona. Current and planned real estate operations include: the
development, sale and management of active adult/retirement communities; the
development and sale of single- and multi-family homes and communities; and the
development, leasing and management of improved commercial/ industrial
properties.
The Company's substantial land holdings represent the potential for
residential development of 102,000 to more than 145,000 single- and multi-family
units. These land holdings include over 32,600 developed or developable acres,
of which 26,400 acres have been platted and/or zoned for the building of over
43,000 single-family homes and over 38,200 multi-family units, and approximately
6,200 acres of partially developed and developable land which have not been
platted on which the Company anticipates developing more than an additional
20,800 residential units. In addition, the Company owns over 3,000 acres of land
upon which over 42.7 million square feet of commercial/industrial property may
be built.
The Company's major land holdings are located in Poinciana (near Disney
World and Orlando), Cape Coral on Florida's west coast (near Fort Myers and
Naples), Ocala Springs in central Florida, Harbor Islands (one of the last large
undeveloped properties along the Intracoastal Waterway on Florida's east coast
near Ft. Lauderdale), and Rio Rico, south of Tucson, Arizona.
Utilities operations include the purification and distribution of water and
the treatment and disposal of wastewater through plants in Florida and Arizona
and contract management services for affiliated and unaffiliated water and
wastewater utilities.
NEW REAL ESTATE BUSINESS STRATEGY
During the third quarter of 1997, new management of the Company began
implementing a real estate business strategy designed to capitalize on the
Company's competitive strengths and current and projected demographic trends in
Florida and Arizona and which focuses on real estate businesses which have
potentially higher profit margins.
Strategy. The Company's new real estate business strategy is focused on
three primary areas:
- Development and management of active adult/retirement communities;
- Development of upscale custom and semi-custom homes and communities;
and
- Development of its commercial and industrial properties.
Competitive Advantages. The Company believes that it has four principal
competitive advantages:
- It owns large contiguous tracts of land.
- Its land holdings are substantially zoned and/or platted, are either
exempt from applicable regulatory requirements or such regulatory
requirements have been substantially fulfilled, and have overall
vesting with regard to costly and time-consuming regulatory and
growth management
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requirements such as concurrency, development of regional impact studies and
regulatory planning and environmental permitting.
- Its extensive land holdings are substantially debt-free.
- It has expended more than $150 million on land infrastructure
improvements, including roads, drainage and utilities installations,
and has invested substantial funds in the development of amenities,
such as parks and other open areas, club houses, golf courses,
swimming pools, tennis courts, hotels, shopping centers and marinas.
Demographic Trends. The Company believes that it will benefit from a
number of recent and anticipated demographic trends:
- The continued high population growth of both Florida and Arizona as
a result of the growing number of retirees choosing Florida and
Arizona for retirement or second homes, population migration from
the Caribbean and Latin America to Florida and increasing commerce
between the U.S. and Latin America.
- The growth of the greater Orlando metropolitan area as a business
and entertainment center.
- The aging of the "baby-boom" generation, which management believes
will significantly increase demand for amenitized pre-retirement and
retirement communities.
The Company's new real estate business strategy focuses on three primary
businesses:
Development and Management of Active Adult/Retirement Communities
A substantial portion of the Company's land holdings is in areas where
management believes there is significant opportunity to develop active
adult/retirement communities. The Company owns more than 10,600 acres in several
large contiguous parcels which are entirely debt-free and which it believes are
suitable for the development of active adult/retirement communities and upon
which an estimated 36,200 units may be built.
To assist in the development of its active adult/retirement communities,
the Company recently entered into a consulting contract with H. Irwin Levy, the
founder of the Century Village concept of active adult/ retirement communities,
and acquired an option to purchase the rights to the Century Village name. At
the same time, the Company hired the entire Century Village executive management
team: the Chief Operating Officer, the Chief Financial Officer, and the heads of
marketing and construction. Century Village is one of the nation's leading
developers of active adult/retirement communities. Collectively, these
executives have been responsible for the development of approximately 50,000
housing units in approximately 20 communities, including four Century Village
communities located in southeast Florida.
Over the next five years, the Company intends to create a brand name in the
active adult/retirement community business and to distinguish its active
adult/retirement communities from those of other developers by establishing a
consumer product-oriented approach. Specifically, the Company intends to develop
resort-like communities with a broad array of amenities and entertainment,
sports, recreational, social, educational and cultural activities. Each
community will be designed and operated as a lifestyle experience developed for
its particular location and market. In addition, management seeks to identify
additional sites which are suitable for development of active adult/retirement
communities and anticipates that it will acquire such sites for cash or stock or
develop them through joint venture or management arrangements.
Development of Upscale Custom and Semi-Custom Homes and Communities
Certain of the Company's land holdings are suitable for development of
upscale custom and semi-custom homes and communities. The Company estimates that
approximately 2,000 upscale homes may be developed on its homesites which are
located along or near fresh or salt water. The Company has targeted custom and
semi-custom homebuilding as an important component of its new real estate
strategy because this business has potentially higher profit margins than the
sale of mid-priced single-family homes and because the Company believes that it
possesses the requisite levels of technical expertise and experience in upscale
and custom homebuilding.
In order to expand its upscale homebuilding business, the Company recently
acquired certain assets of Brookman-Fels, Jeff Ian, Inc. ("Brookman-Fels"), a
well-known regional developer of
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custom and semi-custom homes and single-family residential communities in south
Florida, and entered into employment contracts with its three principals,
Jonathan Fels, Michael Levy and Bernard Offenberg. Brookman-Fels is one of
south Florida's leading custom homebuilders and a winner of many national
design awards, including being named one of America's Best Builders by the
National Association of Homebuilders in 1994. Founded in 1980, Brookman-Fels
was responsible for developing some of south Florida's most successful upscale
communities such as Oak Hammock, Arboretum, The Sanctuary and Treasure Trove.
In addition, Brookman-Fels has gained recognition for building single-family
luxury homes in such upscale south Florida areas as Pinecrest, Old Cutler,
Cocoplum, Snapper Creek, Miami Beach, Plantation Acres and Weston's Windmill
Ranches. Brookman-Fels has developed more than 600 single-family homes,
representing over $250 million in sales.
Development of Commercial and Industrial Properties
The development of commercial and industrial properties is a significant
element in the Company's long-term business strategy. The Company owns over
3,000 acres of land which are zoned and/or planned for over 42.7 million square
feet of commercial and industrial property. A substantial portion of the
Company's commercial and industrial properties is located in areas of Florida
which have historically experienced, and are projected to continue to
experience, high rates of population growth. In addition, the development by
both the Company and other developers of homes and planned communities is
expected to generate further population growth. The Company anticipates that
this growth will create additional demand for its commercial and industrial
properties. Similarly, further development of the Company's commercial and
industrial properties is expected to generate employment, recreational and
entertainment opportunities and, therefore, to increase demand for the Company's
residential communities.
UTILITIES BUSINESS
The Company's utilities business provides for the treatment, distribution
and sale of water for public and private use and the disposal of wastewater. The
Company owns and operates 17 water utilities plants serving more than 42,000
customers and 12 wastewater treatment facilities serving more than 32,000
customers residing in seven communities, which include the Company's communities
of Poinciana, Florida and Rio Rico, Arizona. The Company also provides meter
reading and customer-related services to its own utilities operating units, as
well as to 26 unaffiliated companies and public utilities.
The Company believes that its utilities operations will benefit from
population growth from development by both the Company and other developers of
homes and planned communities within the areas which are serviced by the
utilities facilities. For the year ended December 31, 1996 and the nine months
ended September 30, 1997, the Company's utilities had EBITDA of $10.5 million
and $9.5 million, respectively.
DEVELOPMENT OF MID-PRICED HOMES AND COMMUNITIES
Prior to the third quarter of 1997, the Company's business plan emphasized
the construction and sale of mid-priced single-family homes. Although the
Company has implemented a new real estate strategy emphasizing potentially
higher profit-margin businesses, it intends to continue the construction and
sale of mid-priced homes, both on scattered lots and on contiguous parcels as
part of planned communities.
------------------------
Leon Levy, Chairman of the Board of Avatar and a general partner of Odyssey
Partners, L.P., a private investment partnership ("Odyssey"), has advised the
Company of his intention to purchase $20 million aggregate principal amount of
the Notes offered hereby, net of underwriting fees and commissions. At September
30, 1997, Mr. Levy owned approximately 3.0% of Avatar's Common Stock, and
Odyssey owned approximately 23.2% of Avatar's Common Stock.
Avatar, a Delaware corporation, is located at 255 Alhambra Circle, Coral
Gables, Florida 33134, and its
telephone number is (305) 442-7000.
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THE OFFERING
Securities Offered......... $100 million principal amount of % Convertible
Subordinated Notes due 2005 (the "Notes"), plus up
to an additional $15 million principal amount
issuable upon the exercise of the Underwriters'
over-allotment option.
Maturity................... , 2005.
Payment of Interest........ April 1 and October 1, commencing April 1, 1998.
Conversion................. The Notes are convertible into Common Stock of
Avatar at the option of
the holder at any time at or before maturity,
unless previously redeemed, at a conversion price
of $ per share, subject to adjustment in
certain events. See "Description of the
Notes -- Conversion Rights."
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of Avatar, at any time on or after
, 2001 at the redemption prices set
forth herein, together with accrued interest to the
date of redemption. See "Description of the
Notes -- Optional Redemption."
Repurchase at Holder's
Option..................... Upon the occurrence of a Change in Control (as
defined), holders of Notes may elect to require the
Company to repurchase their Notes, in whole or in
part, at a purchase price equal to 100% of the
principal amount thereof plus accrued and unpaid
interest through the date of repurchase. The term
Change in Control is limited to certain specified
transactions and does not include other events that
might adversely affect the financial condition of
Avatar or result in a downgrade in the credit
rating (if any) of the Notes. See "Risk
Factors -- Limitations on Repurchase of Notes Upon
a Change in Control" and "Description of the
Notes -- Certain Rights to Require Repurchase of
Notes."
Subordination.............. The Notes are subordinated to all present and
future Senior Indebtedness of Avatar and are
effectively subordinated to all indebtedness and
other liabilities of subsidiaries of Avatar. As of
September 30, 1997, Senior Indebtedness of Avatar
was $47.3 million, of which $33.0 million will be
repaid or retired with proceeds from the Offering,
and the aggregate amount of indebtedness and other
balance sheet liabilities of Avatar's subsidiaries
to which the Notes are effectively subordinated was
$116.2 million. See "Capitalization." The Indenture
will not restrict the ability of Avatar or its
subsidiaries to incur any indebtedness or
liabilities. See "Description of the
Notes -- Subordination" and "Risk Factors --
Subordination of Notes; Holding Company Structure."
Use of Proceeds............ Avatar will use the net proceeds from the Offering
to retire certain Senior Indebtedness, to fund real
estate development and acquisition activities, and
for working capital and general corporate purposes.
See "Use of Proceeds."
Market for Notes........... Application will be made to qualify the Notes for
quotation on Nasdaq.
Common Stock Trading....... The Common Stock is traded on The Nasdaq National
Market under the symbol "AVTR."
RISK FACTORS
For a discussion of certain factors that should be considered by
prospective purchasers in evaluating an investment in the Notes, see "Risk
Factors."
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Real estate revenues:
Homebuilding........................ $ 6,077 $ 7,268 $ 7,400 $ 13,260 $ 49,672 $ 34,412 $ 40,975
Other, including deferred gross
profit............................ 28,483 31,451 33,232 34,237 46,477 27,548 22,319
Real estate expenses.................. (44,900) (47,494) (48,954) (58,626) (91,939) (61,525) (66,308)
--------- --------- --------- --------- --------- --------- ---------
Real estate, net...................... (10,340) (8,775) (8,322) (11,129) 4,210 435 (3,014)
Utility revenues...................... 53,209 45,957 28,664 29,669 32,749 24,245 26,153
Utility operating expenses............ (36,772) (34,781) (24,651) (24,923) (25,505) (19,022) (19,207)
Utility interest expense -- direct.... (6,780) (5,832) (3,312) (3,031) (3,288) (2,427) (2,539)
Utility other expenses(1)............. (1,544) (1,261) (811) (811) (814) (611) (518)
--------- --------- --------- --------- --------- --------- ---------
Utility, net.......................... 8,113 4,083 (110) 904 3,142 2,185 3,889
Other revenues and expenses:
Gain on sale of subsidiaries.......... -- 21,822(2) -- -- -- -- --
Other revenues........................ 996 5,565 564 663 2,405 471 601
General and administrative expenses... (7,809) (8,620) (10,224) (9,210) (8,784) (6,660) (6,919)
Interest income and trading account
profit, net......................... 16,396 13,985 11,467 16,339 10,056 8,082 4,367
Corporate and real estate interest
expense............................. (11,698) (9,824) (7,848) (8,487) (8,765) (5,926) (6,204)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)..................... $ (6,744) $ 4,898 $ (14,621) $ (10,339) $ 1,040 $ (1,340) $ (6,581)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) per share............. $ (0.91) $ 0.50 $ (1.61) $ (1.14) $ 0.11 $ (0.15) $ (0.72)
Weighted average number of shares
outstanding......................... 7,403,848 9,840,251 9,095,102 9,095,102 9,095,102 9,095,102 9,095,102
OTHER DATA:
EBITDA(3)............................. $ 19,341 $ 39,840 $ 2,194 $ 7,053 $ 19,356 $ 11,728 $ 7,127
Number of residential units
sold(4)(5).......................... N/A N/A 101 243 444 362 472
Number of residential units
closed(6)........................... 73 91 86 150 293 192 316
Number of residential units in
backlog(4)(7)....................... N/A N/A 59 152 303 322 459
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, --------------------------
1996 ACTUAL AS ADJUSTED(8)
------------ -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................................................. $443,185 $449,251 $516,279
Notes, mortgages and other debt(9):
Corporate............................................................... 33,148 44,669 114,350
Real estate............................................................. 27,462 35,728 35,728
Notes collateralized by contracts and mortgage notes receivables........ 36,030 26,766 26,766
Utilities............................................................... 42,152 38,747 38,747
Stockholders' equity...................................................... 159,452 152,871 150,218
</TABLE>
(Notes on following page)
7
<PAGE> 10
- ---------------
(1) Other expenses relate to preferred stock dividends of utilities
subsidiaries.
(2) In 1993 the Company sold its midwest water utilities located in Indiana,
Missouri, Ohio, and Michigan for an aggregate of $62,000.
(3) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization (including amortization of intangible assets and
contributions in aid of construction). EBITDA is frequently used by
securities analysts and is presented here to provide additional information
about the Company's operations. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles ("GAAP"). EBITDA
should not be considered in isolation or as a substitute for net income
(loss), cash flow provided by operating activities or other income or cash
flow data prepared in accordance with GAAP or as a measure of a company's
profitability or liquidity.
(4) Data not available for years noted.
(5) Indicates the number of residential units for which an agreement of sale has
been executed during each period.
(6) Indicates the number of residential units for which a closing has taken
place during each period.
(7) Indicates the number of residential units sold which were subject to an
executed agreement of sale but had not closed as of the end of each period.
(8) Adjusted to reflect the issuance of Notes offered hereby and the application
of the net proceeds therefrom.
(9) Does not include debt related to discontinued vacation ownership operations
of $10,191 and $14,973 at December 31, 1996 and September 30, 1997,
respectively. Subject to the closing of a pending transaction to sell such
operations, such debt will be assumed by the purchaser of the Company's
vacation ownership operations.
8
<PAGE> 11
RISK FACTORS
An investment in the Notes offered by this Prospectus involves a high
degree of risk. In addition, this Prospectus contains forward-looking statements
that involve risks and uncertainties. Discussions containing such
forward-looking statements may be found in the material set forth under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business" as well as
elsewhere in this Prospectus. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in the Prospectus. Accordingly, prospective investors
should consider carefully the following risk factors, in addition to the other
information concerning the Company and its business contained in this
Prospectus, before purchasing the Notes.
HISTORY OF LOSSES; NEGATIVE CASH FLOW
The Company has had negative cash flows and negative ratios of earnings to
fixed charges and has incurred significant operating and net losses. Net losses
for 1994 and 1995 were approximately $14.6 million and $10.3 million,
respectively. As of September 30, 1997, the Company had an accumulated deficit
of $5.1 million. The Company historically has sold non-strategic assets to fund
its operating deficits and has utilized short-term borrowings to provide working
capital.
Real estate development requires investment of substantial capital, a
significant portion of which is expended before any revenues may be realized.
The Company does not anticipate that it will achieve or sustain profitability or
positive cash flows from operating activities until the year 2000. If the
Company cannot achieve operating profitability or positive cash flows from
operating activities, it may not be able to service the Notes or meet its other
debt service or working capital requirements.
NEW REAL ESTATE BUSINESS STRATEGY
The Company's recently adopted real estate business strategy is unproven,
with little or no operating history to serve as the basis for a prediction of
its probable success or failure. Implementation of the business strategy has
required, and will continue to require, among other things, the addition of new
management personnel and employees, as well as the development of additional
expertise by existing management personnel and employees and the expenditure of
significant amounts of capital. The loss of the services of certain members of
the Company's senior management team could have a material adverse effect on the
Company and, in particular, on the success of the new real estate business
strategy. In addition, the Company's ability to manage growth and to redeploy
its resources effectively will require it to continue to implement and improve
its operational, financial and sales systems. There can be no assurance that the
Company will be able to compete successfully with its current or potential
competitors or that the implementation of the new business strategy will be
successful.
REAL ESTATE, ECONOMIC AND OTHER CONDITIONS GENERALLY
The real estate industry is highly cyclical and is affected by changes in
national, global and local economic conditions and events, such as employment
levels, availability of financing, interest rates, consumer confidence and the
demand for housing and other types of construction. Real estate developers are
subject to various risks, many of which are outside the control of the
developer, including real estate market conditions (both where its communities
and homebuilding operations are located and in areas where its potential
customers reside), and changing demographic conditions, adverse weather
conditions and natural disasters, such as hurricanes, tornados and wildfires,
delays in construction schedules, cost overruns, changes in government
regulations or requirements, increases in real estate taxes and other local
government fees and availability and cost of land, materials and labor. The
occurrence of any of the foregoing could have a material adverse effect on the
financial condition of the Company.
9
<PAGE> 12
INTEREST RATES; MORTGAGE FINANCING
Certain purchasers of the Company's homes finance their purchases through
third-party lenders providing mortgage financing. In general, housing demand is
dependent on home equity, consumer savings and third-party financing and will be
adversely affected by increases in interest rates, unavailability of mortgage
financing, increasing housing costs and unemployment levels. The amount or value
of discretionary income and savings, including retirement assets, available to
home purchasers can be affected by a decline in the capital markets. If mortgage
interest rates increase or the capital markets decline or undergo a major
correction, the ability of prospective buyers to finance home purchases will be
adversely affected, which may have an adverse effect on the financial condition
of the Company.
GEOGRAPHIC CONCENTRATION
The Company's development activities are primarily focused on locations in
Florida and therefore depend to a significant degree on the levels of
immigration to Florida from outside the United States and in-migration to
Florida from within the United States in addition to other local market
conditions. The Company's geographic concentration and limited number of
projects may create increased vulnerability to regional economic downturns or
other adverse project-specific matters. A decline in the economy in Florida
could have an adverse effect on the financial condition of the Company.
DEVELOPMENT OF COMMUNITIES
The Company's communities will be developed over time. Therefore, the
medium- and long-term future of the Company will be dependent on the Company's
ability to develop and market future communities successfully. Committing the
financial and managerial resources to develop a community involves significant
risks. Before a community generates any revenues, material expenditures are
required, among other things, to obtain development approvals to construct
project infrastructure, recreation centers, model homes and sales facilities
and, where opportunities are suitable and appropriate, to acquire land. It
generally takes several years for a community development to achieve cumulative
positive cash flow. No assurance can be given that the Company will successfully
develop and market communities in the future. The inability of the Company to
develop and market its communities successfully and to generate positive cash
flows from such operations in a timely manner would have an adverse effect on
the ability of the Company to service its debt, including the Notes, and to meet
its working capital requirements.
ACCESS TO FINANCING
The Company's business is capital intensive and requires expenditures for
land and infrastructure development, housing construction and working capital.
Accordingly, the Company anticipates incurring additional indebtedness to fund
its real estate development activities. As of September 30, 1997, the Company's
total consolidated indebtedness was $163.5 million, of which $33.0 million will
be repaid or retired with proceeds from this Offering. There can be no assurance
that the amounts available from internally generated funds, cash on hand, the
Company's existing credit facilities, sale of non-strategic assets and the net
proceeds from the Offering will be sufficient to fund the Company's anticipated
operations. The Company may be required to seek additional capital in the form
of equity or debt financing from a variety of potential sources, including
additional bank financing and sales of debt or equity securities. No assurance
can be given that such financing will be available or, if available, will be on
terms favorable to the Company. If the Company is not successful in obtaining
sufficient capital to fund the implementation of its business strategy and other
expenditures, development projects may be delayed or abandoned. Any such delay
or abandonment could result in a reduction in sales and would adversely affect
the Company's future results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
10
<PAGE> 13
DEBT COVENANTS
Under its credit facilities the Company is subject to certain covenants
that restrict its operational and financial flexibility, including covenants
requiring the maintenance of certain financial ratios and restrictions on
distributions, indebtedness, liens, acquisitions and other significant actions.
Failure to comply with certain covenants would, among other things, permit the
Company's lenders to accelerate the maturity of the obligations thereunder and
could result in cross-defaults permitting the acceleration of debt under other
Company credit facilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
JOINT VENTURE RISKS
In connection with its new business strategy, the Company has entered into,
and in the future will continue to seek, joint venture arrangements with
entities whose complementary resources or other business strengths will
contribute to the competitive position of the Company. A joint venture may
involve special risks associated with the possibility that a venture partner (i)
at any time may have economic or business interests or goals that are
inconsistent with those of the Company, (ii) may take actions contrary to the
instructions or requests of the Company or contrary to the Company's policies or
objectives with respect to its real estate investments or (iii) could experience
financial difficulties.
Actions by a venture partner of the Company may have the result of
subjecting property owned by the joint venture to liabilities in excess of those
contemplated by the terms of the joint venture agreement or have other adverse
consequences. As a participant in certain joint ventures, the Company may be
jointly and severally liable for the debts and liabilities of the joint venture.
No assurance can be given that any joint venture arrangements entered into by
the Company will achieve the results anticipated or otherwise prove successful.
PERIOD-TO-PERIOD FLUCTUATIONS
The Company's real estate projects are long-term in nature. Sales activity
at the Company's newly planned retirement communities and other real estate
developments varies from period to period, and the ultimate success of any
community cannot be determined from results in any particular period or periods.
A community may generate significantly higher sales levels at inception (whether
because of local pent-up demand or other reasons) than it does during later
periods over the life of the community. Revenues and earnings of the Company
will also be affected by period-to-period fluctuations in the mix of product,
subdivisions and home closings among the Company's communities and conventional
homebuilding operations. Thus, the timing and amount of revenues arising from
capital expenditures are subject to considerable uncertainty. The inability of
the Company to manage effectively its cash flows from operations would have an
adverse effect on its ability to service its debt, including the Notes, and to
meet its working capital requirements.
COMPETITION
The Company's homebuilding, planned community development and other real
estate operations are subject to substantial existing and potential competition
(including increased competition from a number of national homebuilders that are
entering or expanding their presence in planned community development). Some of
the Company's current and potential competitors have longer operating histories
and greater financial, sales, marketing, technical and other competitive
resources. Existing and future competition may have an adverse effect on the
financial condition of the Company.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL CONSIDERATIONS
The Company's business is subject to extensive federal, state and local
regulatory requirements, the broad discretion that governmental agencies have in
administering those requirements and "no growth" or "slow growth" policies, all
of which can prevent, delay, make uneconomic or significantly increase the costs
of its developments. Various governmental approvals and permits are required
throughout the development process (to the extent they have not already been
obtained), and no assurance can be given as to the receipt (or timing of
receipt) of these approvals or permits. The incurrence of substantial compliance
costs and the imposition of
11
<PAGE> 14
delays and other regulatory burdens on the Company could have a material adverse
effect on the operations of the Company.
Furthermore, various federal, state and local laws subject property owners
or operators to liability for the costs of removal or remediation of certain
hazardous substances released on a property. Such laws often impose liability
without regard to whether the owner knew of, or was responsible for, the release
of the hazardous substances. The presence of such hazardous substance at one or
more of the Company's properties, and the requirement to remove or remediate
such substances, may result in significant cost to the Company.
SUBORDINATION OF NOTES; HOLDING COMPANY STRUCTURE
The Notes are subordinate in right of payment to all current and future
Senior Indebtedness of Avatar. Senior Indebtedness consists of all indebtedness
of Avatar, whether existing on or created or incurred after the date of the
issuance of the Notes, that is not made subordinate to or pari passu with the
Notes by the instrument creating the indebtedness. As of September 30, 1997,
Avatar had Senior Indebtedness in the amount of approximately $47.3 million,
which includes approximately $11.0 million outstanding under Avatar's $20.0
million credit facility. The Indenture does not limit the amount of additional
indebtedness, including Senior Indebtedness, which Avatar can create, incur,
assume or guarantee. Because the Notes are subordinated, in the event of
insolvency, bankruptcy, liquidation, reorganization, dissolution or winding up
of the business of Avatar or upon a default in payment with respect to any
Senior Indebtedness of Avatar or any other event of default with respect to such
indebtedness resulting in the acceleration thereof, the assets of Avatar will be
available to pay the amounts due on the Notes only after all Senior Indebtedness
of Avatar has been paid in full. See "Description of the
Notes -- Subordination."
Avatar is a holding company whose principal assets are the shares of
capital stock of its real estate and utility subsidiaries. Because Avatar does
not generate any operating revenues of its own, it depends on dividends,
advances and payments from its subsidiaries to fund its activities and meet its
cash needs, including its debt service requirements. The subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make funds
available therefor. Their ability to pay dividends or make other payments or
advances to Avatar will depend on their operating results and will be subject to
various business considerations, applicable state laws, restricted payments and
other debt covenants governing certain project financing arrangements of the
subsidiaries and, in the case of the water and wastewater utilities, government
regulations restricting payments of dividends and other distributions to parent
companies.
The Notes will be effectively subordinated in right of payment to all
existing and future indebtedness and liabilities of Avatar's subsidiaries. As of
September 30, 1997, the aggregate amount of indebtedness and other balance sheet
liabilities of Avatar's subsidiaries to which the Notes are effectively
subordinated was approximately $116.2 million, including $38.7 million of
indebtedness from utility operations. Consequently, in the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to Avatar's subsidiaries, the holders of any indebtedness of Avatar's
subsidiaries may be entitled to payment thereof from the assets of such
subsidiaries prior to the holders of any general unsecured obligation of Avatar,
including the Notes.
LIMITATIONS ON REPURCHASE OF NOTES UPON A CHANGE IN CONTROL
In the event of a Change in Control, each holder of Notes will have the
right, at the holder's option, to require Avatar to repurchase all or a portion
of such holder's Notes at a price equal to 100% of the principal amount thereof
plus accrued and unpaid interest to the date of repurchase. Avatar's ability to
repurchase the Notes upon a Change in Control may be limited by the terms of
Avatar's Senior Indebtedness and the subordination provisions of the Indenture.
Further, the ability of Avatar to repurchase Notes upon a Change in Control will
be dependent on the availability of sufficient funds and subject to compliance
with applicable securities laws. Accordingly, there can be no assurance that
Avatar will be able to repurchase the Notes upon a Change in Control. The term
"Change in Control" is defined to include only certain specified transactions
and does not include other events, such as a highly-leveraged business
combination not involving a Change in
12
<PAGE> 15
Control, that would adversely affect the financial condition of the Company or
result in a downgrade of any credit rating of the Notes.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE
Sale of substantial amounts of shares in the public market or the prospect
of such sale could adversely affect the market price of Avatar's Common Stock.
As of September 30, 1997, Avatar had 9,095,102 shares of Common Stock
outstanding, of which 6,705,097 shares are currently available for public sale
without restriction. Avatar's officers and directors and Odyssey, who
beneficially own an aggregate of 2,390,005 shares of Common Stock and an option
which will become exerciseable for the purchase of 45,000 shares of Common
Stock, have agreed not to sell, distribute, pledge, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, or encumber or
exercise registration rights with respect to such securities for 180 days after
the date of the Offering without the prior written consent of CIBC Oppenheimer
Corp. In its sole discretion and at any time without notice, CIBC Oppenheimer
Corp. may release all or any portion of the shares subject to these
restrictions. The Company intends to grant to Leon Levy registration rights with
respect to the Notes, the shares of Common Stock issuable upon conversion
thereof and all shares of Common Stock which he currently owns, excluding shares
held through his ownership or other interest in, or receivable upon liquidation
of, Odyssey. If such registration rights are exercised, a large number of shares
of Common Stock could be sold in the public market. Such sale (or the perception
that such sale could occur) could have an adverse effect on the market price for
Avatar's Common Stock. See "Underwriting."
ANTI-TAKEOVER ISSUES
The Board of Directors of Avatar may issue up to 5,000,000 shares of
Preferred Stock in the future without stockholder approval upon such terms as
the Board of Directors may determine. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying or
preventing a change in control of the Company without further action by the
stockholders. Avatar has no present plans to issue any shares of Preferred
Stock. Avatar is also subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law (the "DGCL"), which prohibits Avatar from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. The application of Section 203 of the DGCL also could have
the effect of delaying or preventing a change of control of the Company. In
addition, the Change in Control repurchase feature of the Notes may also, in
certain circumstances, discourage or make more difficult a sale or takeover of
the Company.
NO PRIOR MARKET FOR THE NOTES
Although the Company will apply to qualify the Notes for quotation on
Nasdaq, the Notes are a new issue of securities, have no established trading
market and may not be widely distributed. The Company has been advised by the
Underwriters that they currently intend to make a market in the Notes. However,
such entities are not obligated to do so and any market-making activity may be
discontinued at any time without notice. In addition, any such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act. Accordingly, no assurance can be given as to the liquidity of, or
trading market for, the Notes or that the Notes will not trade below their face
amount.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price for the Common Stock may be volatile and subject to
fluctuations resulting from news announcements concerning the Company or its
industry, general securities market conditions or other factors.
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds derived from the Offering are estimated to be
approximately $96.0 million ($110.6 million if the Underwriters' over-allotment
option is exercised in full). The net proceeds of the Offering will be used to
retire the $33.0 million aggregate principal amount of Avatar's 8% Senior
Debentures due 2000 and 9% Senior Debentures due 2000, and, together with
Avatar's existing cash and cash generated from operations, to fund real estate
development and acquisition activities and for working capital and general
corporate purposes.
Pending application, the net proceeds of the Offering will be invested in
short-term, high quality investments.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on The Nasdaq National Market. The following
table sets forth through December 8, 1997, the high and low prices for the
Common Stock as reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995
1st Quarter........................................................ 37 1/2 35 1/4
2nd Quarter........................................................ 37 3/4 35 1/2
3rd Quarter........................................................ 38 1/4 35
4th Quarter........................................................ 38 34 1/4
1996
1st Quarter........................................................ 40 1/2 32 5/8
2nd Quarter........................................................ 40 1/4 34 1/4
3rd Quarter........................................................ 34 3/4 29 1/2
4th Quarter........................................................ 32 1/2 30
1997
1st Quarter........................................................ 38 32
2nd Quarter........................................................ 34 3/8 30 3/8
3rd Quarter........................................................ 36 3/4 29 1/2
4th Quarter (through December 8, 1997)............................. 39 3/4 27 1/16
</TABLE>
On December 8, 1997, the closing price of the Common Stock was $27 1/2. The
number of record holders of Common Stock as of December 8, 1997 was 7,869. The
number of record holders may not be representative of the number of beneficial
owners because many shares are held by depositories, brokers or other nominees.
DIVIDEND POLICY
The Company does not currently pay cash dividends on its Common Stock. Its
current dividend policy is to retain earnings to support the growth of its
businesses. In addition, the Company is restricted from paying cash dividends
under the terms of certain of its loan agreements.
The terms of the Notes do not restrict the Company from paying dividends on
its Common Stock. However, under certain circumstances, distributions of cash or
property to holders of Common Stock may result in an adjustment in the
conversion price of the Notes. See "Description of the Notes."
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at September 30, 1997 (except as otherwise noted), and as adjusted
to give effect to the sale of the Notes.
This table should be read in conjunction with the Company's consolidated
financial statements, including the notes thereto, included elsewhere or
incorporated by reference in the Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NOTES, MORTGAGE NOTES AND OTHER DEBT:
CORPORATE:
Bank credit lines................................................... $ 14,350 $ 14,350
8% Senior Debentures due 2000, net of unamortized discount of
$750............................................................. 6,876 --
9% Senior Debentures due 2000, net of unamortized discount of
$1,903........................................................... 23,442 --
% Convertible Subordinated Notes due 2005.......................... -- 100,000
-------- -----------
Total corporate....................................................... $ 44,668 $ 114,350
REAL ESTATE:
Development and construction loans, interest rates ranging from 8%
to 10.5%(1)...................................................... $ 29,746 $ 29,746
Mortgage note obligations, interest rates ranging from 8.8% to 10%,
due from 1997 - 2002............................................. 5,982 5,982
Bank credit lines................................................... 26,766 26,766
-------- -----------
Total real estate..................................................... $ 62,494 $ 62,494
UTILITIES:
Bank credit lines................................................... $ 325 $ 325
Utilities first mortgage bonds due serially from 1997 - 2007,
interest rates ranging from 7.8% to 9.2%......................... 14,730 14,730
7.3% utilities senior notes due 2000 - 2010................. 18,000 18,000
Utilities promissory notes due 2002 - 2004.................. 5,692 5,692
-------- -----------
Total utilities....................................................... $ 38,747 $ 38,747
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 15,500,000 shares authorized, 12,715,448
issued........................................................... $ 12,715 $ 12,715
Additional paid-in capital.......................................... 207,271 207,271
Retained earnings (deficit)......................................... (5,142) (7,795)(2)
-------- -----------
214,844 212,191
Less cost of 3,620,346 treasury shares.............................. 61,973 61,973
-------- -----------
Total stockholders' equity....................................... 152,871 150,218
-------- -----------
Total capitalization........................................ $298,780 $ 365,809
======== =========
</TABLE>
- ---------------
(1) Does not include $15.0 million of debt related to the Company's discontinued
vacation ownership operations. Subject to the closing of a pending
transaction to sell such operations, such debt will be assumed by the
purchaser of such operations.
(2) The increased deficit reflects the write-off of the aggregate net
unamortized discount on the 8% and 9% Senior Debentures which will be repaid
with a portion of the net proceeds from the Offering.
15
<PAGE> 18
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
The following selected financial data for the five years ended December 31,
1996 are derived from the consolidated financial statements of the Company which
have been audited by Ernst & Young LLP, independent auditors. The financial data
for the nine month periods ended September 30, 1996 and 1997 are derived from
unaudited financial statements of the Company. The unaudited financial
statements include all adjustments, consisting of normal recurring adjustments,
which the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire year
ended December 31, 1997. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included herein and incorporated by reference. Such financial
information should also be read in conjunction with the Company's consolidated
historical financial statements (and accompanying notes and schedules) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Prospectus, the 1996 10-K and the September 30 10-Q.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Revenues:
Real estate sales................... $ 34,794 $ 39,997 $ 42,351 $ 48,217 $ 93,510 $ 60,373 $ 60,284
Deferred gross profit............... (234) (1,278) (1,719) (720) 2,639 1,587 3,010
Utilities revenues.................. 53,209 45,957 28,664 29,669 32,749 24,245 26,153
Interest income..................... 16,396 13,985 11,125 9,427 7,846 6,035 4,110
Gain on sale of subsidiaries........ -- 21,822(2) -- -- -- -- --
Trading account profit, net......... -- -- 342 6,912 2,210 2,047 257
Other revenues...................... 996 5,565 564 663 2,405 471 601
-------- -------- -------- -------- -------- -------- --------
Total revenues................. 105,161 126,048 81,327 94,168 141,359 94,758 94,415
Expenses:
Real estate expenses................ 44,900 47,494 48,954 58,626 91,939 61,525 66,308
Utilities expenses.................. 36,772 34,781 24,651 24,923 25,505 19,022 19,207
General and administrative
expenses.......................... 7,809 8,620 10,224 9,210 8,784 6,660 6,919
Interest expense.................... 18,478 15,656 11,160 11,518 12,053 8,353 8,743
Other expenses(3)................... 1,544 1,261 811 811 814 611 518
-------- -------- -------- -------- -------- -------- --------
Total expenses................. 109,503 107,812 95,800 105,088 139,095 96,171 101,695
Income (loss) from continuing
operations before income taxes.... (4,342) 18,236 (14,473) (10,920) 2,264 (1,413) (7,280)
Provision for income taxes.......... -- 12,762 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations........................ (4,342) 5,474 (14,473) (10,920) 2,264 (1,413) (7,280)
Extraordinary item:
Loss on extinguishment of 8%
debentures........................ (2,402) -- -- -- -- -- --
Cumulative effect of change in
method of accounting for income
taxes............................. -- (964) -- -- -- -- --
Cumulative effect of change in
method of accounting for
investments (net of income taxes
of $238).......................... -- 388 -- -- -- -- --
Discontinued operations(4):
Income (loss) from vacation
ownership operations, net of tax
expense........................... -- -- (148) 581 (1,224) 73 699
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................... $ (6,744) $ 4,898 $(14,621) $(10,339) $ 1,040 $ (1,340) $ (6,581)
======== ======== ======== ======== ======== ======== ========
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) per share........... $ (0.91) $ 0.50 $ (1.61) $ (1.14) $ 0.11 $ (0.15) $ (0.72)
Weighted average number of shares
outstanding....................... 7,403,848 9,840,251 9,095,102 9,095,102 9,095,102 9,095,102 9,095,102
OTHER DATA:
EBITDA(5)........................... $ 19,341 $ 39,840 $ 2,194 $ 7,053 $ 19,356 $ 11,728 $ 7,127
Ratio of earnings to fixed
charges(6)........................ 0.79 2.06 (0.18) 0.14 1.17 0.85 0.24
BALANCE SHEET DATA:
Cash (including restricted cash).... $ 4,253 $ 8,620 $ 6,037 $ 4,439 $ 8,046 $ 7,488 $ 5,039
Investments -- trading.............. 17,314 51,184 51,582 48,258 4,535 4,365 4,358
Total assets........................ 474,448 457,747 446,577 470,632 443,185 442,558 449,251
Notes, mortgages and other
debt(7)........................... 194,416 135,557 139,827 165,665 138,792 143,935 145,910
Stockholders' equity................ 144,639 183,372 168,751 158,412 159,452 157,072 152,871
</TABLE>
- ---------------
(1) The Company's consolidated financial statements as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996
have been reclassified to show the effect of discontinued operations for
which a disposition plan was adopted in the third quarter of 1997.
(2) In 1993 the Company sold its midwest water utilities located in Indiana,
Missouri, Ohio and Michigan for an aggregate of $62,000.
(3) Other expenses relate to preferred stock dividends of subsidiaries.
(4) Vacation ownership operations commenced in 1994, and the Company is
currently negotiating the sale of this business.
(5) EBITDA represents income (loss) before interest, income taxes, depreciation
and amortization (including amortization of intangible assets and
contributions in aid of construction). EBITDA is frequently used by
securities analysts and is presented here to provide additional information
about the Company's operations. EBITDA is not a measurement presented in
accordance with GAAP. EBITDA should not be considered in isolation or as a
substitute for net income (loss), cash flow provided by operating activities
or other income or cash flow data prepared in accordance with GAAP or as a
measure of a company's profitability or liquidity.
(6) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings represent pretax income from continuing operations plus fixed
charges and (ii) fixed charges consist of interest on all indebtedness,
including amortization of debt expense and discount relating to any
indebtedness, that portion of rental expense (one-fifth) that the Company
believes to be representative of interest, and preferred stock dividend
requirements of Avatar's subsidiaries. The Company's earnings were
insufficient to cover fixed charges, and the deficiencies in coverage
amounted to $4,300, $14,500 and $10,900 for the years ended December 31,
1992, 1994 and 1995, respectively, and $1,400 and $7,300 for the nine months
ended September 30, 1996 and 1997, respectively.
(7) Does not include debt related to discontinued vacation ownership operations
of $1,135, $6,931 and $10,191 at December 31, 1994, 1995 and 1996,
respectively, and $9,221 and $14,973 at September 30, 1996 and 1997,
respectively. Subject to the closing of a pending transaction to sell such
operations, such debt will be assumed by the purchaser of the Company's
vacation ownership operations.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, included
elsewhere or incorporated by reference in this Prospectus.
OVERVIEW
The Company is engaged in a number of real estate related businesses and in
the ownership and operation of water and wastewater utilities.
Since 1980 the Company has expended more than $150.0 million to improve its
land holdings by installing infrastructure, such as roads, sewers, landscaping,
utility lines and drainage. In addition, the Company has expended substantial
funds to build or improve golf courses, hotels, tennis courts, shopping centers
and other amenities on its properties.
Until 1994, through its national and international retail installment land
sales program, the Company was primarily engaged in the business of selling
lots. In 1993 the Company expanded into the homebuilding business, and, until
the third quarter of 1997, the Company's real estate business plan emphasized
the sale of individual homesites and the construction and sale of mid-priced
single family homes. This strategy increased annual closings of home sales from
86 in 1994 to 293 in 1996 and increased home sale revenues from $7.4 million in
1994 to $50.0 million in 1996. In 1996 the Company decided to terminate its
national and international retail installment land sales program. The Company is
still in the process of winding down this program and collecting related
receivables which, as of September 30, 1997, were approximately $45.0 million
and which collateralize debt of approximately $26.8 million.
While the Company intends to remain in the mid-priced homebuilding
business, the Company's new management has implemented a new real estate
business strategy to capitalize on its distinct competitive advantages and
emphasize higher profit margin businesses. Under its new strategy, the Company
intends to concentrate on development and management of active adult/retirement
and other planned communities, construction of custom and semi-custom homes and
development and acquisition of commercial and industrial properties. As a
consequence of implementing its new real estate business strategy, the Company
believes that its operations and the financial results thereof will change
significantly over the next several years. Accordingly, the results of
operations reflected in the historical financial statements may not be
indicative of the future results of operations of the Company.
RESIDENTIAL DEVELOPMENT. In 1993 the Company commenced residential
development activities at its properties in Poinciana and Cape Coral, Florida,
commenced planning for development of Harbor Islands in Hollywood, Florida, and
began preliminary plans for homebuilding programs in Rio Rico, Arizona.
Growth of the Company's homebuilding business is demonstrated by the
following operating results:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $7,400 $13,260 $49,672 $34,412 $40,925
Other data:
Number of units sold............ 101 243 444 362 472
Number of units closed.......... 86 150 293 192 316
Number of units in backlog...... 59 152 303 322 459
</TABLE>
18
<PAGE> 21
COMMERCIAL AND INDUSTRIAL LAND SALES. Prior to the third quarter of 1997,
the Company's policy was to sell commercial and industrial land at market prices
whenever possible. Under the new real estate business strategy, the Company
intends to develop land and lease and operate such developed properties rather
than to sell them. Revenues from commercial and industrial land sales declined
from $4.0 million in 1994 to $1.7 million in 1996. Future demand for commercial
and industrial land and facilities at the Company's properties is expected to
increase as the result of the development by both the Company and other
developers of homes and planned communities.
WATER AND WASTEWATER UTILITIES. The Company's utilities subsidiaries
provide water and wastewater treatment services to customers in Florida and
Arizona. From 1994 to 1996, annual revenues have increased by approximately $4.1
million or 14%. The Company also provides data processing, customer billing and
related services to affiliated and non-affiliated companies and public entities.
Growth of the Company's utilities is anticipated to come from increases in
the number of customers as its service areas become more fully developed and
from third-party management contracts in the Company's meter reading and billing
service business.
The following table sets forth revenues and income derived from water and
wastewater utilities for the years ended December 31, 1994, 1995 and 1996 and
for the nine months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................. $28,664 $29,669 $32,749 $24,245 $26,153
Approximate number of water
customers........................... 38,000 39,000 41,000 41,000 42,000
Approximate number of wastewater
customers........................... 30,000 31,000 32,000 31,000 32,000
Income (loss) before income taxes........ $ (210) $ 804 $ 3,042 $ 2,110 $ 3,814
Income before income taxes and
non-recurring expense.................. $ 1,324 $ 2,054 $ 3,892 $ 2,460 $ 3,814
</TABLE>
RESORT OPERATIONS. Resort operations are intended to enhance the value of
the Company's land in the communities in which they are located. Such
operations, which include the Cape Coral Golf and Country Club, the Poinciana
Golf and Racquet Club and the Rio Rico Resort and Country Club, have generated
increased revenues on an annual basis, from $13.2 million in 1994 to $16.1
million in 1996.
VACATION OWNERSHIP. While revenues from vacation ownership operations
increased from $1.5 million in 1994 to $11.3 million in 1996, these operations
are not considered by management to be a complementary component of the
Company's new business strategy. The Company is currently negotiating the sale
of the vacation ownership business for approximately $11.0 million in cash plus
the assumption by the buyer of approximately $15.0 million of associated debt.
As of September 30, 1997, the vacation ownership business is accounted for as a
discontinued operation.
RETAIL INSTALLMENT LAND SALES. Prior to 1997, the Company sold homesites
under retail land sales programs, which were terminated in the second quarter of
1996. Receivables, which collateralize debt of approximately $26.8 million, due
from such sales aggregated approximately $45.0 as of September 30, 1997 and are
payable over the next nine years. Revenues from these programs decreased from
$11.9 in 1994 to $4.0 million in 1996.
OTHER REAL ESTATE REVENUES. The Company's rental, leasing and other real
estate revenues, which are primarily generated through the lease of the
Company's community shopping centers and commercial operations in Cape Coral,
Poinciana and Rio Rico, the Tarpon Point Marina in Cape Coral, cable television
operations at Poinciana and property management services, have approximated $5.5
million annually since 1994.
19
<PAGE> 22
TRADING ACCOUNT PROFIT. From 1993 to the fourth quarter of 1997, the
Company invested unused funds in fixed-income and other debt securities. Prior
to 1997, trading account profit had declined due to the Company's use of the
principal of its trading account to fund operations and maintain and enhance its
land holdings. The Company has liquidated its trading account and used such
funds, net of related debt, as working capital.
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company 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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 AND 1995 1995 AND 1996 1996 AND 1997
------------- ------------- -------------------
INCREASE (DECREASE) INCREASE (DECREASE)
------------------------------- -------------------
CHANGE CHANGE CHANGE
------------- ------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Real estate sales....................... $ 5,866 $45,293 $ (89)
Deferred gross profit on homesite
sales................................. 999 3,359 1,423
Utilities revenues...................... 1,005 3,080 1,908
Interest income......................... (1,698) (1,581) (1,925)
Trading account profit, net............. 6,570 (4,702) (1,790)
Other................................... 99 1,742 130
-------- -------- -------
Total revenues..................... 12,841 47,191 (343)
EXPENSES
Real estate expenses.................... 9,672 33,313 4,783
Utilities expenses...................... 272 582 185
General and administrative expenses..... (1,014) (426) 259
Interest expense........................ 358 535 390
Other................................... -- 3 (93)
-------- -------- -------
Total expenses..................... 9,288 34,007 5,524
-------- -------- -------
Income from continuing operations....... 3,533 13,184 (5,867)
-------- -------- -------
(Loss) income from discontinued
operations............................ 729 (1,805) 626
-------- -------- -------
Net income.............................. $ 4,262 $11,379 $(5,241)
======== ======== =======
</TABLE>
The Company 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.
20
<PAGE> 23
Data from homebuilding operations for the nine months ended September 30,
1996 and 1997 and for the years ended December 31, 1994, 1995 and 1996 are
summarized below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
UNITS SOLD, NET
Number of units................. 101 243 444 362 472
Aggregate dollar volume......... $7,919 $39,917 $59,078 $47,755 $60,586
Average price per unit.......... $ 78 $ 164 $ 133 $ 132 $ 128
UNITS CLOSED
Number of units................. 86 150 293 192 316
Aggregate dollar volume......... $7,354 $12,989 $49,894 $34,358 $41,411
Average price per unit.......... $ 86 $ 87 $ 170 $ 179 $ 131
BACKLOG
Number of units................. 59 152 303 322 459
Aggregate dollar volume......... $5,050 $31,978 $41,349 $44,674 $60,524
Average price per unit.......... $ 86 $ 210 $ 136 $ 139 $ 132
</TABLE>
Data from the national and international retail land sales programs,
terminated in the second quarter of 1996, is set forth below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -----------------
1994 1995 1996 1996 1997
------- ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RETAIL LAND SALES OPERATIONS DATA
Sales volume........................ $11,866 $11,424 $3,998 $4,364 $ --
Cost of sales....................... 1,879 1,923 705 718 --
Selling expense..................... 6,440 6,697 3,773 3,522 --
Deferred gross profit............... (1,719) (720) 2,639 1,587 3,010
Interest income..................... 11,125 9,427 7,846 6,035 4,110
Loss on contract cancellations...... 1,281 1,257 1,035 856 872
Contract servicing expense.......... 729 768 785 623 437
Interest expense.................... 2,876 2,781 2,865 2,242 2,173
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1995 1996 1996 1997
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal amount of contracts and mortgage
notes receivable........................ $82,521 $61,534 $68,484 $45,021
Debt collateralized by contracts and
mortgages receivable.................... 28,630 36,030 32,284 26,766
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1996
Operations for the nine month period ended September 30, 1997 resulted in a
net loss of $6.6 million or $.72 per share, compared to a net loss of $1.3
million or $.15 per share for the same period of 1996. The decrease in operating
results was primarily attributable to a decrease in real estate operating
results and trading account profits as well as an increase in net interest
expense, partially offset by an increase in deferred gross profit recognition
and utilities operating results.
21
<PAGE> 24
The Company's real estate revenues for the nine months ended September 30,
1997 decreased $89,000 or 0.2%, while real estate expenses increased $4.8
million or 7.8% when compared to the same period of 1996. The decrease in real
estate revenues is generally a result of the reduced closings at the Company's
Harbor Islands project and the termination of the retail land sales program,
partially mitigated by the overall increase in closings of homes sold. The
increase in real estate expenses, when compared to the same period of 1996, is
essentially a result of increased selling expenses associated with the increased
homebuilding sales volume as well as nonrecurring expenditures associated with
product development at the Company's Poinciana project. The aggregate dollar
volume of homes sold increased from $47.8 million to $60.6 million or 26.8%.
Utilities revenues for the nine months ended September 30, 1997 increased
$1.9 million or 7.9% when compared to the same period of 1996, primarily due to
customer growth, the implementation of rate increases that were not effective
during the first nine months of 1996, and increased revenues from contract
services. Utilities expenses for the nine months ended September 30, 1997
increased $185,000 or 1.0% when compared to the same period of 1996, primarily
due to increases in general, and administrative expenses and operating expenses,
mitigated by a decrease in legal fees.
Interest income for the nine months ended September 30, 1997 decreased $1.9
million or 31.9% when compared to the same period for 1996. The decline in
interest income is attributable to lower average aggregate amounts outstanding
in the Company's contract and mortgage notes receivable portfolio. The Company's
contracts and mortgage notes receivable portfolio amounted to $45.0 million at
September 30, 1997, compared to $68.5 million at September 30, 1996.
Trading account profit, net, for the nine months ended September 30, 1997
decreased $1.8 million or 87.4% compared to the same period for 1996, primarily
due to the lower average balance of investment securities. Trading account
profit represents interest income and realized and unrealized gains and losses
related to the trading investment portfolio, net of commissions payable to
brokers.
General and administrative expenses for the nine month period ended
September 30, 1997 increased $259,000 or 3.9% compared to the same periods of
1996. The increase for the nine months ended September 30, 1997 is primarily
attributable to increased executive compensation, as well as an increase in the
accrual for incentive compensation.
Interest expense for the nine months ended September 30, 1997 increased
$390,000 or 4.7%, compared to the same period of 1996, primarily attributable to
a reduction in capitalized interest, as well as additional borrowings.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995 AND
YEAR ENDED DECEMBER 31, 1994
Operations for the years ended December 31, 1996, 1995 and 1994 resulted in
pre-tax income (loss) of $1.0 million, ($10.3 million) and ($14.6 million),
respectively. The improvement in income (loss) from continuing operations before
income taxes for 1996 compared to 1995 is primarily attributable to an increase
in real estate contribution margin, recognition of deferred gross profit on
homesite sales, and improved utilities contribution margins which was partially
mitigated by a decrease in net trading account profits. The decrease in pre-tax
loss during 1995 compared to 1994 is primarily attributable to an increase in
the pre-tax gain from net trading account profits of $6.6 million which was
partially mitigated by increased selling expenses and start-up costs
attributable to housing programs.
Gross real estate revenues increased $45.3 million or 93.9% during 1996
when compared to 1995 and $5.9 million or 13.9% during 1995 when compared to
1994. The increase in real estate revenues for 1996 when compared to 1995 is
primarily a result of increased homebuilding, the sale of the recreation
facilities and other assets at the Company's former Barefoot Bay community and a
bulk land sale at Leisure Lakes. Homebuilding revenues increased $36.4 million
or 274.6% in 1996 when compared to 1995. The improvement in homebuilding
revenues is primarily due to closings at the Company's Harbor Islands project,
as well as the other sites. Harbor Islands closed 70 units with sales volume of
$27.3 million during 1996 compared to no
22
<PAGE> 25
closings in 1995. Housing units closed, excluding Harbor Islands totaled 223
units with sales volume of $22.6 million compared to 150 units with a sales
volume of $13.0 million in 1995. The increase in real estate revenues for 1995
when compared to 1994 is primarily a result of increased closings. Housing
revenues increased $5.9 million or 79.2% in 1995 when compared to 1994. Real
estate expenses increased $33.3 million or 58.8% in 1996 when compared to 1995
and $9.7 million or 19.8% in 1995 when compared to 1994. The increase in real
estate expenses for 1996 is primarily a result of increased real estate revenues
and an inventory write down of the Company's Banyan Bay property. The increase
in real estate expenses for 1995 when compared to 1994 is primarily a result of
increased selling expenses and start-up costs attributable to increased housing
programs. Homebuilding margins for 1996 were comparable to those of 1995 and
1994.
The average selling price of housing units closed for 1996 was $170,000, an
increase of 95.0% when compared to 1995. This increase is due to closings at
Harbor Islands, which had an average selling price on closed units of $390,000
for 1996 compared to no closings in 1995. The 1995 average selling prices of
housing units closed were consistent with 1994 levels. The average selling price
of housing units in backlog of $136,000 at December 31, 1996 decreased by 35.0%
from 1995 prices due to the reduced number of sales in backlog at Harbor
Islands. The average selling price of housing units in backlog of $210,000 at
December 31, 1995 increased by 144.0% over 1994 prices due to sales at Harbor
Islands, which had an average sales price of $412,000.
Utilities revenues increased $3.1 million or 10.4% during 1996 when
compared to 1995 and $1.0 million or 3.5% during 1995 when compared to 1994.
Utilities expenses increased $582,000 or 2.3% during 1996 when compared to 1995
and $272,000 or 1.1% during 1995 when compared to 1994. Utilities revenues
increased as a result of rate increases, customer growth and increased contract
management operations. Utilities expenses increased correspondingly to the
customer growth.
Interest income decreased $1.6 million or 16.8% during 1996 when compared
to 1995 and $1.7 million or 15.3% during 1995 when compared to 1994. The
declines in interest income are primarily attributable to lower average
aggregate balances of the Company's contract and mortgage notes receivable
portfolio caused by collections, cancellations and reductions in new land sales.
The average balance of the Company's receivables portfolio was $72.3 million,
$90.7 million, and $106.8 million for 1996, 1995 and 1994, respectively.
Trading account profit, net, decreased $4.7 million for 1996 when compared
to 1995 and increased $6.6 million in 1995 when compared to 1994. Trading
account profit, net, represents interest income and realized and unrealized
gains and losses related to the trading investment portfolio, net of commissions
payable to investment advisors.
Other revenues for 1996 include a sale of water rights at Rio Rico for $1.6
million.
General and administrative expenses decreased $426,000 or 4.6% in 1996
compared to 1995 and $1.0 million or 9.9% in 1995 compared to 1994. The decrease
for 1996 compared to 1995 results primarily from a reduction in the accrual for
incentive compensation recorded for executive officers. The decrease for 1995
compared to 1994 results from reductions in the accrual for incentive
compensation recorded for executive officers and expenses related to a legal
settlement in 1994.
Interest expense increased $535,000 or 4.6% in 1996 when compared to 1995
and $358,000 or 3.2% in 1995 when compared to 1994. The increase in 1996 when
compared to 1995 is primarily due to an increase in interest expense in the
homebuilding operations, mitigated in part by a decrease in the outstanding
balance of notes, mortgage notes and other debt, as well as an increase in
capitalization of interest which totaled $4.0 million in 1996. The increase in
1995 is primarily due to the increase in the outstanding balance of notes,
mortgage notes and other debt, which was partially offset by capitalization of
interest associated with the development and construction costs of approximately
$3.2 million for 1995 and $1.6 million for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary business activities are capital intensive in nature.
Significant capital resources are required to finance homebuilding construction
in process, infrastructure for roads, water and wastewater utilities, selling
expenses and working capital needs, including funding of debt service
requirements, operating
23
<PAGE> 26
deficits and the carrying cost of land. The Company anticipates capital
expenditures totalling approximately $36.0 million for 1998. Of this amount,
approximately $16.0 million of the Company's total capital expenditures relates
to the Company's real estate business, primarily for infrastructure and
amenities. Approximately $20.0 million relates to the Company's utilities
businesses and will be funded by cash flow provided by the utilities businesses
and additional borrowings by the Company's utilities subsidiaries. The Company
intends to develop and manage several active adult/retirement communities that
are likely to require significant capital resources. In addition, the Company
anticipates that it will need to expand its utilities operations to accommodate
the population increases in the communities it serves.
Historically, the Company has funded operating deficits and its liquidity
requirements through the sale of non-strategic assets, homebuilding project
borrowings, utilities borrowings and general corporate borrowings. The Company
does not anticipate that its new real estate business strategy will achieve or
sustain profitability or positive cash flow until the year 2000 or later.
Accordingly, the Company will use the net proceeds of the Offering, the proceeds
of the sale of non-strategic assets, and real estate project borrowings to fund
the Company's operating deficits and the carrying cost of land.
At September 30, 1997 the Company's secured real estate lines of credit,
exclusive of timeshare credit facilities, amounted to $26.8 million all of which
were fully utilized. These real estate lines, which are secured by contracts and
mortgage receivables aggregating $45.0 million, mature with respect to $21.0
million in the second quarter of 1998 and $5.8 million in the second quarter of
2001. Corporate secured lines of credit were $23.4 million at September 30, 1997
and the unused and available portions were $9.0 million. One of the corporate
lines in the amount of $3.4 million was repaid in the fourth quarter of 1997.
The other corporate line in the amount of $20.0 million matures in the third
quarter of 1998.
At September 30, 1997, utilities unsecured lines of credit were $15.0
million and the unused and available portion was $14.7 million. The utilities
lines mature in the second quarter of 2000.
Management does not anticipate a significant increase in interest rates for
1998, and, accordingly, does not expect the Company's primary business
activities to be adversely affected by interest rates. A high interest rate
environment would be likely to adversely affect the Company's real estate
results of operations and liquidity because of its negative impact on the
housing industry and because certain of the Company's debt obligations are tied
to prevailing interest rates. Increases in interest rates affecting the
Company's utilities operations generally are passed on to the consumer through
the regulatory process.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share", which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share, disclose both primary and diluted
earnings per share and restate all prior periods. Under the new requirements,
primary earnings per share will be renamed basic earnings per share and will
exclude the dilutive effect of stock options. The impact of SFAS No. 128 on both
primary and diluted earnings per share is not expected to be significant.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the reporting of financial information from operating segments in annual and
interim financial statements issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures with respect to products and
services, geographic areas of operations and major customers. SFAS No. 131,
which is effective for fiscal years beginning after December 15, 1997, will have
no impact on the Company's consolidated results of operations, financial
position or cash flows. However, SFAS No. 131 may affect reported segments and
the Company is reviewing this matter.
24
<PAGE> 27
BUSINESS
GENERAL
The Company is engaged in two principal business activities: real estate
development and the ownership and operation of water and wastewater utilities.
The Company owns and develops land, primarily in various locations in Florida
and Arizona. Current and planned real estate operations include: the
development, sale and management of active adult/retirement communities; the
development and sale of single- and multi-family homes and communities; and the
development, leasing and management of improved commercial and industrial
properties.
The Company's substantial land holdings represent the potential for
residential development of 102,000 to more than 145,000 single- and multi-family
units. These land holdings include over 32,600 developed or developable acres,
of which 26,400 acres have been platted and/or zoned for the building of over
43,000 single-family homes and over 38,200 multi-family units, and approximately
6,200 acres of partially developed and developable land which have not been
platted on which the Company anticipates developing more than an additional
20,800 residential units. In addition, the Company owns over 3,000 acres of land
upon which over 42.7 million square feet of commercial/industrial property may
be built.
The Company's major land holdings are located in Poinciana (near Disney
World and Orlando), Cape Coral on Florida's west coast (near Fort Myers and
Naples), Ocala Springs in central Florida, Harbor Islands (one of the last large
undeveloped properties along the Intracoastal Waterway on Florida's east coast
near Ft. Lauderdale), and Rio Rico, south of Tucson, Arizona.
Utilities operations include the purification and distribution of water and
the treatment and disposal of wastewater through plants in Florida and Arizona
and contract management services for affiliated and unaffiliated water and
wastewater utilities.
The Company's assets totalled over $449.0 million as of September 30, 1997.
NEW REAL ESTATE BUSINESS STRATEGY
During the third quarter of 1997, new management of the Company began
implementing a real estate business strategy designed to capitalize on the
Company's competitive strengths and current and projected demographic trends in
Florida and Arizona and which focuses on real estate businesses which have
potentially higher profit margins.
STRATEGY. The Company's new real estate business strategy is focused on
three primary areas:
- Development and management of active adult/retirement communities;
- Development of upscale custom and semi-custom homes and communities;
and
- Development of its commercial and industrial properties.
COMPETITIVE ADVANTAGES. The Company believes that it has four principal
competitive advantages:
- It owns large contiguous tracts of land.
- Its land holdings are substantially zoned and/or platted, are either
exempt from applicable regulatory requirements or such regulatory
requirements have been substantially fulfilled, and have overall
vesting with regard to costly and time-consuming regulatory and
growth management requirements such as concurrency, development of
regional impact studies and regulatory planning and environmental
permitting.
- Its extensive land holdings are substantially debt-free.
- It has expended more than $150.0 million on land infrastructure
improvements, including roads, drainage and utilities installations,
and has invested substantial funds in the development of
25
<PAGE> 28
amenities, such as parks and other open areas, club houses, golf courses,
swimming pools, tennis courts, hotels, shopping centers and marinas.
DEMOGRAPHIC TRENDS. The Company believes that it will benefit from a
number of favorable long-term trends in the geographic areas in which the
Company's land holdings are located. Such trends include:
Projected Population Growth
- Florida ranks as the fourth most populous state; it is third in
total job creation. (Arizona State University survey).
- Florida is projected to become the third most populous state after
California and Texas, surpassing New York by 2015. (U.S. Census
Bureau).
- By 2025 Florida's population is projected to increase by
approximately 6.0 million, or 41.0%, the majority of which is
attributable to immigration and in-migration. (U.S. Census Bureau).
- The bulk of the Company's homebuilding activities is concentrated in
five counties in central and southern Florida which have averaged
approximately 14.0% annual growth in population since 1990. (U.S.
Census Bureau).
- Arizona is projected to be ranked sixth among the states in terms of
the largest net population increase and among the 10 fastest growing
states ranked by percentage population growth for the period from
1995 to 2025. (U.S. Census Bureau).
Retirement Age Demographics
- Aging of the "baby-boom" generation should increase demand for
amenitized pre-retirement and retirement communities.
Growth of Orlando as a Business and Entertainment Center
- Orlando is one of the fastest growing major markets in the United
States, driven primarily by its central location in Florida, dynamic
tourist industry and relatively low cost of living. (Melaniphy &
Associates). The Company's Poinciana community is located just 21
miles from Orlando and nine miles from Disney World.
Latin American Commerce
- Florida and Arizona have benefited economically from the growth in
commerce between the U.S. and Latin America.
The Company's new real estate strategy focuses on three primary businesses:
DEVELOPMENT AND MANAGEMENT OF ACTIVE ADULT/RETIREMENT COMMUNITIES
A substantial portion of the Company's land holdings is in areas where
management believes there is significant opportunity to develop active
adult/retirement communities. The Company owns more than 10,600 acres in several
large contiguous parcels which are entirely debt-free and which it believes are
suitable for the development of active adult/retirement communities, and upon
which an estimated 36,200 units may be built.
To assist in the development of its active adult/retirement communities, in
October 1997, the Company entered into a consulting contract with H. Irwin Levy,
the founder of the Century Village concept of active adult/retirement
communities, and acquired an option to purchase the rights to the Century
Village name. At the same time, the Company hired the entire Century Village
executive management team: the Chief Operating Officer, the Chief Financial
Officer, and the heads of marketing and construction. Century Village is one of
the nation's leading developers of active adult/retirement communities.
Collectively, these executives have been responsible for the development of
approximately 50,000 housing units in approximately 20 communities, including
four Century Village communities located in southeast Florida. As an incentive
to establish and grow the Company's active adult/retirement community business,
these executives were granted
26
<PAGE> 29
stock appreciation rights which are based on the increase in the fair market
value of the common stock of the Company's newly-formed subsidiary, Avatar
Retirement Communities, Inc.
Over the next five years, the Company intends to create a brand name in the
active adult/retirement community business and to distinguish its active
adult/retirement communities from those of other developers by establishing a
consumer product-oriented approach. Specifically, the Company intends to develop
resort-like communities with a broad array of amenities and entertainment,
sports, recreational, social, educational and cultural activities. Each
community will be designed and operated as a lifestyle experience developed for
its particular location and market. The Company believes that its extensive land
holdings will enable it to offer its customers more land and amenities than its
competitors. Through the use of market research and other marketing techniques,
the Company intends to identify those amenities, home styles and features,
community layouts and other factors that will attract buyers. In addition,
management seeks to identify additional sites which are suitable for development
of active adult/retirement communities and anticipates that it will acquire such
sites for cash or stock or develop them through joint venture or management
arrangements.
The Company is formulating a plan to develop its first active
adult/retirement community at Poinciana. The Company anticipates obtaining
appropriate land use approvals without any significant delay and commencing
construction in mid-1999, with the first closings of home sales scheduled to
occur during mid-2000. It is expected that development of active
adult/retirement communities at Cape Coral, Ocala Springs and Rio Rico will
commence approximately 6 to 18 months after the initial phase of development at
Poinciana is completed.
The following is a description of the locations where the Company initially
plans to develop active adult/retirement communities:
POINCIANA, FLORIDA: At Poinciana, located in central Florida approximately
21 miles south of Orlando and ten miles from Disney World, the Company has
approximately 18,000 acres of land, of which at least 4,300 acres of large
contiguous entirely debt-free parcels are suitable for active adult/retirement
community development of at least 15,000 units.
From 1990 to 1996, Poinciana experienced population growth of more than
332% and is one of Florida's fastest growing master-planned communities.
Management believes that Poinciana should remain a growing market for real
estate development due to the rapid growth of Orlando as a business and
entertainment center.
In addition to the 4,300 acres planned for active adult/retirement
community development, the Company owns more than 1,900 acres of land for
residential development and approximately 1,900 acres of land zoned and/or
planned for industrial and commercial development of up to 28.9 million square
feet.
Recreational facilities owned and operated by the Company at Poinciana
include a golf and racquet club with a swimming pool, restaurant, 18-hole Devlin
Von-Hagge championship golf course, tennis courts, a community center and a
series of nature walks and trails. At Poinciana, the Company also owns and
operates a cable television subsidiary and water and wastewater facilities.
CAPE CORAL, FLORIDA: At Cape Coral, located on Florida's west coast
several miles from Fort Myers, the Company owns approximately 3,900 acres, of
which approximately 700 acres are suitable for an active adult/retirement
community development of at least 3,000 units.
Cape Coral is a 60,700-acre, canal-laced community in southwest Florida,
which has experienced rapid population growth. Since its incorporation in 1970,
the city's population has grown from 11,470 to 91,560 as of September 1997.
The Company owns 5,300 single-family homesites and 400 acres zoned for
commercial and industrial development into as much as 6.1 million square feet.
This community has experienced job growth of over 4% annually since 1990
(Florida State Department of Economic Development) and was recognized as one of
Money Magazine's top spots in its "Best Places to Live in America" in its 1997
annual survey.
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<PAGE> 30
The Company's construction activities in Cape Coral include gated and
waterfront communities, featuring such high-end amenities as private yacht
mooring, with direct deep water access to the Gulf of Mexico. Recreational
facilities at Cape Coral include two marinas: the 175-slip Tarpon Point Marina
with dockmaster facilities, and the Camelot Marina which, upon completion, will
include 76 boat slips. Other amenities owned and operated by the Company include
the recently renovated Cape Coral Golf and Tennis Resort, featuring an 18-hole
championship golf course, a 9-hole executive golf course, eight tennis courts
and a 100-room hotel.
OCALA SPRINGS, FLORIDA: At Ocala Springs, located in north-central Florida
five miles northeast of Ocala in Marion County, Florida, the Company owns
approximately 4,600 acres of land, of which approximately 4,200 acres would
accommodate an active adult/retirement community of at least 14,700 units. The
remaining 400 acres would be available for development of a golf course,
recreational facilities and up to 2.9 million square feet of commercial and
industrial facilities.
RIO RICO, ARIZONA: At Rio Rico the Company owns approximately 16,000 acres
of land, of which approximately 1,500 acres represent an opportunity to develop
an active adult/retirement community of approximately 3,500 units.
Of the Company's land holdings, 8,900 acres are developed or developable
for a variety of uses, including the 1,500 acres considered suitable for an
active adult/retirement community, as well as approximately 300 acres designated
for development of commercial and industrial facilities of up to 4.7 million
square feet.
The Company owns and operates a 180-room hotel complex, which was rated a
4-Diamond resort by the American Automobile Association, an 18-hole Robert Trent
Jones designed championship golf course and a swim and racquet club.
DEVELOPMENT OF UPSCALE CUSTOM AND SEMI-CUSTOM HOMES AND COMMUNITIES
Certain of the Company's land holdings are suitable for development of
upscale custom and semi-custom homes and communities. The Company estimates that
approximately 2,000 upscale homes may be developed on its homesites which are
located along or near fresh or salt water. The Company has targeted custom and
semi-custom homebuilding as an important component of its new real estate
strategy because this business has higher profit margins than the sale of
mid-priced single-family homes and because the Company believes that it
possesses the requisite levels of technical expertise and experience in upscale
and custom homebuilding.
In order to expand its upscale homebuilding business, the Company recently
acquired certain assets of Brookman-Fels, a well-known regional developer of
custom and semi-custom homes and single-family residential communities in south
Florida, and entered into employment contracts with its three principals,
Jonathan Fels, Michael Levy and Bernard Offenberg. Brookman-Fels is one of south
Florida's leading custom homebuilders and a winner of many national design
awards, including being named one of America's Best Builders by the National
Association of Homebuilders in 1994. Founded in 1980, Brookman-Fels was
responsible for developing some of south Florida's most successful upscale
communities such as Oak Hammock, Arboretum, The Sanctuary and Treasure Trove. In
addition, Brookman-Fels has gained recognition for building single-family luxury
homes in such upscale south Florida areas as Pinecrest, Old Cutler, Cocoplum,
Snapper Creek, Miami Beach, Plantation Acres and Weston's Windmill Ranches.
Brookman-Fels has developed more than 600 single-family homes, representing over
$250.0 million in sales. In addition, the Company recently employed Michael
Greenberg, a former executive of Toll Brothers, a national homebuilder. Jonathan
Fels, Michael Greenberg, Michael Levy and Bernard Offenberg constitute the
senior management team of the Company's homebuilding business.
The Company is developing upscale home communities at its Harbor Islands
and Cape Coral properties. As part of its long-term business plan, the Company
also expects to acquire additional sites for cash or stock to build upscale
homes and communities or to develop such sites through joint ventures and
management arrangements.
HARBOR ISLANDS, FLORIDA: Harbor Islands is a gated, master-planned boating
and tennis community, located along the Intracoastal Waterway in the City of
Hollywood, Florida. The community encompasses
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<PAGE> 31
approximately 192 acres and is one of the largest undeveloped tracts of land on
the Intracoastal Waterway in south Florida. When completed, Harbor Islands will
consist of distinctive, separate Mediterranean-style villages on three connected
islands. The community includes 30 acres conveyed to the City of Hollywood for
future parks. Community amenities include a clubhouse with fitness center, pool,
jacuzzi and lighted tennis courts and, when completed, will also include a
196-boat slip marina and yacht club.
The property is currently under development, with 94 semi-custom homes
having been built as of September 30, 1997, and another 18 homes under
construction. The Company has zoning permits for up to 2,400 residential units,
including single-family homes, town-homes, villas and mid- and high-rise
condominium units. It is anticipated that homes will be priced in the $275,000
to over $1.0 million range.
CAPE CORAL, FLORIDA: The Company's land holdings include approximately
1,500 homesites, located along or near fresh or salt water, which are ideally
suited for upscale homes. Homes priced in excess of $200,000 are currently being
developed by the Company.
DEVELOPMENT OF COMMERCIAL AND INDUSTRIAL PROPERTIES
The development of commercial and industrial properties is a significant
element in the Company's long-term business strategy. The Company owns over
3,000 acres of land which are zoned and/or planned for over 42.7 million square
feet of commercial and industrial property. A substantial portion of the
Company's commercial property is located in areas of Florida which have
historically experienced, and are projected to continue to experience, high
rates of population growth. In addition, the development by both the Company and
other developers of homes and planned communities is expected to generate
further population growth. The Company anticipates that this growth will create
additional demand for its commercial properties. Similarly, further development
of the Company's commercial and industrial properties is expected to generate
employment, recreational and entertainment opportunities and, therefore,
increased demand for the Company's residential communities.
POINCIANA: The Company owns approximately 1,900 acres zoned and/or planned
for the development of up to 28.9 million square feet of commercial and
industrial property in Poinciana. As central Florida continues to experience a
business expansion and low industrial vacancy rates, the Company's Poinciana
Office and Industrial Park is well located to attract light manufacturing and
distribution facilities. With over 1.2 million square feet of office and
industrial space currently under-roof, 700 acres of the 1,200-acre park remain
available for future development.
CAPE CORAL: In Cape Coral, the Company owns over 400 acres suitable for
the development of up to 6.2 million square feet of commercial and industrial
space. The Company's existing commercial operations include a 70,000 square foot
neighborhood shopping center, which was 98.0% occupied as of September 30, 1997.
RIO RICO: In Rio Rico, the Company has developed the South Industrial
Park, a one million square foot industrial park which houses more than 40
commercial and industrial enterprises. Another 300 acres remain available for
the development of up to 4.7 million square feet of commercial and industrial
space.
Such properties may be developed through internal operations or through
joint ventures with third parties. In addition, the Company may acquire
additional land holdings for development of commercial and industrial properties
or developed or partially developed commercial or industrial properties.
OTHER REAL ESTATE ASSETS
The Company owns additional real estate that includes more than 9,800 acres
which are not currently considered primary properties for future development.
These properties (listed below) may be available for sale unless changing
circumstances indicate development would benefit the Company's operations.
GOLDEN GATE, FLORIDA: The Company's land holdings in Golden Gate City,
located just east of Naples, Florida includes 42 homesites, 48 acres of land
zoned for multi-family use and 12 acres of commercially zoned
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<PAGE> 32
land. Remaining land holdings at Golden Gate Estates and Golden Gate Acres
consist of 144 homesites and over 9,000 undeveloped acres.
BANYAN BAY, FLORIDA: Located in Marion County, along the St. Lucie River,
this property consists of 250 acres suitable for the development of a
water-oriented planned community.
WOODLAND HILLS, CALIFORNIA: This 350-acre tract of land is located in the
mountains of northwestern Los Angeles County. The land is planned for 59 luxury
homesites.
------------------------
The chart on the following page summarizes the Company's land holdings as
of September 30, 1997:
30
<PAGE> 33
AVATAR HOLDINGS INC.
SUMMARY TABLE OF DEVELOPMENT SITES
(NUMBERS EXPRESSED IN ACRES EXCEPT FOR REFERENCES TO POTENTIAL UNITS)
<TABLE>
<CAPTION>
PARTIALLY
DEVELOPED AND RESIDENTIAL
LOCATION TOTAL DEVELOPED (A) DEVELOPABLE UNDEVELOPABLE DEVELOPED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
POINCIANA, FLORIDA(C)
(21 miles south of Orlando and 10 miles
south of Walt Disney World).............. 18,256 2,675 5,434 10,147 1,893
CAPE CORAL, FLORIDA(D)
(7 miles west of Fort Myers and 32 miles
north of Naples)......................... 3,976 2,485 1,238 253 2,192
OCALA SPRINGS, FLORIDA
(5 miles northeast of Ocala)............... 4,663 4,663
RIO RICO, ARIZONA(E)
(51 miles south of Tucson)................. 16,184 4,957 3,965 7,262 4,670
BANYAN BAY, FLORIDA
(Marion County)............................ 250 250
HARBOR ISLANDS(F)
(Hollywood, Florida)....................... 169 83 43 43 77
BAREFOOT BAY, FLORIDA
(midway between Vero Beach and
Melbourne)............................... 124 23 98 3 16
GOLDEN GATE CITY, ESTATES AND ACRES, FLORIDA
(7 miles east of Naples)................... 9,214 192 9,022 180
LEISURE LAKES, FLORIDA
(5 miles northwest of Lake Placid)......... 201 198 3 198
WOODLAND HILLS, CALIFORNIA
(Northwestern Los Angeles County).......... 349 349
OTHER FLORIDA PROPERTIES.................... 2,510 2,510
------ ------ ------ ------ -----
TOTALS...................................... 55,896 10,613 25,065 20,218 9,226
<CAPTION>
RESIDENTIAL
PARTIALLY DEVELOPED POTENTIAL UNITS (B) COMMERCIAL/INDUSTRIAL
LOCATION AND DEVELOPABLE (RANGE) DEVELOPED/DEVELOPABLE(G)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
POINCIANA, FLORIDA(C)
(21 miles south of Orlando and 10 miles
south of Walt Disney World).............. 4,322 44,345 - 51,437 782 1,112
CAPE CORAL, FLORIDA(D)
(7 miles west of Fort Myers and 32 miles
north of Naples)......................... 1,124 11,517 - 16,717 293 114
OCALA SPRINGS, FLORIDA
(5 miles northeast of Ocala)............... 4,279 14,700 384
RIO RICO, ARIZONA(E)
(51 miles south of Tucson)................. 3,944 23,679 - 51,864 287 21
BANYAN BAY, FLORIDA
(Marion County)............................ 250 876 - 2,754
HARBOR ISLANDS(F)
(Hollywood, Florida)....................... 43 1,703 - 2,303 6
BAREFOOT BAY, FLORIDA
(midway between Vero Beach and
Melbourne)............................... 64 353 - 397 7 34
GOLDEN GATE CITY, ESTATES AND ACRES, FLORIDA
(7 miles east of Naples)................... 9,022 4,727 12
LEISURE LAKES, FLORIDA
(5 miles northwest of Lake Placid)......... 3 281
WOODLAND HILLS, CALIFORNIA
(Northwestern Los Angeles County).......... 349 59
OTHER FLORIDA PROPERTIES....................
------ ----------------- ----- -----
TOTALS...................................... 23,400 102,240 - 145,239 1,387 1,665
</TABLE>
Notes:
(A) Developed acreage is defined as land which has infrastructure
improvements, including roads and utility installations.
(B) Potential units represents the aggregate of single and multi-family zoned
homesites, plus unzoned acreage at a single family conversion factor of
3.5 for average potential units and a multi-family conversion factor of
11.0 for average potential units.
(C) Avatar-owned amenities include: The Poinciana Golf and Racquet Club,
featuring a Bruce Devlin Robert Von Hagge designed par 72, 18-hole
championship golf course, a driving range, putting greens, half-way house
and pro shop, a full-service restaurant, banquet and meeting rooms. Other
amenities include an olympic-size swimming pool, lighted Har-Tru and hard
tennis courts, shuffleboard, volleyball courts, pool bar, grill and
children's playground.
(D) Avatar-owned amenities include: The 100 room Cape Coral Golf and Tennis
Resort, which features a recently renovated, Dick Wilson designed, 18
hole championship golf course, 8 lighted Har-Tru tennis courts, heated
pool with pool bar and grill. Other amenities are a 9-hole executive golf
course, the 175-slip Tarpon Point Marina with dockmaster facilities and
the Camelot Marina.
(E) Avatar-owned amenities include: The 4-Diamond rated 180 room Rio Rico
Resort, which features a Robert Trent Jones Sr. championship golf course,
a full pro-shop, driving range, and putting green. The recently renovated
resort also includes a tennis center with lighted courts, horseback
riding, a heated olympic size pool, sauna, jacuzzi and fitness center,
dining room, lounge and banquet/meeting facilities.
(F) Amenities include: Swimming pool, tennis courts, recreation center, and
fitness center.
(G) Commercial and industrial properties at Poinciana, Cape Coral, Ocala
Springs and Rio Rico are developed or developable into up to 28.9
million, 6.2 million, 2.9 million and 4.7 million square feet,
respectively.
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<PAGE> 34
UTILITIES BUSINESS
The Company's utilities business provides for the treatment, distribution
and sale of water for public and private use and the disposal of wastewater. The
Company owns and operates 17 water utilities plants serving more than 42,000
customers and 12 wastewater treatment facilities serving more than 32,000
customers residing in seven communities, which include the Company's communities
of Poinciana, Florida and Rio Rico, Arizona. The Company also provides meter
reading and customer-related services to its own utilities operating units, as
well as to 26 unaffiliated companies and public utilities.
The Company believes that its utilities operations will benefit from
population growth from development by both the Company and other developers of
homes and planned communities within the areas which are serviced by the
utilities facilities. For the year ended December 31, 1996 and the nine months
ended September 30, 1997, the Company's utilities had EBITDA of $10.5 million
and $9.5 million, respectively.
DEVELOPMENT OF MID-PRICED HOMES AND COMMUNITIES
Prior to the third quarter of 1997, the Company's business plan emphasized
the construction and sale of mid-priced single-family homes. In 1996, the
Company sold 293 homes, generating revenues of $50.0 million. The majority of
these home sales were mid-priced single family homes. Sales of mid-priced homes
represented 45.0% of revenues in 1996. Although the Company has implemented a
new real estate strategy emphasizing potentially higher profit-margin
businesses, it intends to continue the construction and sale of mid-priced
homes, both on scattered lots and on contiguous parcels as part of planned
communities.
POINCIANA, FLORIDA: Housing sales at Poinciana during 1996 totalled 269
units. Through the third quarter of 1997, sales were 288 units.
CAPE CORAL, FLORIDA: At Cape Coral the Company sold 97 housing units
during 1996 and 102 units through the third quarter of 1997.
RIO RICO, ARIZONA: Housing programs which commenced at Rio Rico during
1996 resulted in sales of 31 units by year end and 49 units through the third
quarter of 1997.
OCALA SPRINGS, FLORIDA: The Company's plans for its 4,600-acre Ocala
Springs property provide for development of an active adult/retirement community
of approximately 14,700 units, some of which may be converted to conventional
primary housing depending upon market demand.
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<PAGE> 35
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The following table sets forth the Directors and executive officers of
Avatar and certain consultants, members of management, and other key personnel
of Avatar's subsidiaries.
<TABLE>
<CAPTION>
NAME AGE POSITION(1) OFFICER SINCE
- ---------------------------- --- ------------------------------------------- ----------------------
<S> <C> <C> <C>
AVATAR EXECUTIVE OFFICERS
Leon Levy................... 72 Director and Chairman of the Board 1981
Gerald D. Kelfer............ 52 Chief Executive Officer; President; Vice 1997
Chairman of the Board; and Director
Dennis J. Getman............ 53 Executive Vice President and General 1981
Counsel
Charles L. McNairy.......... 51 Executive Vice President; Treasurer and 1985
Chief Financial Officer
Juanita I. Kerrigan......... 51 Vice President and Secretary 1973
G. Patrick Settles.......... 48 Vice President and Assistant General 1983
Counsel
Lawrence L. Colditz......... 33 Controller 1995
RETIREMENT COMMUNITIES KEY
PERSONNEL
H. Irwin Levy............... 70 Director and Consultant -- Avatar 1997(2)
Retirement Communities, Inc.
Michael S. Rubin............ 54 Director and President -- Avatar Retirement 1997
Communities, Inc.
Jack Jaiven................. 51 Executive Vice President; Treasurer and 1997
Chief Financial Officer -- Avatar
Retirement Communities, Inc.
Michael A. Rich............. 51 Executive Vice 1997
President -- Marketing -- Avatar Retirement
Communities, Inc.
James A. Geddes............. 59 Executive Vice President -- Construction -- 1997
Avatar Retirement Communities, Inc.
HOMEBUILDING KEY PERSONNEL
Jonathan E. Fels............ 45 President -- Avatar Properties Inc. and 1997
Brookman-Fels Communities, Inc.
Michael Greenberg........... 43 Executive Vice President -- Avatar 1997
Properties Inc.
Michael Levy................ 39 Executive Vice President and Chief 1997
Operating Officer -- Avatar Properties Inc.
and Brookman-Fels Communities, Inc.
Bernard Offenberg........... 46 Vice President -- Avatar Properties Inc. 1997
and Brookman-Fels Communities, Inc.
OTHER AVATAR DIRECTORS DIRECTOR SINCE
Edwin Jacobson.............. 68 Director 1992
Milton Dresner.............. 72 Director 1995
Leon T. Kendall............. 69 Director 1983
Martin Meyerson............. 75 Director 1981
Gernot H. Reiners........... 55 Director 1997
Kenneth T. Rosen............ 49 Director 1994
Fred Stanton Smith.......... 69 Director 1980
Henry King Stanford......... 81 Director 1980
</TABLE>
- ---------------
(1) Unless otherwise indicated, each person is an officer or Director of Avatar.
(2) Indicates year in which Mr. Levy became a Director of and consultant to
Avatar Retirement Communities, Inc.
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<PAGE> 36
LEON LEVY has served as Chairman of the Board of Avatar since January 1981.
In addition, he is a General Partner of Odyssey He has also served as Chairman
of the Board of the New York-based Oppenheimer Funds since December 1994;
Chairman of the Board of Oppenheimer Management Corp. from 1974 to 1985; and
Director of S.G. Warburg & Co., Ltd. (Jersey Funds) from February 1983 to
October 1996.
GERALD D. KELFER has served as President of Avatar since February 1997;
Chief Executive Officer since July 1997; Vice Chairman of the Board of Directors
since December 1996; and a member of the Board of Directors since October 1996.
He was a principal of Odyssey from July 1994 to February 1997 and Executive Vice
President, Senior General Counsel and Director of Olympia & York Companies
(U.S.) from 1985 to 1994. Prior to 1985, he was a partner of the law firm of
Roberts & Holland.
DENNIS J. GETMAN has served as Executive Vice President of Avatar since
March 1984 and General Counsel since September 1981. He was Senior Vice
President from September 1981 to March 1984.
CHARLES L. MCNAIRY has served as Executive Vice President of Avatar since
September 1993. He has also served as Treasurer and Chief Financial Officer
since September 1992. He was Senior Vice President from September 1992 to
September 1993 and, except from April 1987 to September 1988, Vice President --
Finance from January 1985 to September 1992.
JUANITA I. KERRIGAN has served as Vice President and Secretary of Avatar
since September 1980.
G. PATRICK SETTLES has served as Vice President of Avatar since November
1986 and Assistant General Counsel since September 1983.
LAWRENCE L. COLDITZ has served as Controller of Avatar since September
1995. He was formerly Assistant Controller from October 1992 to September 1995;
Director of Financial Accounting from October 1991 to October 1992; and
Accounting Manager from October 1990 to October 1991.
H. IRWIN LEVY has served as a Director of, and consultant to, Avatar
Retirement Communities, Inc. since October 1997. Mr. Levy, who is the founder of
the Century Village concept of active adult/retirement communities, has been
Chairman of the Board and Chief Executive Officer of Hilcoast Development Corp.
since August 1992; and was Chairman of the Board and Chief Executive Officer of
CV Reit from 1985 to July 31, 1992. He is currently of counsel to the West Palm
Beach law firm of Levy, Kneen, Mariani, Curtin, Wiener, Kornfeld & del Russo.
Since October 1995, Mr. Levy has been a Director of IMGE, Inc.
MICHAEL S. RUBIN has served as a Director and President of Avatar
Retirement Communities, Inc. since October 1997. He was President and Chief
Operating Officer of Hilcoast Development Corp. from August 1992 to October
1997; and Vice President -- Real Estate Management of CV Reit from May 1991 to
July 31, 1992.
JACK JAIVEN has served as Executive Vice President, Treasurer and Chief
Financial Officer of Avatar Retirement Communities, Inc. since October 1997. He
was Director, Executive Vice President and Chief Financial Officer of Hilcoast
Development Corp. from August 1992 to October 1997; and was Vice President and
Treasurer of CV Reit from December 1988 to July 31, 1992.
MICHAEL A. RICH has served as Executive Vice President -- Marketing of
Avatar Retirement Communities, Inc. since October 1997. He was Vice
President -- Marketing of Hilcoast Development Corp. from August 1992 to October
1997; and Vice President -- Sales and Marketing of F.W.D.C., Inc., a wholly
owned subsidiary of Cenvill Development Corp., from March 1991 until July 31,
1992.
JAMES A. GEDDES has served as Executive Vice President -- Construction of
Avatar Retirement Communities, Inc. since October 1997. He was Vice
President -- Construction of Hilcoast Development Corp. from August 1992 to
October 1997. He was also Vice President of Construction of F.W.D.C., Inc. and
Vice President of Construction of Coconut Creek Developers, Inc., a wholly owned
subsidiary of Hilcoast Development Corp., for more than five years prior to his
resignation on July 31, 1992.
JONATHAN E. FELS has served as President of Avatar Properties Inc. and
Brookman-Fels Communities, Inc. since December 1997. He is a founding partner
and has served as President of the various Brookman-Fels companies since July
1980. From June 1977 to June 1979, he was a Director of Construction of Adler
Ross Associates; and from 1976 to 1977, he was Project Manager of Arvida Corp.
and Cost and Scheduling Engineer of Stone & Webster.
34
<PAGE> 37
MICHAEL GREENBERG has served as Executive Vice President of Avatar
Properties Inc. since September 1997. He was Vice President of Toll Brothers
from February 1995 to September 1997; Assistant Vice President from January 1994
to February 1995; Senior Manager from February 1993 to January 1994 and Project
Manager from June 1991 to February 1993.
MICHAEL LEVY has served as Executive Vice President and Chief Operating
Officer of Avatar Properties Inc. and Brookman-Fels Communities, Inc. since
December 1997. He is a partner and has served as Vice President of the various
Brookman-Fels companies since April 1983.
BERNARD OFFENBERG has been Vice President of Avatar Properties Inc. and
Brookman-Fels Communities, Inc. since December 1997. He is a partner and has
served as Director of Construction of the various Brookman-Fels companies since
August 1994. He was also a principal and Senior Vice President of Signature
Capital Corporation, a custom homebuilder, from October 1989 to May 1994; and
Director of Construction of Shear Homes from April 1987 to October 1989.
EDWIN JACOBSON has served as Chairman of Avatar's Executive Committee since
June 1992. He was Chief Executive Officer of Avatar from February 1994 to July
1997 and President from February 1994 to February 1997. He is also President and
Chief Executive Officer of CMC Heartland Partners, a partnership engaged in the
real estate industry, since September 1990; and President and Chief Executive
Officer of Heartland Technology, Inc. (formerly known as Milwaukee Land
Company), a non-diversified, closed-end management investment company, since
June 1985. In addition, he was President and Chief Executive Officer of Chicago
Milwaukee Corporation, an open-end investment company, from June 1985 to May
1996.
MILTON DRESNER has served as a Director of Avatar since July 1995. In
addition, he is a partner of The Highland Companies, a diversified real estate
development and managerial organization which he co-founded in 1960; and a
Director of Flagship Savings Bank, Hudson General Corporation, Childtime
Childcare and Northern Caring Homes.
LEON T. KENDALL has served as a Director of Avatar since May 1983. In
addition, he has been a Professor of Finance and Real Estate, Kellogg School of
Management, Northwestern University, since September 1988. He was Chairman of
the Board, Mortgage Guaranty Insurance Corporation, and Vice Chairman of the
Board, MGIC Investment Corporation, from December 1981 to December 1989; and
currently serves as a Director of Universal Foods Corporation, Asset Management
Funds, and Chicago Board -- Options Exchange.
MARTIN MEYERSON has served as a Director of Avatar since May 1981. In
addition, he has been Chairman, University of Pennsylvania Foundation,
University of Pennsylvania Professor of Public Policy and Planning, and
President Emeritus, The University of Pennsylvania, since February 1981. He
served The University of Pennsylvania as its President from 1970 to 1981. He
also is President of FISCIT (Switzerland/U.S.); a Director of Universal Health
Services, Inc. and of First Union North; and Chairman of the Board of Directors
of Marconi International Foundation.
GERNOT H. REINERS has served as a Director of Avatar since October 1997. He
was a Managing Partner and a member of the Board of Managers of the BHF-BANK AG
from 1972 to 1997 and Co-Manager of the Bank's New York Branch from 1987 to
1992.
KENNETH T. ROSEN has served as a Director of Avatar since September 1994.
In addition, he has served the University of California at Berkley as Professor
of Business Administration since 1979; and as Chairman of the Fisher Center for
Real Estate and Urban Economics since 1981. He has also served as President of
Rosen Consulting Group, a real estate consulting business, since 1990; as Chief
Executive Officer of ERE Rosen Real Estate Securities, a registered investment
adviser, since February 1995; and as a Director of Golden West Financial
Corporation, since January 1984, and The PMI Group, Inc., since January 1995.
FRED STANTON SMITH has served as a Director of Avatar since September 1980.
In addition, he has been the Vice Chairman of the Board of Directors of The
Keyes Company, a real estate brokerage, financing, management, insurance and
development firm, since January 1992. He was President of The Keyes Company; and
currently serves as Director of the Eagle National Bank.
HENRY KING STANFORD has served as a Director of Avatar since September
1980. In addition, he has been President Emeritus, The University of Miami,
since July 1981; and President Emeritus, University of Georgia, since July 1987.
He was President, The University of Miami, from July 1962 to June 1981; and
Interim President, University of Georgia, from July 1986 to June 1987.
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<PAGE> 38
PRINCIPAL STOCKHOLDERS
The following table sets forth at September 30, 1997, certain information
regarding the beneficial ownership of Common Stock held by (i) each person known
by Avatar to own beneficially more than five percent of the outstanding Common
Stock, (ii) each of Avatar's directors, (iii) certain named executive officers
and (iv) all directors and executive officers of Avatar as a group:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-------------------------------- STOCK OPTIONS
NUMBER OF SHARES PERCENT AND SARS(9)
---------------- ------- -------------
<S> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Odyssey Partners, L.P. ......................... 2,107,763(2)(3) 23.2
Spears, Benzak, Salomon & Farrell, Inc.......... 1,887,476(4) 20.8
Ronald Baron.................................... 965,782(5) 10.6
DIRECTORS AND EXECUTIVE OFFICERS:
Leon Levy....................................... 2,385,758(6) 26.2%
Gerald D. Kelfer................................ -- 225,000(10)
Milton Dresner.................................. 500 *
Edwin Jacobson.................................. -- 225,000(11)
Leon T. Kendall................................. 200(7) *
Martin Meyerson................................. 2,347(8) *
Gernot H. Reiners............................... --
Kenneth T. Rosen................................ 1,000 *
Fred Stanton Smith.............................. --
Henry King Stanford............................. 200 *
Dennis J. Getman................................ -- 15,000(11)
Charles L. McNairy.............................. -- 15,000(11)
G. Patrick Settles.............................. --
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP
(CONSISTING OF 15 PERSONS OF WHOM SIX
BENEFICIALLY OWN SHARES OF COMMON STOCK)........ 2,390,005(6)(7)(8) 26.3
</TABLE>
- ---------------
* Indicates beneficial ownership of less than 1% of the outstanding shares of
Common Stock.
(1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule
13d-3(d), shares not outstanding which are subject to options, warrants,
rights or conversion privileges exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and percentage owned
by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. As of September 30, 1997,
the Company had 9,095,102 shares of Common Stock outstanding. The
information as to securities owned by directors and executive officers was
furnished to the Company by such directors and executive officers.
(2) Does not include shares owned by Leon Levy, Chairman of the Board and
member of the Executive Committee of the Company and general partner of
Odyssey. Leon Levy, Jack Nash, Stephen Berger, Joshua Nash and Brian
Wruble, by virtue of being general partners of Odyssey, share voting and
dispositive power with respect to the Common Stock owned by Odyssey and,
accordingly, may each be deemed to own beneficially the Common Stock owned
by Odyssey. Each of the aforesaid persons has expressly disclaimed any such
beneficial ownership (within the meaning of Exchange Act Rule 13d-3(d)(1))
which exceeds the proportionate interest in the Common Stock which he may
be deemed to own as a general partner of Odyssey. The Company has been
advised that no other person exercises (or may be deemed to exercise) any
voting or investment control over the Common Stock owned by Odyssey.
Odyssey is a private investment partnership located at 31 West 52nd Street,
New York, New York 10019.
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<PAGE> 39
(3) By virtue of its present Common Stock ownership, Odyssey may be deemed to
be a "control" person of the Company within the meaning of that term as
defined in Rule 12b-2 under the Exchange Act.
(4) Based upon information set forth in the Schedule 13G, dated February 14,
1997, filed by KeyCorp., the parent holding company of Spears, Benzak,
Salomon & Farrell, Inc. (a registered investment adviser, "Spears,
Benzak"), such shares are held for the benefit of various of its clients;
it has revocable shared dispositive power with such clients; and it has no
power to vote or direct the vote of such shares. The address of Spears,
Benzak is 45 Rockefeller Plaza, New York, New York 10111.
(5) Ronald Baron owns 15,000 shares of Avatar and may be deemed to own an
additional 41,000 by reason of his position as a General Partner of an
investment partnership. Mr. Baron also may be deemed to own an additional
909,782 shares on behalf of investment advisory clients of Baron Capital
Management, Inc. and BAMCO, Inc., both registered investment advisers of
which he is the controlling person, and he expressly disclaims beneficial
ownership of such shares. The address of Ronald Baron is c/o Baron Capital
Management, 767 Fifth Avenue, New York, New York 10153.
(6) Includes 2,107,763 shares owned by Odyssey. Mr. Levy is a general partner
of Odyssey and, therefore, may be deemed to own beneficially the shares of
Common Stock owned by Odyssey. See Notes (1) and (2).
(7) Does not include 200 shares owned by Mr. Kendall's wife for her own
account, as to which shares Mr. Kendall disclaims beneficial ownership.
(8) Does not include 847 shares owned by Mr. Meyerson's wife, as to which
shares Mr. Meyerson disclaims beneficial ownership.
(9) Indicates the aggregate number of underlying shares of Common Stock subject
to options, warrants, rights or conversion privileges owned by such person
(whether or not exercisable within 60 days) plus, in the case of stock
appreciation rights ("SARs"), the number of such shares used to calculate
the value of all SARs held by such person.
(10) Represents 225,000 shares of Common Stock issuable upon the exercise of
stock options, 20% of which become exerciseable on February 13, 1998, and
on each of the four anniversaries thereof.
(11) Represents the aggregate number of shares of Common Stock used to calculate
the value of both vested and unvested SARs issued to such person.
37
<PAGE> 40
DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture to be dated as of ,
1998 (the "Indenture") between Avatar and The Chase Manhattan Bank, as trustee
(the "Trustee"). The summaries of certain provisions of the Notes and the
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Indenture,
including the definitions therein of certain terms. Wherever terms defined in
the Indenture are referred to in this Prospectus, the applicable definition for
such terms is incorporated herein by reference. A copy of the proposed form of
Indenture is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
GENERAL
The Notes will be unsecured obligations of Avatar, will be limited to
$100.0 million in aggregate principal amount (up to $115.0 million if the
Underwriters' over-allotment option is exercised in full) and will mature on
, 2005. The Notes will bear interest at the rate per annum shown on
the front cover hereof from the date of original issuance of Notes under the
Indenture, or from the most recent Interest Payment Date on which interest has
been paid or provided for, payable semiannually on April 1 and October 1 of each
year, commencing April 1, 1998. Interest on the Notes will be paid on the basis
of a 360-day year of twelve 30-day months.
Principal of, and premium, if any, and interest on, the Notes will be
payable (i) in same-day funds on or prior to the payment dates with respect to
such amounts in the case of Notes held of record by the Depository Trust Company
("DTC") or its nominee and (ii) at the office of the Trustee in New York, New
York, in the case of Notes held of record by Holders other than DTC or its
nominee, and the Notes may be surrendered for registration of transfer, exchange
or conversion at the office of the Trustee in New York, New York. Avatar may, at
its option, pay interest on Notes held of record by Holders other than DTC or
its nominee by checks mailed to the addresses of the Persons entitled thereto as
they appear in the Register for the Notes on the Regular Record Date for that
interest.
The Notes will be issued only in registered form, without coupons, and in
denominations of $1,000 or any integral multiple thereof. No service fee will be
charged for any registration of transfer or exchange of the Notes, but Avatar
may require payment of a sum sufficient to cover any tax or other governmental
charge and any other expenses (including the fees and expenses of the Trustee)
payable in connection therewith. Avatar is not required (i) to issue, register
the transfer of or exchange any Notes during a period beginning at the opening
of business 15 days before the day of the mailing of a notice of redemption and
ending at the close of business on the day of each mailing or (ii) to register
the transfer of or exchange any Notes selected for redemption in whole or in
part, except the unredeemed portion of Notes being redeemed in part or (iii) to
register the transfer or exchange of any Notes surrendered for conversion or
repurchase upon the occurrence of a Change in Control.
All monies paid by Avatar to the Trustee or any Paying Agent for the
payment of principal of and premium and interest on any Note which remain
unclaimed for two years after such principal, premium or interest becomes due
and payable may be repaid to Avatar. After such repayment, the Holder of such
Note may, as an unsecured general creditor, look only to Avatar for payment
thereof.
The Indenture does not contain any covenants or financial restrictions on
the payment of dividends, the incurrence of Senior Indebtedness or the issuance
or repurchase of securities of Avatar or its subsidiaries. The Indenture does
not contain any covenants or other provisions that would afford protection to
Holders of the Notes in the event of a highly leveraged transaction or a Change
in Control of Avatar, except as described below under "-- Certain Rights to
Require Repurchase of Notes."
CONVERSION RIGHTS
The Notes will be convertible, in whole or from time to time in part (in
denominations of $1,000 or integral multiples thereof), into shares of Common
Stock, at the option of the Holder, at any time after 60 days following the
original issuance of the Notes prior to redemption or final maturity, at the
conversion price
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<PAGE> 41
of $ per share, adjusted as described in the following paragraph. The
right to convert Notes that have been called for redemption will terminate at
the close of business on the second business day preceding the Redemption Date
unless Avatar defaults in making the payment due on that redemption. See
"-- Optional Redemption."
The initial conversion price will be subject to adjustment upon certain
events, including the following: (i) the subdivision, combination or
reclassification of outstanding shares of Common Stock; (ii) the issuance of
Common Stock as a dividend or distribution on capital stock, including Common
Stock; (iii) the issuance of rights, warrants or options to all holders of
Common Stock entitling them to acquire shares of Common Stock (or securities
convertible into Common Stock) at a price per share less than the then Current
Market Price; (iv) the distribution to all holders of Common Stock of shares of
capital stock of Avatar (other than Common Stock), evidences of indebtedness of
Avatar's assets (including distributions of capital stock of Avatar's
subsidiaries and other securities, but excluding (a) dividends or distributions
paid exclusively in cash, (b) dividends or distributions provided for in clause
(ii) above and (c) rights, warrants and options provided for in clause (iii)
above); (v) a distribution consisting exclusively of cash (excluding any cash
distributions referred to in clause (iv) above) to all holders of Common Stock
in an aggregate amount that, together with (a) all other cash distributions
(excluding any cash distributions referred to in clause (iv) above) made within
the 12 months preceding the record date for that distribution and (b) any cash
and the fair market value of other consideration paid in respect of any tender
offer subject to the provisions of the Exchange Act, made by Avatar or a
subsidiary of Avatar for Common Stock consummated within the 12 months preceding
that distribution, exceeds 10% of Avatar's market capitalization (being at any
time the product of the then Current Market Price multiplied by the number of
shares of Common Stock then outstanding) on the record date fixed for
determining the shareholders entitled to such distribution; and (vi) the
consummation of a tender offer made by Avatar or any subsidiary of Avatar for
Common Stock which involves an aggregate consideration that, together with (x)
any cash and the fair market value of any other consideration paid or payable in
respect of any previous tender offer made by Avatar or a subsidiary of Avatar
for Common Stock consummated within the 12 months preceding the consummation of
such tender offer and (y) the aggregate amount of all cash distributions
(excluding those referred to in (iv) above), exceeds 10% of Avatar's market
capitalization on the date of consummation of such tender offer. No adjustment
of the conversion price will be required to be made until cumulative adjustments
amount to at least 1.0% of the conversion price, as last adjusted. Any
adjustment that would otherwise be required to be made will be carried forward
and taken into account in any subsequent adjustment.
Avatar, in its discretion, will be permitted to reduce the conversion price
in order that any event treated for federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the holders of Common Stock or, if
that is not possible, to diminish any income taxes that are otherwise payable
because of that event.
In the case of any reclassification of the Common Stock, or any
consolidation or merger of Avatar with or into any other corporation (other than
one in which no change is made in the outstanding Common Stock), or the sale or
transfer of all or substantially all the properties and assets of Avatar, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property, the Holder of any Note then outstanding will, with
certain exceptions, have the right thereafter to convert that Note only into the
kind and amount of securities, cash and other property receivable upon the
reclassification, consolidation, merger, sale, transfer or share exchange by a
holder of the number of shares of Common Stock into which that Note might have
been converted immediately prior to that reclassification, consolidation,
merger, sale, transfer or share exchange, provided that the Holder of Notes has
not exercised any other right of election as to the stock, other securities or
other property or assets receivable in connection therewith; and, if the right
of conversion is not exercised, adjustments will be provided for events
subsequent thereto which are as nearly equivalent as practical to the conversion
price adjustments described above.
Fractional shares of Common Stock will not be issued on conversion, but, in
lieu thereof, Avatar will pay a cash adjustment based on the Closing Price at
the close of business on the day of conversion. If any Notes are surrendered for
conversion during the period from the close of business on any Regular Record
Date through and including the next succeeding Interest Payment Date (except any
such Note called for
39
<PAGE> 42
redemption on a Redemption Date, or repurchasable on a Repurchase Date,
occurring within such period), those Notes when surrendered for conversion must
be accompanied by payment to Avatar in New York Clearing House funds, or other
funds acceptable to Avatar, of an amount equal to the interest thereon which the
registered Holder on that Regular Record Date is to receive. Except as described
in the preceding sentence, no interest will be payable by Avatar on converted
Notes with respect to any Interest Payment Date subsequent to the date of
conversion. No other payment or adjustment for interest or dividends is to be
made on conversion.
OPTIONAL REDEMPTION
The Notes are not entitled to any sinking fund. The Notes are not
redeemable by Avatar prior to , 2001. Thereafter, the Notes may be
redeemed at the option of Avatar in whole or in part, at any time and from time
to time prior to Maturity, upon not less than 30 nor more than 60 days' notice
to each Holder at the following Redemption Prices (expressed as percentages of
the principal amount) plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
to receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date):
If redeemed during the 12-month period beginning in the year
indicated ( , in the case of 2001), the redemption price shall be:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------------------------------- ----------
<S> <C>
2001.............................................. %
2002..............................................
2003..............................................
2004..............................................
2005..............................................
</TABLE>
If all accrued and payable interest on the Notes has not been paid, the
Notes may not be redeemed in part and Avatar may not purchase or acquire any
Notes otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Notes. If less than all of the Notes are to be
redeemed, the Trustee will select those to be redeemed by lot, pro rata or such
other method as the Trustee in its discretion shall deem appropriate and fair.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Notes and any other payment obligations of Avatar in respect of the Notes
(including any obligation to repurchase the Notes) will, to the extent set forth
in the Indenture, be subordinated in right of payment to the prior payment in
full of all Senior Indebtedness whether outstanding on the date of the Indenture
or thereafter incurred. If there is a payment or distribution of assets to
creditors on any liquidation, dissolution, winding up, receivership,
reorganization, assignment for the benefit of creditors, marshaling of assets
and liabilities or any bankruptcy, insolvency or similar case or proceeding of
Avatar, the holders of all Senior Indebtedness will be entitled to receive
payment in full of all Obligations due or to become due or in respect thereof
before the Holders of the Notes will be entitled to receive any payment in
respect of the principal of or premium, if any, or interest on the Notes, and
until all Obligations with respect to the Senior Indebtedness are paid in full,
any distribution to which the Holders of the Notes would be entitled shall be
made to the holders of the Senior Indebtedness.
Avatar also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) upon or in respect of the Notes if (i) a
default in the payment of the principal of or premium, if any, or interest on
any Senior Indebtedness (a "Payment Default") occurs and is continuing beyond
any applicable grace period or (ii) any other default occurs and is continuing
beyond any applicable grace period with respect to any Designated Senior
Indebtedness which permits holders of Designated Senior Indebtedness as to which
that default relates to accelerate its maturity (a "Nonpayment Default") and the
Trustee receives notice of that default (a "Payment Blockage Notice") from
Avatar or other person permitted to give such notice under the Indenture. The
payments on or in respect of the Notes shall be resumed (i) in the case of a
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<PAGE> 43
Payment Default respecting Designated Senior Indebtedness, on the date on which
that default is cured or waived and (ii) in the case of a Nonpayment Default
respecting Designated Senior Indebtedness, the earliest of (a) the date on which
that Nonpayment Default is cured or waived, (b) the date the applicable Payment
Blockage Notice is retracted by written notice to the Trustee from a
representative of the holders of the Designated Senior Indebtedness which have
given that Payment Blockage Notice and (c) 179 days after the date on which the
applicable Payment Blockage Notice is received by the Trustee, if the maturity
of such Designated Senior Indebtedness has not been accelerated. No new period
of payment blockage may be commenced unless and until (i) 365 days have elapsed
since the date of commencement of the payment blockage period resulting from the
immediately prior Payment Blockage Notice and (ii) all scheduled payments of
principal, premium, if any, and interest on the Notes that have come due have
been paid in full in cash. No Nonpayment Default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee shall be,
or be made, the basis for a subsequent Payment Blockage Notice, unless such
default has been cured for a period of 90 consecutive days and recurs.
If the Maturity of the Notes is accelerated because of an Event of Default,
the Indenture requires Avatar to promptly notify holders of Designated Senior
Indebtedness of that event.
"Senior Indebtedness" is defined in the Indenture as the principal of and
premium, if any, and interest on and other Obligations in respect of (i) all
indebtedness of Avatar for money borrowed, whether outstanding on the date of
execution of the Indenture or thereafter created, incurred or assumed, except
any such other indebtedness that, by the terms of the instrument or instruments
by which it was created or incurred, expressly provides that it (a) is junior in
right of payment to the Notes or (b) ranks pari passu in right of payment with
the Notes, and (ii) any amendments, renewals, extensions, modifications,
refinancings and refundings of any of the foregoing. For purposes of this
definition, "indebtedness for money borrowed" when used with respect to Avatar
means (i) any obligation of, or any obligation guaranteed by, Avatar for the
repayment of borrowed money (including fees, penalties and other obligations in
respect thereof), whether or not evidenced by bonds, debentures, notes or other
written instruments, (ii) any deferred payment obligation of, or any such
obligation guaranteed by, Avatar for the payment of the purchase price of
property or assets evidenced by a note or similar instrument and (iii) any
obligation of, or any such obligation guaranteed by, Avatar for the payment of
rent or other amounts under a lease of property or assets, which obligation is
required to be classified and accounted for as a capitalized lease on the
balance sheet of Avatar under generally accepted accounting principles. As used
in the Indenture: (i) "Obligations" in respect of the Senior Indebtedness
include any principal, interest, premiums, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any such indebtedness; and (ii) "Designated Senior Indebtedness" means
Senior Indebtedness (a) under any debt facility with banks or other lenders
which provide for revolving credit loans, term loans, receivables financing
(including through the sale of receivables) or letters of credit to Avatar or
(b) the principal amount of which is $25.0 million or more and that has been
designated by Avatar as "Designated Senior Indebtedness."
The Notes are obligations exclusively of Avatar. Certain operations of
Avatar are currently conducted through its subsidiaries, which are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due in respect of the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. The ability of any subsidiary of
Avatar to loan or advance funds or pay dividends to Avatar (i) may be subject to
contractual or statutory restrictions, (ii) will be contingent on the
subsidiary's earnings and cash flows and (iii) will be subject to various
business considerations.
The Notes will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
subsidiaries of Avatar. Any right of Avatar to receive assets of any of its
subsidiaries on the liquidation or reorganization of that subsidiary (and any
consequent right of the Holders of the Notes to participate in those assets)
will be effectively subordinated to the claims of that subsidiary's creditors,
except to the extent that Avatar is itself recognized as a creditor of that
subsidiary, in which case the claims of Avatar would still be subordinated to
any security in the assets of that subsidiary and any indebtedness of that
subsidiary senior to that held by Avatar.
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The Indenture does not limit or prohibit the incurrence of (i) Senior
Indebtedness or (ii) other indebtedness, liabilities or other commitments by
Avatar or its subsidiaries. As of September 30, 1997, the aggregate amount of
Senior Indebtedness to which the Notes are subordinated was approximately $47.3
million, and the aggregate amount of indebtedness and other balance sheet
liabilities of Avatar's subsidiaries to which the Notes are effectively
subordinated was approximately $116.2 million. Avatar also expects to incur
Senior Indebtedness from time to time in the future. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In the event that, notwithstanding the foregoing, the Trustee or any Holder
of the Notes receives any payment or distribution of assets of Avatar of any
kind in contravention of any of the subordination provisions of the Indenture,
whether in cash, property or securities, including, without limitation, by way
of set-off or otherwise, in respect of the Notes before all Senior Indebtedness
is paid in full, then such payment or distribution will be held by the recipient
in trust for the benefit of holders of Senior Indebtedness or their
representatives to the extent necessary to make payment in full of all Senior
Indebtedness remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness.
Avatar is obligated to pay reasonable compensation to the Trustee and to
indemnify the Trustee against certain losses, liabilities or expenses incurred
by it in connection with its duties relating to the Notes. The Trustee's claims
for such payments will generally be senior to those of Holders of the Notes in
respect of all funds collected or held by the Trustee.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Avatar will not consolidate with or merge into any other Person or convey,
transfer or lease its properties and assets substantially as an entirety to any
Person in one transaction or a series of related transactions, or permit any
Person to consolidate with or merge into Avatar, unless (i) if applicable, the
Person formed by such consolidation or into which Avatar is merged or the Person
or corporation which acquires the properties and assets of Avatar substantially
as an entirety is a corporation, limited liability company, partnership or trust
organized and validly existing under the laws of the United States or any state
thereof or the District of Columbia and expressly assumes payment of the
principal of and premium, if any, and interest on the Notes and the performance
or observance of each obligation of Avatar under the Indenture, (ii) immediately
after giving effect to such transaction no Event of Default will have occurred
and be continuing and (iii) such consolidation, merger, conveyance, transfer or
lease does not adversely affect the validity or enforceability of the Notes.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF NOTES
If any Change in Control (as defined below) occurs after the date of
issuance of the Notes and on or prior to Maturity, each Holder of Notes will
have the right, at the Holder's option, to require Avatar to repurchase all or
any part of the Holder's Notes on the date (the "Repurchase Date") that is 30
days after the date Avatar gives notice of the Change in Control as described
below at a price (the "Repurchase Price") equal to 100% of the principal amount
thereof, together with accrued and unpaid interest to the Repurchase Date. On or
prior to the Repurchase Date, Avatar is required to deposit with the Trustee or
a Paying Agent an amount of money in same-day funds sufficient to pay the
Repurchase Price of the Notes to be repaid on the Repurchase Date.
Failure by the Company (i) to provide timely notice of a Change in Control,
as provided for below, or (ii) to repurchase the Notes when required will result
in an Event of Default under the Indenture whether or not that repurchase is
permitted by the subordination provisions of the Indenture.
On or before the 15th day after a Change in Control occurs, Avatar is
obligated to mail to all Holders of Notes a notice of that occurrence which
states the Repurchase Date, the date by which the repurchase right must be
exercised, the Repurchase Price and the procedures the Holder must follow to
exercise its repurchase right. To exercise this right, a Holder must deliver to
Avatar or its designated agent and to the Trustee, on or before the close of
business on the Repurchase Date, written notice of the Holder's exercise of that
right,
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together with the certificates evidencing the Notes to be repurchased, duly
endorsed for transfer to Avatar. Any such notice of exercise may be withdrawn by
the Holder by a written notice of withdrawal delivered to the Trustee at any
time prior to the close of business on the Repurchase Date. In addition, if the
Repurchase Date falls between any Regular Record Date and the next succeeding
Interest Payment Date, Notes to be purchased must be accompanied by payment of
an amount equal to the interest thereon that is to be paid on such Interest
Payment Date.
A "Change in Control" will occur when: (i) all or substantially all the
assets of Avatar or of Avatar and its subsidiaries, taken as a whole, are sold
in one transaction or any series of related transactions as an entirety to any
Person or related group of Persons; (ii) any consolidation or merger of the
Company occurs (a) in which Avatar is not the continuing or surviving
corporation (other than a consolidation or merger with a wholly owned subsidiary
of Avatar in which all shares of Common Stock outstanding immediately prior to
the effectiveness thereof are changed into or exchanged for the same
consideration) or (b) pursuant to which the Common Stock would be converted into
cash, securities or other property, in each case other than a consolidation or
merger of Avatar in which the holders of the Common Stock immediately prior to
the consolidation or merger have, directly or indirectly, at least a majority of
the total voting power of all classes of capital stock entitled to vote
generally in the election of directors of the continuing or surviving
corporation immediately after such consolidation or merger in substantially the
same proportion as their ownership of Common Stock immediately before such
transaction; (iii) any Person (other than a director, officer or beneficial
owner currently known by Avatar to own more than 5% of the outstanding Common
Stock), or any such Persons acting together that would constitute a "group" for
purposes of Section 13(d) of the Exchange Act, together with any affiliates
thereof, shall beneficially own (as defined in Exchange Act Rule 13d-3) at least
50% of the total voting power of all classes of capital stock of Avatar entitled
to vote generally in the election of directors of Avatar; (iv) at any time
during any consecutive two-year period, individuals who at the beginning of that
period constituted the Board of Directors of Avatar (the "Board") (together with
any new directors whose election by the Board or whose nomination for election
by the stockholders of Avatar was approved by a vote of more than 50% of the
directors then still in office who were either directors at the beginning of
that period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board then in
office; or (v) the Company is liquidated or dissolved.
The right of Holders to require Avatar to repurchase Notes if a Change in
Control occurs could create an event of default under Senior Indebtedness, as a
result of which any repurchase could, absent a waiver of such repurchase right,
be blocked by the subordination provisions of the Indenture. See
"-- Subordination." Failure by Avatar to repurchase the Notes when required will
result in an Event of Default with respect to the Notes whether or not such
repurchase is permitted by those subordination provisions. The ability of Avatar
to pay cash to the Holders of Notes upon a repurchase may be limited by certain
financial covenants contained in Senior Indebtedness. No assurance can be given
that Avatar would have sufficient funds to pay the Repurchase Price for all
Notes tendered by Holders upon the occurrence of a Change in Control.
The foregoing provisions (i) may not afford Holders protection in the event
of highly leveraged or other transaction involving the Company which may
adversely affect Holders and (ii) may discourage open market purchases of the
Common Stock or a non-negotiated tender or exchange offer for such stock and,
accordingly, may limit a stockholder's ability to realize a premium over the
market price of the Common Stock in connection with any such transaction.
EVENTS OF DEFAULT
The following are Events of Default with respect to the Notes under the
Indenture: (i) default in the payment of principal of or any premium on any Note
when due (even if such payment is prohibited by the subordination provisions of
the Indenture); (ii) default in the payment of any interest on any Note when
due, which default continues for 30 days (even if that payment is prohibited by
the subordination provisions of the Indenture); (iii) default in the performance
or breach of any other covenant or warranty of Avatar in the Indenture which
continues for 30 days after written notice as provided in the Indenture; (iv)
default under one or more bonds, debentures, notes or other evidences of
indebtedness for money borrowed by Avatar or any of its subsidiaries or under
one or more mortgages, indentures or instruments under which there may be issued
or
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by which there may be secured or evidenced any indebtedness for money borrowed
by Avatar or any of its subsidiaries, whether such indebtedness now exists or is
hereafter created, which default individually or in the aggregate constitutes a
failure to pay the principal of indebtedness in excess of $10 million when due
and payable after the expiration of any applicable grace period with respect
thereto or results in indebtedness in excess of $10 million becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable, without such indebtedness having been discharged, or
such acceleration having been rescinded or annulled, within a period of 30 days;
(v) entry of a final judgment or judgments against Avatar or any of its
subsidiaries in the amount of at least $10 million that remain undischarged and
unstayed for a period of 30 days; and (vi) certain events involving bankruptcy
or reorganization of or similar events respecting Avatar or any of its
subsidiaries.
If an Event of Default shall occur and be continuing, the Trustee or
Holders of not less than 25% in aggregate principal amount of the Outstanding
Notes may declare the principal of and premium, if any, on all the Notes to be
due and payable immediately but if a majority in principal amount of Holders of
Outstanding Notes waive any past default (except the nonpayment of principal of,
premium, if any, and interest on any Note and certain other limitations), then
such default will cease to exist and any Event of Default arising therefrom will
be deemed cured for every purpose of the Indenture; but no such waiver will
extend to any subsequent or other default. If an Event of Default occurs and is
continuing as a result of an event of bankruptcy or reorganization of Avatar or
any of its subsidiaries, the principal of, premium, if any, and accrued and
unpaid interest on the Notes will automatically become due and payable without
any declaration or other act on the part of the Trustee or any Holder of Notes.
Avatar is required to furnish to the Trustee annually a statement as to the
performance by Avatar of certain of its obligations under the Indenture and as
to any default in that performance. The Indenture provides that the Trustee may
withhold notice to Holders of the Notes of any continuing default (except in the
case of a default in payment of the principal of or premium, if any, or interest
on any Notes) if the Trustee considers it in the interest of Holders of the
Notes to do so.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes, unless
such Holders have offered to the Trustee security or indemnity satisfactory to
the Trustee. Subject to such provision for security or indemnification, the
Holders of a majority in principal amount of the Outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee, provided that the Trustee will have the right to decline to follow
any such direction if the Trustee is advised by counsel that the action or
proceeding so directed may not lawfully be taken or the Trustee determines that
the action or proceeding so directed could involve the Trustee in personal
liability or would be unduly prejudicial to the rights of the holders not
joining in such directions or would conflict with the Indenture.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting Avatar and the Trustee, with
the consent of the Holders of not less than a majority in principal amount of
Outstanding Notes, to modify the Indenture or any supplemental indenture or the
rights of the Holders of the Notes, except that no such modification shall (i)
extend the fixed maturity of any Note, reduce the rate or extend the time for
payment of interest thereon, reduce the principal amount thereof or premium, if
any, thereon, reduce any amount payable upon redemption or repurchase thereof,
change the obligation of Avatar to repurchase any Note upon the happening of any
Change in Control in a manner materially adverse to Holders of Notes, impair the
right of a Holder to institute suit for payment thereof, change the currency in
which the Notes are payable, impair the right to convert the Notes into Common
Stock subject to the terms set forth in the Indenture, or modify the provisions
of the Indenture with respect to the subordination of the Notes in a manner
adverse to the Holders of the Notes in any material respect, without the consent
of each Holder of a Note so affected, or (ii) reduce the aforesaid percentage of
Notes whose Holders are required to consent to any such supplemental indenture,
without the consent of the Holders of all then Outstanding Notes. The Indenture
also provides for certain modifications of its terms without the consent of
Holders of the Notes.
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GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to that state's
conflicts of laws principles.
BOOK-ENTRY
The Notes will be issued in the form of a global note or notes (together,
the "Global Note") deposited with, or on behalf of, DTC and registered in the
name of Cede & Co. as DTC's nominee. Owners of beneficial interests in the Notes
represented by the Global Note will hold such interests pursuant to the
procedures and practices of DTC and must exercise any rights in respect of their
interests (including any right to convert or require repurchase of their
interests) in accordance with those procedures and practices. Such beneficial
owners will not be deemed Holders of Notes, and will not be entitled to any
rights under the Global Note or the Indenture, with respect to the Global Note,
and Avatar and the Trustee, and any of their respective agents, may treat DTC as
the sole Holder and owner of the Global Note.
DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds securities that its participants
("Participants") deposit with the DTC. DTC also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
Direct Participants and by the NYSE, the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly. The rules applicable to DTC and its
participants are on file with the Securities and Exchange Commission.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form as set forth below, the Global Note may not be transferred
except as a whole by DTC to a nominee of DTC, or by a nominee of DTC to DTC or
another nominee of DTC or by DTC or any such nominee of DTC to a successor
depository or nominee of such successor depository.
The Notes represented by the Global Note will not be exchangeable for
certificated Notes, provided that if (i) DTC is at any time unwilling, unable or
ineligible to continue as depository (unless the Company has approved a
successor depository within 90 days) or (ii) there shall have occurred or be
continuing an Event of Default with respect to such Global Note, Avatar will
issue individual Notes in definitive form in exchange for the Global Note. In
addition, Avatar may at any time and in its sole discretion determine not to
have a Global Note, and, in such event, will issue individual Notes in
definitive form in exchange for the Global Note previously representing all such
Notes. In such instances, an owner of a beneficial interest in a Global Note
will be entitled to physical delivery of Notes in definitive form equal in
principal amount to such beneficial interest and to have such Notes registered
in its name. Individual Notes so issued in definitive form will be issued in
denominations of $1,000 and any larger amount that is an integral multiple of
$1,000 and will be issued in registered form only, without coupons.
Payments of interest on and premium, if any, and principal of the Notes
will be made by Avatar through the Trustee to DTC or its nominee, as the case
may be, as the registered owner of the Global Note. Neither Avatar nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Global Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests. Avatar expects that DTC, upon receipt of
any payment of interest premium, if any, or principal in respect of the Global
Note, will credit the accounts of DTC's Direct Participants with payment in
amounts proportionate to their respective holdings and not of Avatar, subject to
any statutory or regulatory requirements as may be in effect from time to time
as shown on
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the records of DTC. Avatar also expects that payments by Participants to owners
of beneficial interests in the Global Note will be governed by standing customer
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participants.
So long as the Notes are represented by the Global Note, DTC or its nominee
will be the only entity that can exercise a right to repayment pursuant to the
Holder's option to elect repayment of its Notes or the right of conversion of
the Notes. Notice by Participants or by owners of beneficial interests in a
Global Note held through such Participants of the exercise of the option to
elect repayment, or the right of conversion, of beneficial interests in Notes
represented by the Global Note must be transmitted to DTC in accordance with its
procedures on a form required by DTC and provided to Participants. In order to
ensure that DTC's nominee will timely exercise a right to repayment, or the
right of conversion, with respect to a particular Note, the beneficial owner of
such Notes must instruct the broker or other participant through which it holds
an interest in such Notes to notify DTC of its desire to exercise a right to
repayment, or the right of conversion. Different firms have different cut-off
times for accepting instructions from their customers and, accordingly, each
beneficial owner should consult the broker or other Participant through which it
holds an interest in a Note in order to ascertain the cut-off time by which such
an instruction must be given in order for timely notice to be delivered to DTC.
Avatar will not be liable for any delay in delivery of such notice to DTC.
MARKET FOR NOTES
Application will be made to qualify the Notes for quotation on Nasdaq under
the symbol " ."
INFORMATION CONCERNING THE TRUSTEE
The Chase Manhattan Bank, as the Trustee under the Indenture, has been
appointed by Avatar as paying agent, conversion agent and registrar with regard
to the Notes. The Indenture provides that, except during the continuance of an
Event of Default, the Trustee thereunder will exercise such rights and powers
vested in it under the Indenture and use the same degree of care and skill in
its exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and the provisions of the Trust Indenture Act of 1939, as
amended (the "TIA"), incorporated by reference therein contain certain
limitations on the rights of the Trustee thereunder, should it become a creditor
of Avatar, to obtain payment of certain claims in certain cases or to realize on
certain property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions; provided,
however, that if it acquires any conflicting interest (within the meaning of the
TIA) it must eliminate such conflicting interest or resign.
TAXATION OF NOTES
See "Certain Federal Income Tax Considerations" for a discussion of certain
federal income tax matters.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain of the principal U.S. federal income
tax consequences of the purchase, ownership and disposition of the Notes or
Common Stock issued on conversion thereof. This discussion is a summary for
general information only and does not consider all aspects of U.S. federal
income tax that may be relevant to the purchase, ownership and disposition of
the Notes or Common Stock by a prospective investor in light of such investor's
personal circumstances. The discussion also does not address the U.S. federal
income tax consequences of ownership of Notes or Common Stock not held as
capital assets within the meaning of Section 1221 of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), or the U.S. federal income tax
consequences to investors subject to special treatment under the U.S. federal
income tax laws, such as dealers in securities or foreign currency, tax-exempt
investors, real estate investment trusts, regulated investment companies, banks,
thrifts, insurance companies or other financial institutions, persons that hold
the Notes or Common Stock as a position in a "straddle", as part of a "synthetic
security" or "hedge", "conversion transaction" or other integrated investment,
persons that have a "functional currency" other than the U.S. dollar, or
investors in pass-through entities. In addition, this discussion is generally
limited to the tax consequences to initial holders. Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed.
This discussion is based upon the Code, existing and proposed regulations
thereunder, and current administrative rulings and court decisions. All of the
foregoing is subject to change, possibly on a retroactive basis, and any such
change could affect the continuing validity of this discussion.
PERSONS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS, AS WELL AS THE
LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Note that is (i) a citizen or resident
(as defined in Section 7701(b)(1) of the Code) of the United States, (ii) a
corporation organized under the laws of the U.S. or any political subdivision
thereof or therein, (iii) an estate, the income of which is subject to U.S.
federal income tax regardless of its source, or (iv) a trust with respect to
which a court within the United States is able to exercise primary supervision
over its administration and one or more United States persons have the authority
to control all of its substantial decisions (a "U.S. Holder"). Certain U.S.
federal income tax consequences relevant to a holder other than a U.S. Holder
are discussed separately below.
STATED INTEREST
The stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income either at the time it accrues or is received depending upon such
U.S. Holder's method of accounting for federal income tax purposes. For this
purpose, interest will be deemed to accrue without regard to conversion of the
Notes.
MARKET DISCOUNT
Gain recognized on the disposition (including a redemption) by a subsequent
purchaser of a Note that has accrued market discount will be treated as ordinary
income, and not capital gain, to the extent of the accrued market discount,
provided that the amount of the market discount exceeds a statutorily defined de
minimis amount. "Market discount" is defined as the excess, if any, of (i) the
stated redemption price at maturity over (ii) the tax basis of the debt
obligation in the hands of the holder immediately after its acquisition.
Under the de minimis exception, there is no market discount if the excess
of the stated redemption price at maturity of the obligation over the holder's
tax basis in the obligation is less than 0.25% of the stated redemption price at
maturity multiplied by the number of complete years after the acquisition date
to the Note's date of maturity. Unless a holder elects otherwise, the accrued
market discount would be the amount
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calculated by multiplying the market discount by a fraction, the numerator of
which is the number of days the obligation has been held by a holder and the
denominator of which is the number of days after the holder's acquisition of the
obligation up to and including its maturity date.
If a U.S. Holder of a Note acquired at market discount disposes of such
Note in any transaction other than a sale, exchange or involuntary conversion,
even though not otherwise taxable (e.g., a gift), such U.S. Holder will be
deemed to have realized an amount equal to the fair market value of the Note and
would be required to recognize as ordinary income any accrued market discount to
the extent of the deemed gain. A U.S. Holder of a Note acquired at a market
discount may also be required to defer the deduction of all or a portion of the
interest on any indebtedness incurred or maintained to carry the Note until it
is disposed of in a taxable transaction.
A U.S. Holder of a Note acquired at market discount may elect to include
the market discount in income as it accrues. This election would apply to all
market discount obligations acquired by the electing U.S. Holder on or after the
first day of the first taxable year to which the election applies. The election
may be revoked only with the consent of the Service. If a U.S. Holder of a Note
so elects to include market discount in income currently, the above-discussed
rules with respect to ordinary income recognition resulting from sales and
certain other disposition transactions and to deferral of interest deductions
would not apply.
BOND PREMIUM
If a U.S. Holder purchases a Note at a cost that is in excess of the amount
payable at maturity (which will be determined by reference to an earlier call
date if the call price would reduce the amount of the premium) (such excess
being the "bond premium"), a U.S. Holder may elect to amortize such bond premium
on a constant interest basis over the period from the acquisition date to the
maturity date of such Note (or, in certain circumstances, until an earlier call
date) and, except as future Treasury Regulations may otherwise provide, reduce
the amount of interest included in income in respect of the Note by such amount.
A U.S. Holder who elects to amortize bond premium must reduce its adjusted basis
in the Note by the amount of such allowable amortization. An election to
amortize bond premium would apply to all amortizable bond premiums on all
taxable bonds held at or acquired after the beginning of the U.S. Holder's
taxable year as to which the election is made, and may be revoked only with the
consent of the Service. No amortization is allowed for any premium attributable
to the conversion feature of the Note.
If an election to amortize bond premium is not made, a U.S. Holder must
include the full amount of each interest payment in income in accordance with
its regular method of accounting and will generally receive a tax benefit from
the bond premium only upon computing its gain or loss upon the sale or other
disposition or payment of the principal amount of the Note.
TAX BASIS
A U.S. Holder's initial tax basis in a Note will be equal to the purchase
price paid by such U.S. Holder for such Note.
SALE OR REDEMPTION
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Company) or other disposition of a Note
will be a taxable event for federal income tax purposes. In such event, a U.S.
Holder will recognize gain or loss equal to the difference between (i) the
amount of cash plus the fair market value of any other property received upon
the sale, exchange, redemption or other taxable disposition (other than in
respect of accrued and unpaid interest thereon) and (ii) the U.S. Holder's
adjusted tax basis therein (other than any tax basis attributable to accrued and
unpaid interest). Subject to the discussion above under the caption "Market
Discount", any such gain or loss generally will be short-term, mid-term or
long-term capital gain or loss depending on the length of time the Note had been
held.
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CONVERSION OF THE NOTE INTO COMMON STOCK
No gain or loss will be recognized for federal income tax purposes on
conversion of Notes solely into shares of Common Stock, except with respect to
any cash received in lieu of a fractional share or, in the case of both cash and
accrual basis taxpayers, any accrued interest not previously included in income.
A U.S. Holder's tax basis in the Common Stock received upon conversion will
generally be equal to the U.S. Holder's tax basis in the Notes converted into
Common Stock less the basis allocated to any fractional share for which cash is
received, and a U.S. Holder's holding period in the Common Stock will generally
include the holding period of the Notes converted. Any accrued market discount
not previously included in income as of the date of the conversion of the Notes
and not recognized upon the conversion (e.g., as a result of the receipt of cash
in lieu of a fractional interest in the Note) should carry over onto the Common
Stock received on conversion and be treated as ordinary income upon the
subsequent disposition of such Common Stock.
ADJUSTMENT OF CONVERSION PRICE
Section 305 treats as a distribution taxable as a dividend (to the extent
of the issuing corporation's current or accumulated earnings and profits)
certain actual or constructive distributions of stock with respect to stock or
convertible securities. Under Treasury Regulations, an adjustment in the
conversion price, or the failure to make such an adjustment, may, under certain
circumstances be treated as a constructive dividend. Generally, a U.S. Holder's
tax basis in a Note will be increased by the amount of any such constructive
dividend.
BACK-UP WITHHOLDING
A U.S. Holder of Notes or Common Stock may be subject to "back-up
withholding" at a rate of 31% with respect to certain "reportable payments"
including interest payments, dividend payments and, under certain circumstances,
principal payments on the Notes or proceeds from the disposition of Common Stock
issued on conversion of the Notes. These back-up withholding rules apply if the
U.S. Holder, among other things, (i) fails to furnish a social security number
or other taxpayer identification number (TIN) certified under penalties of
perjury within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) fails to report properly interest or dividends, or (iv)
under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the TIN furnished is the correct number and
that such holder is not subject to back-up withholding. A U.S. Holder who does
not provide the Company with its correct TIN also may be subject to penalties
imposed by the Internal Revenue Service ("Service"). Any amount withheld from a
payment to a U.S. Holder under the back-up withholding rules is creditable
against the U.S. Holder's federal income tax liability, provided the required
information is furnished to the Service. Back-up withholding will not apply,
however, with respect to payments made to certain holders, including
corporations and tax-exempt organizations, provided their exemption from back-up
withholding is properly established.
The Company will report to the U.S. Holders of Notes and Common Stock and
to the Service the amount of any "reportable payments" for each calendar year
and the amount of tax withheld, if any, with respect to such payments.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Holder of a Note that is not a U.S. Holder, as
defined above ("Non-U.S. Holder").
For purposes of withholding tax on interest and dividends discussed below,
a non-resident alien or other non-resident fiduciary of an estate or trust will
be considered a Non-U.S. Holder. For purposes of the following discussion,
interest, dividends and gain on the sale or exchange or other disposition of a
Note or Common Stock will be considered to be "U.S. trade or business income" if
such income or gain is (i) effectively connected with the conduct of a U.S.
trade or business or (ii) in the case of a treaty resident, attributable to a
permanent establishment (or, in the case of an individual, a fixed base) in the
United States.
49
<PAGE> 52
STATED INTEREST
Generally any interest paid to a Non-U.S. Holder that is not U.S. trade or
business income will not be subject to U.S. tax if the interest qualifies as
"portfolio interest". Generally interest on the Notes will qualify as portfolio
interest if (i) the Non-U.S. Holder does not actually or constructively own 10%
or more of the total voting power of all voting stock of the Company and is not
a "controlled foreign corporation" with respect to which the Company is a
"related person" within the meaning of the Code, and (ii) the beneficial owner
(a) under penalty of perjury, certifies that the beneficial owner is not a
United States person and such certificate provides the beneficial owner's name
and address, and (b) is not a bank receiving interest on an extension of credit
made pursuant to a loan agreement made in the ordinary course of its trade or
business.
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exception, and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate withholding. U.S.
trade or business income will be taxed at regular U.S. rates rather than the 30%
gross rate. In the case of a Non-U.S. Holder that is a corporation, such United
States trade or business income may also be subject to the "branch profits tax"
(which is generally imposed on a foreign corporation on the actual or deemed
repatriation from the U.S. of earnings and profits attributable to U.S. trade or
business income) at a rate of 30%. The branch profits tax may not apply (or may
apply at a reduced rate) if the recipient is a qualified resident of certain
countries with which the U.S. has an income tax treaty. To claim the benefit of
a tax treaty or to claim exemption from withholding because the income is U.S.
trade or business income, the Non-U.S. Holder must provide a properly executed
Form 1001 or 4224 (or such successor forms as the Service designates), as
applicable, prior to the payment of interest. These forms must be periodically
updated. Under final regulations that will be effective for payments after
December 31, 1998, the Forms 1001 and 4224 may be replaced by Form W-8. Also,
under the final regulations, a Non-U.S. Holder who is claiming the benefit of a
treaty in certain circumstances may be required to obtain a U.S. taxpayer
identification number and to provide certain documentary evidence issued by
foreign governmental authorities to prove residence in the foreign country.
Certain special procedures are provided in the final regulations for payments
through qualified intermediaries.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder of Common Stock will be
subject to withholding of U.S. federal income tax at a 30% rate unless such is
reduced by an applicable income tax treaty. Dividends that are connected with
such holders conduct of a trade or business in the U.S. (U.S. trade or business
income) are generally subject to the U.S. federal income tax at regular rates,
but are not generally subject to the 30% withholding tax if the Non-U.S. Holder
files the appropriate form with the payor, as discussed above. Any U.S. trade or
business income received by a Non-U.S. Holder that is a corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be applicable under an income tax treaty.
Dividends paid to an address in a foreign country generally are presumed (absent
actual knowledge to the contrary) to be paid to a resident of such country for
purposes of the withholding discussed above and for purposes of determining the
applicability of a tax treaty rate. Under final regulations that are effective
for payments after December 1, 1998, however, a Non-U.S. Holder of Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy applicable certification and other requirements, which would include
the requirement that the Non-U.S. Holder file a form which contains the holder's
name and address. In some circumstances, a Non-U.S. Holder may also be required
to provide a U.S. taxpayer identification number and a certificate of residence
in the foreign country (or other acceptable proof of such residence) to claim
the benefits of an applicable treaty rate.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for a refund
with the Service.
50
<PAGE> 53
CONVERSION
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
on the conversion of the Notes into Common Stock, except with respect to cash
(if any) received in lieu of a fractional share or interest not previously
included in income. Cash in lieu of a fractional share may give rise to gain
that would be subject to the rules described below for the sale of Notes. Cash
or Common Stock treated as issued for accrued interest would be treated as
interest under the rules described above.
SALE, EXCHANGE OR REDEMPTION OF NOTES OR COMMON STOCK
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a Note or Common Stock generally will not be subject to U.S.
federal income tax, provided that: (i) such gain is not U.S. trade or business
income; (ii) the Non-U.S. Holder is not an individual who holds the Note or
Common Stock as a capital asset, is present in the U.S. for 183 days or more in
the taxable year of the disposition and who meets certain other requirements;
(iii) the Non-U.S. Holder is not subject to tax pursuant to the provisions of
U.S. tax law applicable to certain U.S. expatriates (including certain former
citizens or residents of the U.S.); (iv) the Notes and the Common Stock are
"regularly traded on an established securities market" (within the meaning of
the Regulations under Section 897 of the Code); and (v) the Non-U.S. Holder has
not held directly or indirectly at any time during the five year period ending
on the date of the disposition more than 5% of the Notes or the Common Stock, as
the case may be. For this purpose, the determination of whether the Notes or the
Common Stock will be treated as "regularly traded on an established securities
market" will depend upon the extent of trading volume in the Notes or the Common
Stock as the case may be, or upon the existence of a broker or dealer making a
market in such Notes or Common Stock.
FEDERAL ESTATE TAX
Notes held (or treated as held) by an individual who is not a citizen or
resident of the U.S. (for federal estate tax purposes) at the time of his or her
death will not be subject to the U.S. federal estate tax provided that the
individual does not actually or constructively own 10% or more of the total
voting power of all voting stock of the Company and income on the Notes was not
U.S. trade or business income. Common Stock owned or treated as owned by an
individual who is not a citizen or resident of the U.S. (for federal estate tax
purposes) will be included in such individual's estate for U.S. federal income
tax purposes unless an applicable estate tax treaty otherwise applies.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each Non-U.S. Holder
any interest or dividend that is subject to withholding, or that is exempt from
U.S. withholding tax pursuant to a tax treaty, or interest that is exempt from
U.S. tax under the portfolio interest exception. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides.
The Treasury Regulations provide that backup withholding and information
reporting will not apply to payments of principal on the Notes or Common Stock
by the Company to a Non-U.S. Holder, if the Holder certifies as to its non-U.S.
status under penalties of perjury or otherwise establishes an exemption
(provided that neither the Company nor its paying agent has actual knowledge
that the holder is a U.S. person or that the conditions of any other exemption
are not, in fact, satisfied).
The payment of the proceeds from the disposition of Notes or Common Stock
to or through the U.S. office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as to its non-U.S. status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
Holder is a U.S. person or that the conditions of any other exemptions are not,
in fact, satisfied. The payment of the proceeds from the disposition of a Note
to or through a non-U.S. office of a non-U.S. broker will not be subject to
information reporting or backup withholding unless the non-U.S. broker has
certain types of relationships with the U.S.
51
<PAGE> 54
In the case of the payment of proceeds from the disposition of the Notes or
Common Stock to or through a non-U.S. office of a broker that is either a U.S.
person or a U.S. related person, the Treasury Regulations require information
reporting on the payment unless the broker has documentary evidence in its files
that the owner is a Non-U.S. Holder and the broker has no knowledge to the
contrary. Backup withholding will not apply to payments made through foreign
offices of a broker that is not a U.S. person or a U.S. related person (absent
actual knowledge that the payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY,
EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR TAX
CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES AND THE
COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE
LAWS.
THE COMPANY
EFFECT OF NEW LEGISLATION
Under recently enacted legislation, no deduction is permitted for interest
paid or accrued on any indebtedness of a corporation that is "payable in equity"
of the issuer or related party. Debt is treated as payable in equity of the
issuer if the debt is part of an arrangement designed to result in payment of
the instrument with or by reference to the equity. Such arrangements could
include debt instruments that are convertible at the holder's option when it is
substantially certain that the right will be exercised. However, it is not
expected that the provision will affect debt with a conversion feature where the
conversion price is significantly higher than the market price of the stock on
the date of the debt issuance. Accordingly, the Company does not believe that
its interest deduction will be adversely affected by these rules.
EFFECT ON TAX CARRYOVERS
The Code contains provisions that can reduce the federal income tax benefit
to the Company from its carryovers of net operating losses (and certain tax
credits) if the ownership of the stock of the Company were to change by more
than a statutorily prescribed threshhold amount during any three year period.
While the issuance of the Notes (or their conversion) could contribute to such a
"change in ownership", the Company believes that the effect of the issuance
and/or conversion of the Notes on such tax benefits should not be material.
52
<PAGE> 55
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
the Underwriters has severally agreed to purchase from the Company, the
principal amount of Notes set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITER
------------
<S> <C>
CIBC Oppenheimer Corp.......................................... $
SBC Warburg Dillon Read Inc. .................................. $
------------
Total................................................ $100,000,000
============
</TABLE>
The Underwriters propose to offer part of the Notes directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus and part of the Notes to certain securities dealers at such price
less a concession not in excess of % of the principal amount per Note. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of % per Note to certain brokers and dealers. After the Notes are released for
sale to the public, the offering price and other selling terms may from time to
time be changed by the Underwriters. The Underwriters are obligated to take and
pay for all of the Notes offered hereby (other than those covered by the
over-allotment option described below) if any are taken.
The Company has granted the Underwriters an option, exercisable for up to
30 days after the date of this Prospectus, to purchase up to an aggregate of
$15,000,000 principal amount of additional Notes of the public offering price
set forth on the cover page hereof, less Underwriters' discounts and
commissions. If the Underwriters exercise such option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage of such additional Notes that the principal amount of Notes
purchased by each of them as shown in the foregoing table bears to the
$100,000,000 principal amount of Notes offered hereby. The Underwriters may
exercise such option only to cover over-allotments, if any, incurred in
connection with the sale of the Notes offered hereby.
Leon Levy, Chairman of the Board of the Company and a General Partner of
Odyssey (a privately-held investment partnership which is a principal
stockholder of the Company), has advised the Company of his intention to
purchase $20,000,000 aggregate principal amount of Notes offered hereby, net of
underwriting fees and commissions.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including, without limitation, liabilities under the Securities Act
or to contribute to payments which the Underwriters may be required to make in
respect thereof.
The Company has agreed not to offer, sell, contract to sell, or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or any rights to acquire Common
Stock (other than shares issuable upon exercise of outstanding options) for a
period of 180 days after the date of this Prospectus, without the prior written
consent of CIBC Oppenheimer Corp. The Company's officers and directors and
Odyssey have also agreed not to offer, sell, contract to sell, pledge or grant
any option to purchase or otherwise dispose of such securities for 180 days
after the date of this Prospectus, without the prior written consent of CIBC
Oppenheimer Corp. See "Risk Factors -- Shares Eligible for Future Sale."
In connection with the Offering and in compliance with applicable law, the
Underwriters may effect transactions which stabilize or maintain the market
price of the Notes, the Common Stock, or both at levels above those which might
otherwise prevail in the open market. Specifically, the Underwriters may
overallot in connection with the Offering creating a short position in the Notes
for their own account. For the purposes of covering a short position or
stabilizing the price of the Notes, the Underwriters may place bids for the
Notes, the Common Stock, or both or effect purchases of the Notes, the Common
Stock, or both in the open market. A short position may also be covered by
exercise of the over-allotment option described above. The Underwriters are not
required to engage in any of these activities and any such activities, if
commenced, may be discontinued at any time.
53
<PAGE> 56
The Company will apply to qualify the Notes for quotation on Nasdaq.
However, the Notes are a new issue of securities, have no established trading
market and may not be widely distributed. The Company has been advised by the
Underwriters that they currently intend to make a market in the Notes. However,
such entities are not obligated to do so, and any market making may be
discontinued at any time without notice. There can be no assurance as to whether
an active trading market for the Notes will develop.
LEGAL OPINIONS
Certain legal matters with respect to the Notes offered hereby will be
passed upon for the Company by Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New
York, New York 10153. Robert Todd Lang, the sole shareholder of a professional
corporation that is a member of Weil, Gotshal & Manges LLP, is a limited partner
of Odyssey, a principal stockholder of Avatar. As of the date of this
Prospectus, an aggregate of 12,739 shares of Avatar's Common Stock were owned
beneficially by certain members of Weil, Gotshal & Manges LLP. Certain legal
matters will be passed upon for the Underwriters by Morgan, Lewis & Bockius LLP,
101 Park Avenue, New York, New York 10178.
EXPERTS
The consolidated financial statements as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996, included in
this Prospectus have been so included in reliance on the report of Ernst & Young
LLP, independent auditors, given on the authority of said firm as experts in
auditing and accounting.
54
<PAGE> 57
AVATAR HOLDINGS INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Balance Sheets -- December 31, 1996 and December 31, 1995................ F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994................................................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................ F-6
Notes to Consolidated Financial Statements for the years ended December 31, 1996, 1995
and 1994............................................................................ F-7
Consolidated Balance Sheets (unaudited) -- September 30, 1997 and December 31, 1996... F-23
Consolidated Statements of Operations (unaudited) -- Nine and three months ended
September 30, 1997 and 1996......................................................... F-24
Consolidated Statements of Cash Flows (unaudited) -- Nine months ended September 30,
1997 and 1996....................................................................... F-25
Notes to Consolidated Financial Statements............................................ F-26
</TABLE>
F-1
<PAGE> 58
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, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 27. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, 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.
ERNST & YOUNG LLP
Miami, Florida
February 28, 1997 except for Notes H and S,
as to which the dates are March 18, 1997
and December 2, 1997, respectively
F-2
<PAGE> 59
AVATAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash............................................................... $ 6,463 $ 2,436
Restricted cash.................................................... 1,583 2,003
Investments -- trading............................................. 4,535 48,258
Contracts, mortgage notes and other receivables, net............... 45,266 58,272
Land and other inventories......................................... 162,204 144,907
Property, plant and equipment, net................................. 186,378 182,614
Other assets....................................................... 12,916 13,474
Regulatory assets.................................................. 3,768 4,021
Net assets of discontinued operations.............................. 20,072 14,647
-------- --------
Total Assets............................................. $443,185 $470,632
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes, mortgage notes and other debt:
Real estate and corporate........................................ $ 74,148 $103,408
Development and construction loans............................... 22,492 19,093
Utilities........................................................ 42,152 43,164
Estimated development liability for sold land...................... 8,459 13,033
Accounts payable................................................... 7,116 8,876
Accrued and other liabilities...................................... 30,842 31,913
Deferred customer betterment fees.................................. 18,430 18,997
Minority interest in consolidated subsidiaries..................... 9,064 9,060
Net liabilities of discontinued operations......................... 11,785 8,334
-------- --------
Total Liabilities........................................ 224,488 255,878
Commitments and contingent liabilities
Contributions in aid of construction............................... 59,245 56,342
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share
Authorized: 15,500,000 shares
Issued: 12,715,448 shares........................................ 12,715 12,715
Additional paid-in capital......................................... 207,271 207,271
Retained earnings.................................................. 1,439 399
-------- --------
221,425 220,385
Treasury stock, at cost, 3,620,346 shares.......................... 61,973 61,973
-------- --------
Total Stockholders' Equity.................................... 159,452 158,412
-------- --------
Total Liabilities and Stockholders' Equity............... $443,185 $470,632
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 60
AVATAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Real estate sales.......................................... $ 93,510 $ 48,217 $ 42,351
Deferred gross profit on homesite sales.................... 2,639 (720) (1,719)
Utility revenues........................................... 32,749 29,669 28,664
Interest income............................................ 7,846 9,427 11,125
Trading account profit, net................................ 2,210 6,912 342
Other...................................................... 2,405 663 564
-------- -------- --------
Total revenues................................... 141,359 94,168 81,327
EXPENSES
Real estate expenses....................................... 91,939 58,626 48,954
Utility expenses........................................... 25,505 24,923 24,651
General and administrative expenses........................ 8,784 9,210 10,224
Interest expense........................................... 12,053 11,518 11,160
Other...................................................... 814 811 811
-------- -------- --------
Total expenses................................... 139,095 105,088 95,800
-------- -------- --------
Income (loss) from continuing operations before income
taxes.................................................... 2,264 (10,920) (14,473)
Provision for income taxes................................. -- -- --
-------- -------- --------
Net income (loss) from continuing operations............... 2,264 (10,920) (14,473)
Discontinued operations:
Income (loss) from operations, less income tax expense of
$0.................................................... (1,224) 581 (148)
-------- -------- --------
Net income (loss).......................................... $ 1,040 $(10,339) $(14,621)
======== ======== ========
Per share amounts:
Net income (loss) from continuing operations............... $ 0.25 $ (1.20) $ (1.59)
======== ======== ========
Income (loss) from discontinued operations................. $ (0.14) $ 0.06 $ (0.02)
======== ======== ========
Net income (loss).......................................... $ 0.11 $ (1.14) $ (1.61)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 61
AVATAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
------- ---------- -------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1994........................ $12,715 $ 207,271 $ 25,359 $ 61,973
Net income...................................... -- -- (14,621) --
Balance at December 31, 1994...................... 12,715 207,271 10,738 61,973
Net (loss)...................................... -- -- (10,339) --
------- -------- ------- -------
Balance at December 31, 1995...................... 12,715 207,271 399 61,973
Net income...................................... -- -- 1,040 --
------- -------- ------- -------
Balance at December 31, 1996...................... $12,715 $ 207,271 $ 1,439 $ 61,973
======= ======== ======= =======
</TABLE>
There are 5,000,000 authorized shares of preferred stock, none of which are
issued.
See notes to consolidated financial statements.
F-5
<PAGE> 62
AVATAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................... $ 1,040 $(10,339) $(14,621)
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization.................................... 10,278 9,654 8,453
Deferred gross profit............................................ (2,639) 720 1,719
Cost of sales not requiring cash................................. 3,956 3,590 3,010
Inventory write down............................................. 1,464 -- --
Trading account profit, net...................................... (2,210) (6,912) (342)
Changes in operating assets and liabilities:
Restricted cash................................................ 420 (731) 170
Investments -- trading......................................... 45,554 11,000 --
Principal payments on contracts receivable..................... 14,391 17,571 19,423
Receivables.................................................... 1,616 (6,560) (8,748)
Other receivables.............................................. (362) (1,174) (526)
Inventories.................................................... (27,291) (34,711) (6,175)
Other assets................................................... 884 2,591 (375)
Assets/liabilities of discontinued operations, net............. (1,974) (3,622) 246
Accounts payable and accrued and other liabilities............. (2,766) 4,228 6,612
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................. 42,361 (14,695) 8,846
INVESTING ACTIVITIES
Investment in property, plant and equipment.......................... (11,465) (13,473) (15,530)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES................................ (11,465) (13,473) (15,530)
FINANCING ACTIVITIES
Net proceeds from revolving lines of credit and long-term
borrowings......................................................... 73,931 68,348 25,342
Principal payments on revolving lines of credit and long-term
borrowings......................................................... (100,800) (42,122) (21,071)
Purchase of 9% debentures............................................ -- (387) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................. $(26,869) $ 25,839 $ 4,271
-------- -------- --------
INCREASE (DECREASE) IN CASH.......................................... $ (2,413) $ 4,027 $ (2,329)
Cash at beginning of year............................................ 2,436 4,765 7,178
-------- -------- --------
CASH AT END OF YEAR.................................................. $ 6,463 $ 2,436 $ 4,765
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES
Contributions in aid of construction................................. $ 5,584 $ 5,000 $ 1,344
======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest -- Continuing operations (net of amount capitalized of
$3,573, $3,234, and $1,625 in 1996, 1995, and 1994,
respectively)...................................................... $ 7,702 $ 9,336 $ 10,899
======== ======== ========
Interest -- Discontinued operations (net of amount capitalized of
$430 in 1996 and $0 in 1995 and 1994).............................. $ 473 $ 221 $ 22
======== ======== ========
Income taxes......................................................... $ -- $ -- $ 255
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 63
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(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
single and multifamily residential housing, vacation ownership intervals,
improved and unimproved real estate, and providing water and wastewater utility
services.
Restricted Cash:
Restricted cash represents housing deposits of $1,537 and utility deposits
of $46. The housing deposits will become available to the Company when the
housing contracts close.
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.
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement 121 in
the first quarter of 1996, and there was no material impact on the Company's
operations or financial position.
Revenues:
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.
The Company uses the installment method of profit recognition for sales of
homesites, the accrual method of profit recognition for sales of completed
vacation ownership intervals, and the percentage of completion method for sales
of those vacation ownership intervals, which are under construction. 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, and deferred profit is included in the balance sheet, as
a reduction of contracts receivable, until recognized. Under the percentage of
completion method, the gross profit on recorded sales is recognized based upon
the percentage of construction completed.
Utility revenues are recorded as the service is provided.
F-7
<PAGE> 64
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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:
Income taxes have been provided using the liability method in accordance
with 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 where 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.
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 lives of the utility systems and reflects probable future revenue
reductions or increases from ratepayers.
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.
Investments:
The Company classifies its entire 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 that was $4,535 at
December 31, 1996 and $48,258 at December 31, 1995.
Postretirement Benefits:
The Company accrues 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.
Advertising Costs:
Advertising costs are expensed as incurred. For the years ended December
31, 1996, 1995 and 1994, advertising costs totaled $3,758, $3,265 and $1,304,
respectively.
F-8
<PAGE> 65
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income/Loss Per Common Share:
For 1996, 1995 and 1994, net income/loss per common share is computed on
the basis of the weighted average number of shares outstanding of 9,095,102.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results, however, could differ from those estimates.
Reclassifications:
Certain 1995 and 1994 financial statement items have been reclassified to
conform with 1996 presentations.
NOTE B -- REAL ESTATE SALES
The components of real estate sales are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues from homebuilding activities................. $49,672 $13,260 $ 7,400
Resort revenues....................................... 16,087 14,151 13,222
Gross homesite sales*................................. 12,387 12,561 12,271
Proceeds from sales of recreation facility............ 8,300 -- --
Rental, leasing, cable and other real estate
operations.......................................... 5,362 5,621 5,457
Commercial/Industrial land sales...................... 1,702 2,624 4,001
------- ------- -------
Total real estate sales............................. $93,510 $48,217 $42,351
======= ======= =======
</TABLE>
- ---------------
* 1996 includes $3,714 of land sales generated by the Homebuilding Division and
$4,276 for bulk land sales.
NOTE C -- INVESTMENTS
The Company classifies its entire 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, 1996 and 1995 included
corporate bonds and other 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. The portfolio at
December 31, 1995, also included obligations for securities that had been sold
that the Company did not own and was, therefore, obligated to purchase at a
future date. Such obligations were recorded at the fair market value of the
securities.
F-9
<PAGE> 66
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the fair values of investments (including
securities sold short which are valued at the cost to purchase as of December
31):
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Corporate bonds................................................... $ -- $21,985
Non-rated bonds................................................... 77 8,472
Equity securities................................................. 81 2,045
Other rated bonds................................................. 2,172 4,753
Money market accounts............................................. 2,205 11,519
Less: Securities sold short....................................... -- (516)
------ -------
Total market value........................................... $4,535 $48,258
====== =======
Aggregate cost............................................... $3,975 $44,116
====== =======
</TABLE>
NOTE D -- CONTRACTS, MORTGAGE NOTES AND OTHER RECEIVABLES
Contracts, mortgage notes and other receivables are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Contracts and mortgage notes receivable.......................... $61,534 $82,521
Notes and other receivables...................................... 8,543 7,466
------- -------
70,077 89,987
------- -------
Less:
Allowance for doubtful accounts................................ 848 648
Market valuation reserve....................................... 140 704
Deferred gross profit.......................................... 21,878 27,589
Other.......................................................... 1,945 2,774
------- -------
24,811 31,715
------- -------
$45,266 $58,272
======= =======
</TABLE>
Contracts and mortgage notes receivable were 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, 1996, 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 the
homesites as collateral for contracts and mortgages receivable and such
collateral can be repossessed by the Company in the event of 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, 1996 and 1995 were $7,099 or 9.6% and
$11,619 or 13.0%, respectively. Estimated maturities for the five years
subsequent to 1996 are: 1997 -- $17,142; 1998 -- $14,862; 1999 -- $10,822;
2000 -- $7,786 and 2001 -- $6,501.
F-10
<PAGE> 67
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- LAND AND OTHER INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Land developed and in process of development........... $105,617 $ 94,196
Land held for future development or sale............... 33,544 34,790
Dwelling units completed or under construction......... 22,270 14,800
Other.................................................. 773 1,121
-------- --------
$162,204 $144,907
======== ========
</TABLE>
In 1996, the Company recorded an impairment loss of $1,464 on a certain
tract of land located at the Company's Banyan Bay site. Fair value was
determined based on a purchase offer received for the land.
NOTE F -- ESTIMATED DEVELOPMENT LIABILITY FOR SOLD LAND
The estimated cost to complete consists of required land and utility
improvements in all areas designated for homesite sales and are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Gross unexpended costs (net of recoveries of $11,941 in
1996 and $11,495 in 1995).............................. $11,685 $19,022
Less costs relating to unsold homesites.................. 3,226 5,989
------- -------
Estimated development liability for sold land............ $ 8,459 $13,033
======= =======
</TABLE>
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 voiding the
portion of the existing agreement relating to water and wastewater extensions,
leaving only the electrical portion.
Avatar may be obligated to expend approximately $8,394 (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
$11,685 are estimated as follows: 1997-$3,849 and thereafter-$7,836. Because the
timing of the expenditures after 1997 is dependent upon certain future
occurrences beyond Avatar's control, projection by year after 1997 is not
presently practicable.
F-11
<PAGE> 68
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and accumulated depreciation consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Utility land, plant and equipment...................... $230,600 $219,271
Land and improvements.................................. 12,395 12,844
Buildings and improvements............................. 17,941 19,165
Machinery, equipment and fixtures...................... 13,513 14,803
Other.................................................. 639 418
-------- --------
275,088 266,501
Less accumulated depreciation.......................... 88,710 83,887
-------- --------
$186,378 $182,614
======== ========
</TABLE>
Depreciation charged to operations during 1996, 1995 and 1994 was $6,315,
$5,833 and $5,655, respectively, net of amortization of contributions and
advances in aid of construction of $4,289, $4,051 and $2,798 during 1996, 1995
and 1994, respectively.
NOTE H -- NOTES, MORTGAGE NOTES AND OTHER DEBT
Notes, mortgage notes and other debt are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------- --------
<S> <C> <C>
Real estate and corporate
Bank credit lines............................................. $39,381 $ 56,024
8% senior debentures, due 2000, net of unamortized discount of
$899 and $1,080, respectively.............................. 6,728 6,547
9% senior debentures, due 2000, net of unamortized discount of
$2,275 and $2,725, respectively............................ 23,070 22,619
Mortgage note obligations, interest rates from 8.875% to 10%,
due from 1999-2002......................................... 4,969 9,612
Avatar Homesite Mortgage Trust 1992-2002, 7% Notes............ -- 8,606
------- --------
$74,148 $103,408
======= ========
Development and construction loans, interest rates from 8% to
10.5%......................................................... $22,492 $ 19,093
======= ========
Utilities
Bank credit lines............................................. $ 4,350 $ 2,975
Utility first mortgage bonds due serially from 1997-2007,
interest rates from 7.79% to 9.19%......................... 15,608 16,820
Utility senior notes, 7.27%, due 2000-2010.................... 18,000 18,000
Utility promissory notes, due 1997-2002....................... 4,194 5,369
------- --------
$42,152 $ 43,164
======= ========
</TABLE>
At December 31, 1996, Avatar had secured bank credit lines of $59,379 and
unsecured bank credit lines of $15,000. The unused portions of secured and
unsecured credit lines were $20,000 and $10,650, respectively, at December 31,
1996. The weighted average interest rate on short term borrowing at December 31,
1996 was 9.1%. Interest rates for borrowings under these lines range from 6.43%
to 8.25% on the unsecured bank credit
F-12
<PAGE> 69
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lines and from 8% to 10.5% on the secured bank credit lines at December 31,
1996. Additionally, certain credit lines provide for fixed rate borrowings
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 real
property, and contracts and mortgage, notes receivable of $57,436 and
investments of $3,964 at December 31, 1996.
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. These notes were paid in full during the third quarter
of 1996.
During 1996, an Avatar subsidiary and Stanco Partners Ltd. entered into a
joint venture agreement (the Joint Venture) and acquired Casa Del Mar (CDM), an
Ormond Beach, Florida beachfront hotel. In connection with the acquisition of
Casa Del Mar, the Joint Venture entered into a loan agreement with $5,674
outstanding at December 31, 1996. The debt is guaranteed by a subsidiary of
Avatar as well as the Joint Venture Partners.
Maturities of notes, mortgage notes and other debt at December 31, 1996,
are as follows:
<TABLE>
<CAPTION>
DEVELOPMENT
AND
REAL ESTATE CONSTRUCTION UTILITIES TOTAL
----------- ----------- --------- --------
<S> <C> <C> <C> <C>
1997................................... $ 176 $14,756 $ 7,618 $ 22,550
1998................................... 32,813 5,239 2,184 40,236
1999................................... 209 565 2,184 2,958
2000................................... 29,951 1,140 3,821 34,912
2001................................... 6,854 -- 3,820 10,674
thereafter............................. 4,145 792 22,525 27,462
------- ------- ------- --------
$74,148 $22,492 $ 42,152 $138,792
======= ======= ======= ========
</TABLE>
Maturities for 1997 include approximately $4,350 related to the Company's
bank credit lines.
Interest capitalized during 1996, 1995 and 1994 amounted to $4,003, $3,234
and $1,625, respectively.
Property, plant and equipment and inventory pledged as collateral for
notes, mortgage notes and other indebtedness had a net book value of
approximately $159,000 at December 31, 1996.
NOTE I -- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
As of December 31, 1996 and 1995, preferred stock outstanding is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
9% cumulative preferred stock.............................. $9,000 $9,000
Other...................................................... 64 60
------ ------
$9,064 $9,060
====== ======
</TABLE>
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 $814 in 1996, $811 in 1995, and $811
in 1994.
F-13
<PAGE> 70
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 five highest years
of earnings. 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.
The following table sets forth the defined benefit plan's funded status as
of December 31, 1996, 1995 and 1994 and the retirement expense recognized in the
consolidated statements of income for the years then ended.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3,288, $2,924, and $2,382,
respectively..................................... $ 3,367 $ 3,025 $ 2,526
======= ======= =======
Projected benefit obligation for services rendered to
date................................................ $(3,885) $(3,646) $(3,159)
Plan assets at fair value............................. 4,060 3,642 3,036
------- ------- -------
Projected benefit obligation less than (in excess of)
plan assets......................................... 175 (4) (123)
Unrecognized net gain................................. (515) (413) (413)
Prior service cost not yet recognized in net periodic
pension cost........................................ 362 409 456
Unrecognized net assets at January 1, 1986, net of
amortization........................................ (58) (73) (87)
------- ------- -------
Accrued pension cost included in accrued and other
liabilities......................................... $ (36) $ (81) $ (167)
======= ======= =======
Net retirement cost included the following components:
Defined Benefit Plan:
Service cost -- benefits earned during the
period......................................... $ 204 $ 190 $ 209
Interest cost on projected benefit obligation.... 284 250 229
Actual return on plan assets..................... (406) (495) (362)
Net amortization and deferral.................... 139 245 169
------- ------- -------
Net pension cost................................. 221 190 245
Defined contribution plan........................... 122 117 102
------- ------- -------
Total retirement expense.................... $ 343 $ 307 $ 347
======= ======= =======
</TABLE>
The actuarial assumptions used in determining the present value of the
projected benefit obligation were: weighted average discount rate of 7.5% in
1996, 1995 and 1994, rate of increase in future compensation levels of 5% in
1996, 1995 and 1994, and expected long-term rate of return on plan assets of 8%
in 1996, 1995 and 1994.
Plan assets are invested in the general asset fund of a major insurance
company, which is composed primarily of fixed income securities, and a separate
account, which is composed of equity securities, public bonds or cash
equivalents.
F-14
<PAGE> 71
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
A utility subsidiary of Avatar sponsors a defined non-contributory benefit
postretirement plan that provides medical and life insurance benefits to both
salaried and nonsalaried employees after retirement. Participants contribute a
portion of such benefits. The utility's funding policy for its postretirement
plan is to fund on a pay-as-you-go basis.
The following table sets forth the plan's status as of December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................ $ (882) $ (948) $ (766)
Fully eligible active plan participants............. (496) (768) (865)
Other active plan participants...................... (1,460) (2,299) (2,307)
------- ------- -------
(2,838) (4,015) (3,938)
Plan assets at fair value............................. 0 0 0
------- ------- -------
Accumulated postretirement benefit obligation in
excess of plan assets............................... (2,838) (4,015) (3,938)
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions... (2,281) (715) (195)
Unrecognized transition obligation.................... 2,645 2,798 2,793
------- ------- -------
Accrued postretirement benefit cost................... $(2,474) $(1,932) $(1,340)
======= ======= =======
Net periodic postretirement benefit cost included the
following components:
Service cost........................................ $ 244 $ 273 $ 315
Interest cost on accumulated postretirement benefit
obligation....................................... 277 283 271
Amortization of transition obligation over 20
years............................................ 155 155 155
Other............................................... (88) (35) (23)
------- ------- -------
Net periodic postretirement benefit cost.............. $ 588 $ 676 $ 718
======= ======= =======
</TABLE>
For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits assumed for 1996, 1995 and 1994 was 10%,
11% and 12%, respectively; the rate of increase was assumed to decrease
gradually to 6% by the year 2000 and remain at that level thereafter;
termination rates calculations, except those at December 31, 1996, used the
Crocker-Sarason Straight T-6 tables less 51GAM deaths; the T-8 tables were used
for the December 31, 1996 calculation. This change in termination rates will
decrease the net periodic benefit cost in future years. 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, 1996 by $516 and the aggregate of the service and interest
cost components of net periodic postretirement benefit for the year then ended
by $113.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation for 1996, 1995 and 1994 was 7.5%, 7.5% and
8.0%, respectively.
NOTE L -- LEASE COMMITMENTS
Avatar leases the majority of its administration and sales offices under
operating leases that expire at varying times through 2001. Rental expenses for
the years 1996, 1995 and 1994 were $1,838, $1,562, and
F-15
<PAGE> 72
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,235, respectively. Minimum rental commitments under noncancelable operating
leases as of December 31, 1996 were as follows: 1997 -- $2,110; 1998 -- $1,837;
1999 -- $1,478; 2000 -- $575; 2001 -- $280.
NOTE M -- ACCRUED AND OTHER LIABILITIES
Accrued and other liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Property taxes........................................... $ 5,788 $ 5,886
Customer deposits and advances........................... 5,225 5,596
Interest................................................. 1,027 1,573
Other.................................................... 18,802 18,858
------ ------
$30,842 $31,913
====== ======
</TABLE>
As of December 31, 1996, the Company had certain incentive compensation
agreements providing for a cash payment (to the extent vested), within ten days
following the respective fifth anniversary date (payment terms are subject to
renewal agreements) 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 eligible employee will vest in the rights to this incentive compensation
with respect to one-fifth thereof in 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 years
ended December 31, 1996, 1995 and 1994, the Company recorded incentive
compensation of ($213), $39 and $763, respectively, associated with these
agreements. The liability for incentive compensation included in other
liabilities at December 31, 1996 and 1995 is $822 and $1,035, respectively.
NOTE N -- INCOME TAXES
Under the installment method of tax reporting for homesite and vacation
ownership sales, Avatar anticipates that its 1996 consolidated federal income
tax return will reflect a net operating loss carryforward of approximately
$40,000, which expires in years 2003 through 2010. In addition, investment tax
credits and alternative minimum tax credit carryforwards of approximately $5,000
are available, a portion of which expires in years 1997 to 2001. The Internal
Revenue Service has not examined these carryforwards.
The Company has recorded a valuation allowance of $41,000 with respect to
the deferred income tax assets that 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.
F-16
<PAGE> 73
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred income tax assets
Net operating loss carryover................................. $ 15,000 $ 16,000
Tax over book basis of land inventory........................ 24,000 23,000
Unrecoverable land development costs......................... 3,000 4,000
Tax over book basis of depreciable assets.................... 7,000 7,000
Alternative minimum tax and investment tax credit
carryforward.............................................. 5,000 5,000
Other........................................................ 2,000 2,000
-------- --------
Total deferred income taxes.......................... 56,000 57,000
Valuation allowance for deferred income tax assets........... (41,000) (42,000)
-------- --------
Deferred income tax assets after valuation allowance........... 15,000 15,000
Deferred income tax liabilities
Book over tax income recognized on homesite sales............ (3,000) (4,000)
Book over tax income recognized on vacation ownership
sales..................................................... (3,000) (1,000)
Deferred carrying charges on utility plant................... (2,000) (3,000)
Other........................................................ (7,000) (7,000)
-------- --------
Total deferred income tax liabilities.......................... (15,000) (15,000)
-------- --------
Net deferred income taxes.................................... $ -- $ --
======== ========
</TABLE>
A reconciliation of income tax expense (credit) from continuing operations
to the expected income tax expense (credit) at the federal statutory rate of 34%
for the year ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income tax expense (credit) computed at statutory
rate................................................ $ 770 $(3,713) $(4,921)
Income tax effect of non-deductible dividends on
preferred stock of subsidiary....................... 277 276 275
State income tax (credit), net of federal effect...... 147 (381) (515)
Other................................................. (194) (182) 161
Change in valuation allowance on deferred tax
assets.............................................. (1,000) 4,000 5,000
------- ------- -------
Provision for income taxes............................ $ -- $ -- $ --
======= ======= =======
</TABLE>
In years 1988 through 1995, the Company elected the installment method for
recording a substantial amount of its homesite and vacation ownership 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 -- CONTINGENCIES
Avatar is involved in various pending litigation matters primarily arising
in the normal course of its business. Although the outcome of these and the
following matter cannot be determined, management
F-17
<PAGE> 74
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Florida Cities Water Company
("Florida Cities"), a utility subsidiary of Avatar Holdings Inc. ("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-CIV-FTM-21, alleging that
Florida Cities' Waterway Estates treatment plant, located in Lee County, Florida
operated in violation of the Federal Clean Water Act ("Act"), 33 U.S.C. sec.1251
et seq. On May 5 and June 26, 1995, the United States amended its complaint to
include allegations against Florida Cities for violations of the Act at two
other Florida wastewater treatment plants, Barefoot Bay, located in Brevard
County, and Carrollwood, located in Hillsborough County. In addition, the
government amended the complaint to include Avatar, the parent corporation, as a
defendant. A trial was held in March and April 1996. On August 20, 1996, the
Court issued its final judgment, incorporating earlier rulings. The Court found
Avatar not liable on any of the government's claims and entered judgment in
Avatar's favor. The Court found Florida Cities not liable on certain of the
government's claims, but liable on other claims, and awarded the government $310
in civil penalties against Florida Cities. On October 18, 1996, the government
filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.
Avatar and Florida Cities believe that there are strong arguments to support the
affirmance of the judgment of the District Court on appeal.
NOTE P -- FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Real estate
Unaffiliated customers..................................... $108,610 $ 64,499 $ 52,663
Intersegment............................................... 100 100 100
-------- -------- --------
108,710 64,599 52,763
Utility
Unaffiliated customers..................................... 32,749 29,669 28,664
-------- -------- --------
32,749 29,669 28,664
Elimination of intersegment revenues....................... (100) (100) (100)
-------- -------- --------
Total Revenues............................................. $141,359 $ 94,168 $ 81,327
======== ======== ========
Operating profit:
Real estate................................................ $ 7,987 $ (3,237) $ (6,415)
Utility.................................................... 6,330 3,835 3,102
-------- -------- --------
Total operating profit..................................... 14,317 598 (3,313)
Interest expense........................................... (12,053) (11,518) (11,160)
-------- -------- --------
Income (loss) from continuing operations before income
taxes and effect of changes in methods of accounting..... $ 2,264 $(10,920) $(14,473)
======== ======== ========
Depreciation and amortization:
Real estate................................................ $ 2,506 $ 2,347 $ 1,957
Utility.................................................... 3,809 3,486 3,698
-------- -------- --------
Total...................................................... $ 6,315 $ 5,833 $ 5,655
======== ======== ========
</TABLE>
F-18
<PAGE> 75
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Capital expenditures:
Real estate................................................ $ 3,324 $ 2,138 $ 5,599
Utility.................................................... 12,336 17,382 10,745
-------- -------- --------
$ 15,660 $ 19,520 $ 16,344
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Identifiable assets:
Real estate................................................ $252,273 $239,459 $221,384
Utility.................................................... 186,020 182,661 173,357
-------- -------- --------
Total Identifiable Assets.................................. 438,293 422,120 394,741
General corporate assets................................... 4,892 48,512 51,836
-------- -------- --------
Total Assets............................................... $443,185 $470,632 $446,577
======== ======== ========
</TABLE>
- ---------------
(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.
F-19
<PAGE> 76
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE Q -- 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 -- trading at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Cash and restricted cash.......................... $ 8,046 $ 8,046 $ 4,439 $ 4,439
Investments -- trading............................ 4,535 4,535 48,258 48,258
Contracts, mortgage notes and other receivables... 45,266 46,365 58,272 59,250
Notes, mortgage notes and other debt:
Bank credit lines:
Short term bank credit lines.................... -- -- 16,799 16,799
Long term bank credit lines..................... 39,381 39,465 39,225 38,905
------- ------- ------- -------
Total bank credit lines................. 39,381 39,465 56,024 55,704
Mortgage obligations and promissory notes......... 4,969 5,018 9,612 9,888
Senior debentures................................. 29,798 30,936 29,166 30,936
Mortgage trust notes.............................. -- -- 8,606 7,107
------- ------- ------- -------
Total real estate and corporate......... $ 74,148 $75,419 $103,408 $103,635
======= ======= ======= =======
Development & Construction Loans:
Short term development and construction loans..... 7,353 7,353 2,916 2,916
Long term development and construction loans...... 15,139 24,117 16,177 16,681
------- ------- ------- -------
Total development and construction loans.......... $ 22,492 $31,470 $ 19,093 $ 19,597
======= ======= ======= =======
Avatar Utilities Inc.:
Short term bank credit lines...................... 4,350 4,350 2,975 2,975
Mortgage obligations, first mortgage bonds, and
promissory notes................................ 37,802 35,618 40,189 37,851
------- ------- ------- -------
Total Utilities................................... $ 42,152 $39,968 $ 43,164 $ 40,826
======= ======= ======= =======
</TABLE>
The Company in estimating the fair value of financial instruments used the
following methods and assumptions:
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 Note A).
Contracts, mortgage notes and other receivables: The fair value amounts
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 are estimated using discounted cash flow analysis
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
F-20
<PAGE> 77
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 R -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 QUARTER
-------------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues........................................ $27,315 $36,065 $31,378 $46,601
Expenses............................................ 27,975 36,027 32,169 42,924
------- ------- ------- -------
(Loss) income before income taxes................... (660) 38 (791) 3,677
(Loss) income from discontinued operations.......... (416) 55 434 (1,297)
Provision for income taxes.......................... -- -- -- --
------- ------- ------- -------
Net (loss) income................................... $(1,076) $ 93 $ (357) $ 2,380
======= ======= ======= =======
Per share amounts:
Net (loss) income................................. $ (0.12) $ 0.01 $ (0.04) $ 0.26
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER
-------------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues........................................ $24,639 $23,884 $22,336 $22,529
Expenses............................................ 25,137 25,348 25,890 27,933
------- ------- ------- -------
(Loss) income before income taxes................... (386) (1,594) (3,464) (4,895)
Income (loss) from discontinued operations.......... 112 (130) 90 509
Provision for income taxes.......................... -- -- -- --
------- ------- ------- -------
Net (loss) income................................... $ (386) $(1,594) $(3,464) $(4,895)
======= ======= ======= =======
Per share amounts:
Net (loss) income.............................. $ (0.04) $ (0.18) $ (0.38) $ (0.54)
======= ======= ======= =======
</TABLE>
The financial statements for the year ended December 31, 1995 include the
following amounts recorded in the fourth quarter:
(a) a decline due to an adjustment to the market value of investments
of $1,315 (or $.14 per share).
(b) a provision of $1,250 (or $.14 per share) due to an increase in
the accrual related to pending litigation.
NOTE S -- SUBSEQUENT EVENT
Discontinued Operations
During 1997, the Company developed a formal plan for the disposition of its
timeshare business. A letter of intent for the sale of the business was executed
in the third quarter of 1997. The expected sales price is approximately $11.0
million. Accordingly, net assets and liabilities of the time share business have
been segregated from continuing operations in the accompanying consolidated
balance sheets, and operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of
operations and cash flows.
F-21
<PAGE> 78
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to the discontinued operations for the years ended
December 31, 1996, 1995 and 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
-----------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
REVENUES
Real estate sales....................................... $10,011 $7,764 $1,512
Deferred gross profit on homesite sales................. -- 7 9
Interest income......................................... 972 226 --
Other................................................... 356 -- --
------- ------ ------
Total revenues.......................................... 11,339 7,997 1,521
EXPENSES
Real estate expenses.................................... 11,679 7,269 1,622
General and administrative expenses..................... -- 38 --
Interest expense........................................ 884 109 47
------- ------ ------
Total expenses.......................................... 12,563 7,416 1,669
------- ------ ------
(Loss) income before income taxes....................... (1,224) 581 (148)
Provision for income taxes.............................. -- -- --
------- ------ ------
Net (loss) income....................................... $(1,224) $ 581 $ (148)
======= ====== ======
</TABLE>
The net assets and liabilities of the discontinued operations included in
the accompanying balance sheets as of December 31, 1996 and 1995 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash....................................................... $ 53 $ 31
Restricted cash............................................ 198 2,045
Contracts, mortgage notes and other receivables, net....... 11,278 6,243
Land and other inventories................................. 6,007 4,363
Property, plant and equipment, net......................... 237 230
Other assets............................................... 2,299 1,735
------- -------
Total Assets..................................... $ 20,072 $ 14,647
======= =======
LIABILITIES
Notes, mortgage notes and other debt:
Real estate and corporate................................ $ 995 $ 1,489
Development and construction loan........................ 9,196 5,442
Accounts payable........................................... 349 430
Accrued and other liabilities.............................. 1,245 973
------- -------
Total Liabilities................................ $ 11,785 $ 8,334
======= =======
</TABLE>
F-22
<PAGE> 79
AVATAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash............................................................... $ 3,311 $ 6,463
Restricted cash.................................................... 1,728 1,583
Investments - trading.............................................. 4,358 4,535
Contracts and mortgage notes receivables, net...................... 27,080 38,200
Other receivables, net............................................. 5,498 7,066
Land and other inventories......................................... 175,862 162,204
Property, plant and equipment, net................................. 187,839 186,378
Other assets....................................................... 13,609 12,916
Regulatory assets.................................................. 3,405 3,768
Net assets of discontinued operations.............................. 26,561 20,072
-------- --------
Total Assets............................................. $ 449,251 $443,185
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes, mortgage notes and other debt:
Corporate........................................................ $ 44,669 $ 33,149
Notes, collateralized by contracts and mortgage notes
receivable.................................................... 26,766 36,030
Real Estate...................................................... 35,727 27,461
Utilities........................................................ 38,747 42,152
Estimated development liability for sold land...................... 8,778 8,459
Accounts payable................................................... 5,136 7,116
Accrued and other liabilites....................................... 33,558 30,842
Deferred customer betterment fees.................................. 17,897 18,430
Minority interest in consolidated subsidiaries..................... 7,264 9,064
Net liabilities of discontinued operations......................... 16,235 11,785
-------- --------
Total Liabilities........................................ 234,777 224,488
Commitments and contingent liabilities
Contributions in aid of construction............................... 61,603 59,245
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share
Authorized: 15,500,000 shares
Issued: 12,715,448 shares........................................ 12,715 12,715
Additional paid-in capital......................................... 207,271 207,271
(Deficit) retained earnings........................................ (5,142) 1,439
-------- --------
214,844 221,425
Treasury stock, at cost, 3,620,346 shares.......................... 61,973 61,973
-------- --------
Total Stockholders' Equity.................................... 152,871 159,452
-------- --------
Total Liabilities and Stockholders' Equity............... $ 449,251 $443,185
======== ========
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE> 80
AVATAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
-------------------- -------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Real estate sales.................................. $ 60,284 $60,373 $17,535 $19,761
Deferred gross profit.............................. 3,010 1,587 935 1,210
Utility revenues................................... 26,153 24,245 8,242 7,810
Interest income.................................... 4,110 6,035 1,188 1,918
Trading account profit, net........................ 257 2,047 50 450
Other.............................................. 601 471 217 229
-------- ------- ------- -------
Total revenues........................... 94,415 94,758 28,167 31,378
EXPENSES
Real estate expenses............................... 66,308 61,525 20,955 20,827
Utility expenses................................... 19,207 19,022 6,315 6,202
General and administrative expenses................ 6,919 6,660 2,141 1,976
Interest expense................................... 8,743 8,353 3,558 2,961
Other.............................................. 518 611 163 203
-------- ------- ------- -------
Total expenses........................... 101,695 96,171 33,132 32,169
-------- ------- ------- -------
Loss from continuing operations before income
taxes............................................ (7,280) (1,413) (4,965) (791)
Provision for income taxes......................... -- -- -- --
-------- ------- ------- -------
Net loss from continuing operations................ (7,280) (1,413) (4,965) (791)
Discontinued operations:
Income (loss) from operations, less income tax
expenses of $0................................ 699 73 (48) 434
-------- ------- ------- -------
Net loss........................................... $ (6,581) $(1,340) $(5,013) $ (357)
======== ======= ======= =======
Per share amounts:
Net loss from continuing operations................ $ (0.80) $ (0.16) $ (0.54) $ (0.09)
======== ======= ======= =======
Income (loss) from discontinued operations......... $ 0.08 $ 0.01 $ (0.01) $ 0.05
======== ======= ======= =======
Net loss........................................... $ (0.72) $ (0.15) $ (0.55) $ (0.04)
======== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE> 81
AVATAR HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................... $ (6,581) $ (1,340)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................................ 7,551 7,487
Deferred gross profit................................................ (3,010) (1,587)
Inventory writedown.................................................. 200 --
Cost of homesite sales not requiring cash............................ 5,172 3,591
Trading account profit, net.......................................... (257) (2,047)
Changes in operating assets and liabilities:
Restricted cash................................................... (145) 1,418
Investments -- trading............................................ 528 45,554
Principal payments on contracts receivable........................ 13,876 10,714
Receivables....................................................... 289 (484)
Other receivables................................................. 1,533 (132)
Inventories....................................................... (18,711) (22,210)
Other assets...................................................... 363 (202)
Assets/liabilities of discontinued operations, net................ (2,039) (2,276)
Accounts payable and accrued and other liabilities................ (584) (2,116)
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.......... (1,815) 36,370
INVESTING ACTIVITIES
Investment in property, plant and equipment............................ (6,654) (10,173)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES........................ (6,654) (10,173)
FINANCING ACTIVITIES
Net proceeds from revolving lines of credit and long-term borrowings... 46,070 50,283
Principal payments on revolving lines of credit and long-term
borrowings........................................................... (38,953) (72,013)
Redemption of 9% cumulative preferred stock............................ (1,800) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.......... 5,317 (21,730)
-------- --------
(DECREASE) INCREASE IN CASH............................................ (3,152) 4,467
Cash at beginning of period............................................ 6,463 2,436
-------- --------
CASH AT END OF PERIOD.................................................. $ 3,311 $ 6,903
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest -- Continuing operations (net of amount capitalized of
$2,289 and $2,850 in 1997 and 1996 respectively)......... $ 6,485 $ 6,106
-------- --------
Interest -- Discontinued operations (net of amount capitalized of $13
and $127 in 1997 and 1996 respectively).................. $ 811 $ 616
======== ========
Income taxes......................................................... $ -- $ --
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Contributions in aid of construction................................... $ 4,401 $ 3,085
======== ========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 82
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
BASIS OF STATEMENT PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheets as of September 30, 1997 and December 31,
1996, and the related consolidated statements of operations for the nine month
and three month periods ended September 30, 1997 and 1996 and the consolidated
statements of cash flows for the nine month periods ended September 30, 1997 and
1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statement presentation. In the opinion of management, all
adjustments necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted only of normal recurring items.
Interim results are not necessarily indicative of results for a full year.
For a complete description of the Company's other accounting policies,
refer to Avatar Holdings Inc.'s 1996 Annual Report on Form 10-K and the notes to
Avatar's consolidated financial statements included therein.
RECLASSIFICATIONS
Certain amounts presented for 1996 have been reclassified in the financial
statements for comparative purposes.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share", which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share, disclose both primary and diluted
earnings per share and restate all prior periods. Under the new requirements,
primary earnings per share will be renamed basic earnings per share and will
exclude the dilutive effect of stock options. The impact of SFAS No. 128 on both
primary and diluted earnings per share, is not expected to be significant.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the reporting of financial information from operating segments in annual and
interim financial statements issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures with respect to products and
services, geographic areas of operations, and major customers. SFAS No. 131,
which is effective for fiscal years beginning after December 15, 1997, will have
no impact on the Company's consolidated results of operations, financial
position or cash flows. However, SFAS No. 131 may affect reported segments and
the Company is reviewing this matter.
NET (LOSS) INCOME PER COMMON SHARE
For the nine and three months ended September 30, 1997 and 1996, net
(loss)/ income per common share is computed on the basis of the weighted average
number of shares outstanding of 9,095,102.
RESTRICTED CASH
Restricted cash, at September 30, 1997, includes utility deposits of $57,
as well as housing deposits of $1,671, which have been placed in escrow. The
housing deposits will become available to the Company when the housing contracts
close. Net assets from discontinued operations, at September 30, 1997, includes
$332 in restricted cash.
F-26
<PAGE> 83
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options.
The Company's 1997 Incentive and Capital Accumulation Plan (the "Incentive
Plan") was adopted by the Incentive Plan Committee, ratified by the Board of
Directors on February 13, 1997 and approved by the stockholders at the Annual
Meeting on May 29, 1997. The Incentive Plan makes available 425,000 shares of
Avatar Common Stock subject to certain adjustments. On February 13, 1997 Avatar
entered into a Nonqualified Stock Option Agreement with the Company's President
and granted him an option to purchase 225,000 shares of Avatar Common Stock at
$34.00 per share (such price being in the judgment of an appointed committee of
the Board not less than 100% of the Fair Market Value as defined in the
Incentive Plan). The Option will become exerciseable with respect to 45,000
shares on February 13, 1998 and on each February 13 thereafter through 2002, and
any unexercised portion of the Option will expire on February 13, 2007.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Accordingly, actual results could differ from those
reported.
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 September 30, 1997 and December 31, 1996
included bonds rated B- or above by Moody's and/or Standard & Poor's, non-rated
bonds and money market accounts. At December 31, 1996, the portfolio also
included equity securities and non-rated bonds of companies which are in
bankruptcy and have defaulted as to payments of principal and interest on such
bonds.
The following table sets forth the fair values of investments:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Non-rated bonds.................................... $ 100 $ 77
Equity securities.................................. -- 81
Other rated bonds.................................. 2,212 2,172
Money market accounts.............................. 2,046 2,205
------ ------
Total market value....................... $ 4,358 $4,535
====== ======
Aggregate cost........................... $ 3,657 $3,975
====== ======
</TABLE>
F-27
<PAGE> 84
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONTRACTS AND MORTGAGE NOTES RECEIVABLES
Contracts and mortgage notes receivable (net of receivables from
discontinued operations, refer to Discontinued Operations note on page F-30) is
summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Contracts and mortgage notes receivable............ $45,021 $ 61,534
Less:
Deferred gross profit*........................... 17,109 21,878
Allowance for doubtful accounts.................. 832 1,456
------- -------
17,941 23,334
------- -------
$27,080 $ 38,200
======= =======
</TABLE>
- ---------------
* Under the installment sales method, the gross profit on recorded sales is
deferred and recognized in income of future periods as principal payments on
contracts receivable are received; deferred gross profit is included on the
balance sheet, as a reduction of contracts receivable, until recognized.
LAND AND OTHER INVENTORIES
Inventories (net of inventories from discontinued operations, refer to
Discontinued Operations note on page F-30) consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Land developed and in process of development....... $ 110,715 $105,617
Land held for future development or sale........... 33,544 33,544
Dwelling units completed or under construction..... 30,850 22,270
Other.............................................. 753 773
-------- --------
$ 175,862 $162,204
======== ========
</TABLE>
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES
Minority interest in consolidated subsidiaries is represented by preferred
stock of Avatar Utilities' subsidiaries. Total preferred stock outstanding is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
9% Cumulative preferred stock...................... $ 7,200 $9,000
Other.............................................. 64 64
------ ------
$ 7,264 $9,064
====== ======
</TABLE>
Avatar's utility subsidiary's 9% cumulative preferred stock issue provides
for mandatory redemption of a minimum of $1,800 per annum beginning in 1997.
During the first quarter Avatar redeemed $1,800 of the preferred stock. A
redemption of all outstanding shares shall occur no later than March 1, 2001.
Charges to operations recorded as "Other expenses" relate to preferred
stock dividends of subsidiaries for the nine months ended September 30, 1997 and
1996, which amounted to $518 and $611, respectively, and for the three months
ended September 30, 1997 and 1996, which amounted to $163 and $203,
respectively.
F-28
<PAGE> 85
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities as of September 30,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred income tax assets
Net operating loss carryforward.............................. $ 19,000 $ 16,000
Tax over book basis of land inventory........................ 23,000 24,000
Unrecoverable land development costs......................... 3,000 3,000
Tax over book basis of depreciable assets.................... 6,000 7,000
Alternative minimum tax and investment tax credit
carryforward.............................................. 4,000 4,000
Other........................................................ 3,000 3,000
-------- --------
Total deferred income taxes.......................... 58,000 57,000
Valuation allowance for deferred income tax assets........... (43,000) (42,000)
-------- --------
Deferred income tax assets after valuation allowance........... 15,000 15,000
Deferred income tax liabilities
Book over tax income recognized on homesite sales............ (2,000) (3,000)
Book over tax income recognized from discontinued
operations................................................ (4,000) (3,000)
Deferred carrying charges on utility plant................... (2,000) (2,000)
Other........................................................ (7,000) (7,000)
-------- --------
Total deferred income tax liabilities................ (15,000) (15,000)
-------- --------
Net deferred income taxes............................ $ 0 $ 0
======== ========
</TABLE>
A reconciliation of income tax expense before discontinued operations to
the expected income tax expense (credit) at the federal statutory rate of 34%
for the nine months ended September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Income tax (credit) computed at statutory rate............ $(2,475) $(480)
Income tax effect of non-deductible dividends on preferred
stock of subsidiary..................................... 176 207
State income tax (credit), net of federal effect.......... (265) (21)
Other, net................................................ 564 294
Change in valuation allowance on deferred tax assets...... 2,000 --
------- -----
Provision for income taxes................................ $ 0 $ 0
======= =====
</TABLE>
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.
F-29
<PAGE> 86
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
On October 1, 1993, the United States, on behalf of the U.S. Environmental
Protection Agency, filed a civil action against Florida Cities Water Company
("Florida Cities"), a utility subsidiary of Avatar Holdings Inc. ("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-CIV-FTM-21, alleging that
Florida Cities' Waterway Estates treatment plant, located in Lee County, Florida
operated in violation of the Federal Clean Water Act ("Act"), 33 U.S.C.
sec. 1251 et seq. On May 5 and June 26, 1996, the United States amended its
complaint to include allegations against Florida Cities for violations of the
Act at two other Florida wastewater treatment plants, Barefoot Bay, located in
Brevard County, and Carrollwood, located in Hillsborough County. In addition,
the government amended the complaint to include Avatar, the Parent Corporation,
as a defendant. A trial was held in March and April 1996. On August 20, 1996,
the Court issued its final judgment, incorporating earlier rulings. The Court
found Avatar not liable on any of the government's claims and entered judgment
in Avatar's favor. The Court found Florida Cities not liable on certain of the
government's claims, but liable on other claims, and awarded the government $310
in civil penalties against Florida Cities. On October 18, 1996, the government
filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.
In June of 1997, the parties filed a joint motion to dismiss all related appeals
with prejudice. The U.S. Court of Appeals dismissed all appeals with prejudice
on August 6, 1997, and the civil penalties have been paid by Florida Cities.
DISCONTINUED OPERATIONS
During 1997, the Company developed a formal plan for the disposition of its
timeshare business. In the third quarter of 1997, the Company executed a letter
of intent to sell this business. The expected sales price is approximately $11.0
million. Accordingly, net assets and liabilities of the timeshare business have
been segregated from continuing operations in the accompanying consolidated
balance sheets, and operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of
operations and cash flows.
Information relating to the discontinued operations for the nine and three
months ended September 30, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
------------------ -----------------
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES
Real estate sales.............................. $ 9,827 $7,824 $3,412 $4,293
Interest income................................ 1,228 632 479 263
Other.......................................... 284 292 43 64
------- ------ ------ ------
Total revenues....................... 11,339 8,748 3,934 4,620
EXPENSES
Real estate expenses........................... 9,476 8,200 3,516 4,093
Interest expense............................... 1,164 475 466 93
------- ------ ------ ------
Total expenses....................... 10,640 8,675 3,982 4,186
Income (loss) before income taxes.............. 699 73 (48) 434
Provision for income taxes..................... -- -- -- --
------- ------ ------ ------
Net income (loss).............................. $ 699 $ 73 $ (48) $ 434
======= ====== ====== ======
</TABLE>
F-30
<PAGE> 87
AVATAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The net assets and liabilities of the discontinued operations included in
the accompanying consolidated balance sheets as of September 30, 1997 and
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash......................................................... $ 49 $ 53
Restricted cash.............................................. 332 198
Contracts, mortgage notes and other receivables, net......... 15,452 11,278
Land and other inventories................................... 8,024 6,007
Property, plant and equipment, net........................... 278 237
Other assets................................................. 2,426 2,299
------------- ------------
Total Assets....................................... $26,561 $ 20,072
========== ==========
LIABILITIES
Notes, mortgage notes and other debt:
Real estate................................................ $14,973 $ 10,191
Accounts payable............................................. 785 349
Accrued and other liabilities................................ 477 1,245
------------- ------------
Total Liabilities.................................. $16,235 $ 11,785
========== ==========
</TABLE>
SUBSEQUENT EVENT
In accordance with the Company's plan to develop active adult/retirement
communities at various properties, the Company acquired, on October 3, 1997, key
executives, systems and software from Hilcoast Development Corp. (Hilcoast), the
developers of Century Village, in exchange for 75,000 shares of Avatar Common
Stock. Additionally, Avatar acquired an option to purchase from a direct wholly
owned subsidiary of Hilcoast, all rights to use the name "Century Village",
together with any trademarks or other intellectual property rights. The option
is exercisable by the Company until October 3, 1998, and upon closing the
purchase, the Company would be obligated to issue a number of shares of Avatar
Common Stock having a fair market value on the day immediately preceding the
closing equal to $1,719.
F-31
<PAGE> 88
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF ANY OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference....... 1
Available Information................................. 1
Forward-looking Statements............................ 2
Prospectus Summary.................................... 3
The Company........................................... 3
Risk Factors.......................................... 9
Use of Proceeds....................................... 14
Price Range of Common Stock........................... 14
Dividend Policy....................................... 14
Capitalization........................................ 15
Selected Financial Data............................... 16
Management's Discussion and Analysis of Results of
Operations and Financial Condition.................. 18
Business.............................................. 25
Management............................................ 33
Principal Stockholders................................ 36
Description of the Notes.............................. 38
Certain Federal Income Tax Consequences............... 47
Underwriting.......................................... 53
Legal Opinions........................................ 54
Experts............................................... 54
Index to Financial Statements......................... F-1
</TABLE>
============================================================
============================================================
$100,000,000
AVATAR HOLDINGS INC.
[ ]% CONVERTIBLE
SUBORDINATED NOTES DUE 2005
------------------------
PROSPECTUS
------------------------
CIBC OPPENHEIMER
SBC WARBURG DILLON READ INC.
, 1997
============================================================
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts. All of the following costs and
expenses are estimated except the Securities and Exchange Commission
Registration Fee and the NASD Filing Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $33,925
NASD Filing Fee.................................................... 12,500
Accountants' Fees and Expenses.....................................
Counsel Fees and Expenses..........................................
Printing and Engraving Expenses....................................
Blue Sky Fees and Expenses.........................................
-------
Total.................................................... $
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Generally, Section 145 of the General Corporation Law permits a corporation
to provide indemnification to its directors and officers under certain
circumstances. Reference is also made to Article Sixth of the Company's
Certificate of Incorporation which provides that the Company shall indemnify any
person who was or is a party or threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the fact that he is
or was a director, officer, employee or agent of the Company. In addition, the
Company maintains liability insurance which, subject to certain exceptions and
limitations, insures directors and officers against any claim or claims made
against them for any actual or alleged error, misstatement or misleading
statement, act or omission, neglect or breach of duty while acting in their
capacities as such directors and officers.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of the Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement.*
4.1 -- Form of Indenture dated as of , 1998, between the Company and The Chase
Manhattan Bank, as Trustee, in respect of the Company's % Convertible
Subordinated Notes due 2005.*
4.2 -- Form of Convertible Subordinated Note (included in the form of Indenture to be filed
as Exhibit 4.1 to this Registration Statement).
5 -- Opinion of Weil, Gotshal & Manges LLP.*
12 -- Statement of Computation of Ratio of Earnings to Fixed Charges.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Weil, Gotshal & Manges LLP (included in its opinion which appears as
Exhibit 5 to this Registration Statement).
24 -- Power of Attorney (included on signature page of this Part II).
25 -- Statement of Eligibility and Qualification of The Chase Manhattan Bank, as Trustee
on Form T-1 with respect to the % Convertible Subordinated Notes due 2005.*
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
II-1
<PAGE> 90
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions in Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act (the "Act") in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
II-2
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 9th day of
December, 1997.
AVATAR HOLDINGS INC.
By: /s/ GERALD D. KELFER
------------------------------------
Gerald D. Kelfer
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Gerald D. Kelfer, Juanita I. Kerrigan and
Charles L. McNairy, or any of them, each acting alone, his true and lawful
attorney-in-fact and agent with full powers of substitution and resubstitution,
for such person and in his name, place and stead, in any and all capacities, in
connection with the Registrant's Registration Statement on Form S-3 under the
Securities Act of 1933, including to sign the Registration Statement and any and
all amendments or supplements to the Registration Statement, including any and
all stickers and post-effective amendments to the Registration Statement and to
sign any and all additional registration statements relating to the same
offering of securities as those that are covered by the Registration Statement
that are filed pursuant to Rule 462(b) under the Securities Act of 1933, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any applicable
securities exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully, to all intents and purposes, as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
/s/ GERALD D. KELFER President, Chief Executive December 9, 1997
- ------------------------------------------ Officer and Director
Gerald D. Kelfer
/s/ CHARLES L. MCNAIRY Executive Vice President, December 9, 1997
- ------------------------------------------ Treasurer and Chief
Charles L. McNairy Financial Officer
/s/ LEON LEVY Director and Chairman of the December 9, 1997
- ------------------------------------------ Board of Directors
Leon Levy
/s/ EDWIN JACOBSON Director and Chairman of the December 9, 1997
- ------------------------------------------ Executive Committee
Edwin Jacobson
</TABLE>
II-3
<PAGE> 92
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
/s/ MILTON DRESNER Director December 9, 1997
- ------------------------------------------
Milton Dresner
/s/ LEON T. KENDALL Director December 9, 1997
- ------------------------------------------
Leon T. Kendall
/s/ MARTIN MEYERSON Director December 9, 1997
- ------------------------------------------
Martin Meyerson
/s/ KENNETH T. ROSEN Director December 9, 1997
- ------------------------------------------
Kenneth T. Rosen
/s/ FRED STANTON SMITH Director December 9, 1997
- ------------------------------------------
Fred Stanton Smith
/s/ HENRY KING STANFORD Director December 9, 1997
- ------------------------------------------
Henry King Stanford
/s/ GERNOT H. REINERS Director December 9, 1997
- ------------------------------------------
Gernot H. Reiners
</TABLE>
II-4
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------ --------------------------------------------------------------------- ------------
<S> <C> <C> <C>
1 -- Form of Underwriting Agreement.*
4.1 -- Form of Indenture dated as of , 1998, between the Company
and The Chase Manhattan Bank, as Trustee, in respect of the Company's
% Convertible Subordinated Notes due 2005.*
4.2 -- Form of Convertible Subordinated Note (included in the form of
Indenture to be filed as Exhibit 4.1 to this Registration Statement).
5 -- Opinion of Weil, Gotshal & Manges LLP.*
12 -- Statement of Computation of Ratio of Earnings to Fixed Charges.
23.1 -- Consent of Ernst & Young LLP.
23.2 -- Consent of Weil, Gotshal & Manges LLP (included in its opinion which
appears as Exhibit 5 to this Registration Statement).
24 -- Power of Attorney (included on signature page of this Part II).
25 -- Statement of Eligibility and Qualification of The Chase Manhattan
Bank, as Trustee on Form T-1 with respect to the % Convertible
Subordinated Notes due 2005.*
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
Nine Months ended
September 30,
Year ended December 31, (unaudited)
-------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing
operations before taxes....... (4,342) 18,236 (14,473) (10,920) 2,264 (1,413) (7,280)
Fixed Charges:
Intreest expense.............. 18,478 15,656 11,160 11,518 12,053 8,353 6,743
Preferred stock dividends..... 1,544 1,261 811 811 814 611 518
Interest portion of rental
expense..................... 303 237 247 312 368 336 367
------- ------ ------- ------ ------ ------ ------
Total fixed charges 20,325 17,154 12,218 12,641 13,235 9,300 9,628
------- ------ ------- ------ ------ ------ ------
Total fixed charges and income
before taxes.................. 15,983 35,390 (2,255) 1,721 15,499 7,887 2,348
======= ====== ======= ====== ====== ====== ======
Ratio of earnings to fixed
charges....................... 0.79 2.06 (0.18) 0.14 1.17 0.85 0.24
======= ====== ======= ====== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 28, 1997 (except for Notes H and S, as to
which the dates are March 18, 1997, and December 2, 1997, respectively) with
respect to the consolidated financial statements and schedule, as amended,
included in the Registration Statement (Form S-3) and related Prospectus of
Avatar Holdings Inc. dated December 10, 1997.
Ernst & Young LLP
Miami, Florida
December 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,046
<SECURITIES> 4,535
<RECEIVABLES> 70,077
<ALLOWANCES> (24,811)
<INVENTORY> 162,204
<CURRENT-ASSETS> 0
<PP&E> 275,088
<DEPRECIATION> (88,710)
<TOTAL-ASSETS> 443,185
<CURRENT-LIABILITIES> 0
<BONDS> 138,792
0
0
<COMMON> 12,715
<OTHER-SE> 146,737
<TOTAL-LIABILITY-AND-EQUITY> 443,185
<SALES> 93,510
<TOTAL-REVENUES> 141,359
<CGS> 59,279
<TOTAL-COSTS> 84,784
<OTHER-EXPENSES> 18,457
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,053
<INCOME-PRETAX> 2,264
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,264
<DISCONTINUED> (1,224)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,040
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 5,039
<SECURITIES> 4,358
<RECEIVABLES> 51,144
<ALLOWANCES> (18,566)
<INVENTORY> 175,862
<CURRENT-ASSETS> 0
<PP&E> 187,839
<DEPRECIATION> 0
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0
0
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<EPS-PRIMARY> (0.72)
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</TABLE>
