<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
--------------------------------------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from
_______ to ________
----------------------------------------
Commission file number 0-7616
I.R.S. Employer Identification Number 23-1739078
Avatar Holdings Inc.
(a Delaware Corporation)
255 Alhambra Circle
Coral Gables, Florida 33134
(305) 442-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 9,170,102 shares of the
Company's common stock ($1.00 par value) were outstanding as of April 30, 1998.
<PAGE> 2
AVATAR HOLDINGS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997 ........................ 3
Consolidated Statements of Operations --
Three months ended March 31, 1998 and 1997 .............. 4
Consolidated Statements of Cash Flows --
Three months ended March 31, 1998 and 1997 .................. 5
Notes to Consolidated Financial Statements .................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...... 12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................ 16
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets - (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 49,569 $ 4,085
Restricted cash 4,898 4,690
Contracts and mortgage notes receivables, net 21,695 24,319
Other receivables, net 7,517 6,186
Land and other inventories 163,219 161,161
Property, plant and equipment, net 187,356 188,602
Other assets 22,383 19,448
Regulatory assets 3,201 3,318
Assets of discontinued operations 28,954 27,559
--------- ---------
Total Assets $ 488,792 $ 439,368
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes, mortgage notes and other debt:
Corporate $ 130,000 $ 44,506
Notes collateralized by contracts and mortgage notes receivable 15,220 23,566
Real Estate 20,716 39,163
Utilities 38,513 39,216
Estimated development liability for sold land 8,736 8,697
Accounts payable 6,330 6,081
Accrued and other liabilities 35,081 36,918
Deferred customer betterment fees 18,571 18,667
Minority interest in consolidated subsidiaries 5,469 7,268
Liabilities of discontinued operations 19,152 18,662
--------- ---------
Total Liabilities 297,788 242,744
Commitments and contingent liabilities
Contributions in aid of construction 61,037 61,582
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share
Authorized: 15,500,000 shares
Issued: 9,170,102 shares 9,170 9,170
Additional paid-in capital 151,422 151,422
Accumulated deficit (30,625) (25,550)
--------- ---------
Total Stockholders' Equity 129,967 135,042
========= =========
Total Liabilities and Stockholders' Equity $ 488,792 $ 439,368
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
REVENUES
Real estate sales $ 21,293 $ 20,151
Deferred gross profit 1,133 1,028
Utility revenues 8,824 9,034
Interest income 1,607 1,515
Trading account profit, net -- 92
Other 164 199
-------- --------
Total revenues 33,021 32,019
EXPENSES
Real estate expenses 22,052 22,360
Utility expenses 6,685 6,435
General and administrative expenses 2,478 2,584
Interest expense 4,268 2,306
Other 150 191
-------- --------
Total expenses 35,633 33,876
-------- --------
Loss from continuing operations (2,612) (1,857)
Discontinued operations:
Loss from discontinued operations
less income tax expense of $0 (155) (130)
Extraordinary item:
Loss on early extinguishment of debt,
less income tax expense of $0 (2,308) --
-------- --------
Net loss $ (5,075) $ (1,987)
======== ========
Basic and Diluted EPS:
Loss from continuing operations $ (0.29) $ (0.20)
Loss from discontinued operations $ (0.02) $ (0.02)
Loss from extraordinary item $ (0.25) --
Net loss $ (0.56) $ (0.22)
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,075) $ (1,987)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 2,593 2,686
Loss on early extinguishment of debt 2,308 --
Deferred gross profit (1,133) (1,028)
Cost of homesite sales not requiring cash 367 357
Trading account profit, net -- (92)
Changes in operating assets and liabilities:
Restricted cash (208) 1,010
Principal payments on contracts receivable 1,947 3,979
Receivables 1,810 1,193
Other receivables (1,331) 483
Inventories (2,386) (8,302)
Other assets (3,703) (296)
Assets/liabilities from discontinued operations, net (905) (984)
Accounts payable and accrued and other liabilities (1,684) (637)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (7,400) (3,618)
INVESTING ACTIVITIES
Investment in property, plant and equipment (1,890) (2,612)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,890) (2,612)
FINANCING ACTIVITIES
Proceeds from issuance of 7% Convertible Subordinate Notes 115,000 --
Net proceeds from revolving lines of credit and
long-term borrowings 5,863 16,261
Principal payments on revolving lines of credit and
long-term borrowings (64,289) (11,099)
Redemption of 9% preferred stock of subsidiary (1,800) (1,800)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 54,774 3,362
--------- ---------
INCREASE (DECREASE) IN CASH 45,484 (2,868)
Cash at beginning of period 4,085 6,463
--------- ---------
CASH AT END OF PERIOD $ 49,569 $ 3,595
========= =========
</TABLE>
5
<PAGE> 6
AVATAR HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) -- continued
For the Three Months Ended March 31, 1998 and 1997
(Dollars in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Cash paid during the period for: 1998 1997
------ ------
<S> <C> <C>
Interest - Continuing operations (net of amount
capitalized of $20 and $1,019
in 1998 and 1997, respectively) $2,444 $ 264
------ ------
Interest - Discontinued operations (net of amount
capitalized of $0 and $0 in 1998
and 1997, respectively) 463 268
====== ======
Income taxes $ -- $ --
====== ======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Contributions in aid of construction $552 $1,039
====== =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
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 March 31, 1998 and December 31,
1997, and the related consolidated statements of operations for the three months
ended March 31, 1998 and 1997 and the consolidated statements of cash flows for
the three months ended March 31, 1998 and 1997 have been prepared in accordance
with generally accepted accounting principles for interim financial information,
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statement presentation. In
the opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included. Such adjustments consisted only of
normal recurring items. Interim results are not necessarily indicative of
results for a full year.
For a complete description of the Company's other accounting policies,
refer to Avatar Holdings Inc.'s 1997 Annual Report on Form 10-K and the notes to
Avatar's consolidated financial statements included therein.
RECLASSIFICATIONS
Certain 1997 financial statement items have been reclassified to
conform to the 1998 presentation.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
shares outstanding of 9,170,102 and 9,095,102 for three months ended March 31,
1998 and 1997, respectively. For computing earnings per share for the three
months ended March 31, 1998, the conversion of the Notes and employee stock
options were not assumed, as the effect of both would be antidilutive. There is
no difference between basic and diluted earnings per share for 1998 and 1997.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Due to the short
maturity period of the cash equivalents, the carrying amount of these
instruments approximates their fair values. Restricted cash includes deposits of
$4,898 and $4,690 as of March 31, 1998 and December 31, 1997, respectively.
These balances are comprised of housing deposits that will become available to
the Company when the housing contracts close and utilities deposits from water
utilities customers.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 123, "Accounting for Stock-Based Compensation." Statement No. 123
allows companies to measure compensation cost in connection with employee stock
compensation plans using a fair value based method or to use an intrinsic value
based method in accordance with Accounting Principles Board Opinion No. 25,
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
"Accounting for Stock Issued to Employees" (APB 25). The Company has elected to
follow APB 25 and related interpretations in accounting for its employee stock
options.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Accordingly, actual results could differ from those
reported.
CONTRACTS AND MORTGAGE NOTES RECEIVABLES
Contracts and mortgage notes receivables is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
<S> <C> <C>
Contracts and mortgage notes receivable $36,159 $40,478
------- -------
Less:
Market valuation reserve 26 43
Deferred gross profit 14,186 15,659
Other 252 457
------- -------
14,464 16,159
------- -------
$21,695 $24,319
======= =======
</TABLE>
LAND AND OTHER INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Land developed and in process of development $ 98,599 $ 98,407
Land held for future development or sale 31,552 31,552
Dwelling units completed or under construction 32,221 30,334
Other 847 868
-------- --------
$163,219 $161,161
======== ========
</TABLE>
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
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>
March 31, December 31,
1998 1997
------ ------
<S> <C> <C>
9% Cumulative preferred stock $5,400 $7,200
Other 69 68
------ ------
$5,469 $7,268
====== ======
</TABLE>
Avatar's utilities subsidiary's 9% cumulative preferred stock issue
provides for redemption of a minimum of $1,800 of the preferred stock per annum
beginning in 1997. During each of the first quarters of 1998 and 1997, Avatar
redeemed $1,800 of the preferred stock. A redemption of all outstanding shares
shall occur no later than March 1, 2001.
Charges to operations recorded as "Other expenses" relate to preferred
stock dividends of subsidiaries for the three months ended March 31, 1998 and
1997, which amount to $150 and $191, respectively.
NOTES, MORTGAGE NOTES AND OTHER DEBT
On February 2, 1998 the Company issued $115 million principal amount of
7% Convertible Subordinated Notes due 2005 (the "Notes"). The Notes are
convertible into common stock of Avatar at the option of the holder at any time
at or before maturity, unless previously redeemed, at a conversion price of
$31.80 per share. These Notes are designed to enhance the Company's liquidity
resources and to give it increased operating and financial flexibility. The
Notes are subordinated to all present and future senior indebtedness of Avatar
and are effectively subordinated to all indebtedness and other liabilities of
subsidiaries of Avatar. The net proceeds of $111,550 after deducting expenses
were used to repay $33,000 aggregate amount of 8% Senior Debentures due 2000 and
9% Senior Debentures due 2000. The remaining proceeds will be used to implement
the development of the Company's new active adult communities, to expand its
homebuilding operations, to reduce higher interest rate borrowings, to provide
additional working capital and for other corporate purposes. The early
extinguishment of the 8% and 9% Senior Debentures resulted in an extraordinary
loss of $2,308 pertaining to the unamortized portion of discounts associated
with these debentures.
9
<PAGE> 10
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
March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Deferred income tax assets
Net operating loss carry-forward $ 21,000 $ 20,000
Tax over book basis of land inventory 31,000 31,000
Unrecoverable land development costs 3,000 3,000
Tax over book basis of depreciable assets 5,000 5,000
Alternative minimum tax and investment tax credit carry-forward 4,000 5,000
Other 2,000 2,000
-------- --------
Total deferred income taxes 66,000 66,000
Valuation allowance for deferred income tax assets (52,000) (51,000)
-------- --------
Deferred income tax assets after valuation allowance 14,000 15,000
Deferred income tax liabilities
Book over tax income recognized on home-site sales (2,000) (2,000)
Book over tax income recognized on vacation ownership sales (4,000) (4,000)
Deferred carrying charges on utilities plant (2,000) (2,000)
Other (6,000) (7,000)
-------- --------
Total deferred income tax liabilities (14,000) (15,000)
-------- --------
Net deferred income taxes $ 0 $ 0
======== ========
</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 three months ended March 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Income tax expense (credit) computed at statutory rate $ (888) $ (631)
Income tax effect of non-deductible dividends
on preferred stock of subsidiary 51 65
State income tax (credit), net of federal effect (96) (65)
Other, net (67) (369)
Change in valuation allowance on deferred tax assets 1,000 1,000
------- -------
Provision for income taxes $ 0 $ 0
======= =======
</TABLE>
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
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.
DISCONTINUED OPERATIONS
During 1997, the Company developed a formal plan for the disposition of
its timeshare business. During the second quarter of 1998, the Company entered
into a non-binding letter of intent with an unaffiliated third-party for the
sale of the timeshare business. Accordingly, net assets and liabilities of the
timeshare business have been segregated from the continuing operations in the
accompanying balance sheets, and operating results are segregated and reported
as discontinued operations in the accompanying consolidated statements of
operations and cash flows.
Information relating to the discontinued operations for the three
months ended March 31, 1998 and 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months
---------------------------
1998 1997
------- -------
<S> <C> <C>
REVENUES
Real estate sales $ 2,116 $ 2,553
Interest income 599 359
Other 242 (28)
------- -------
Total revenues 2,957 2,884
EXPENSES
Real estate expenses 2,563 2,679
Interest expense 549 335
------- -------
Total expenses 3,112 3,014
Net loss from discontinued operations $ (155) $ (130)
======= =======
</TABLE>
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -- continued
DISCONTINUED OPERATIONS -- continued
The net assets and liabilities of the discontinued operations included
in the accompanying consolidated balance sheets as of March 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 50 $ 49
Restricted cash 261 322
Contracts and mortgage notes receivables, net 15,727 15,197
Other receivables, net 1,184 691
Land and other inventories 9,559 8,903
Property, plant and equipment, net 248 238
Other assets 1,925 2,159
------- -------
Total Assets $28,954 $27,559
======= =======
LIABILITIES
Notes, mortgage notes and other debt:
Notes, collateralized by contracts and mortgage notes receivable 12,921 12,952
Real estate 5,451 4,568
Accounts payable 452 694
Accrued and other liabilities 328 448
------- -------
Total Liabilities $19,152 $18,662
======= =======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q.
Operations for the three month period ended March 31, 1998 resulted in
a net loss of $5,075 or $0.56 per share, compared to a net loss of $1,987 or
$0.22 per share for the same period of 1997. The decrease in operating results
for the three months was primarily attributable to an increase in interest
expense and a decrease in utilities operating results as well as an
extraordinary loss on the early extinguishment of debt. The decrease in
operations was partially offset by an improvement in real estate operating
results.
Avatar's real estate revenues for the three months ended March 31, 1998
increased $1,142 or 5.7%, while real estate expenses decreased $308 or 1.4%,
when compared to the same period of 1997. The increase in real estate revenues
for the months ended March 31, 1998 is generally a result of increased housing
revenues. The decrease in real estate expenses for the three month
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) --CONTINUED
RESULTS OF OPERATIONS - CONTINUED
period ended March 31, 1998, when compared to the same period of 1997, is
generally a result of decreased marketing and homebuilding expenses.
Data from homebuilding operations for the three months ended March 31,
1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
Three Months
--------------------------
1998 1997
------- -------
<S> <C> <C>
UNITS CLOSED
Number of units 110 108
Aggregate dollar volume $14,931 $13,983
Average price per unit $ 136 $ 129
UNITS SOLD, NET
Number of units 135 193
Aggregate dollar volume $21,408 $23,073
Average price per unit $ 159 $ 120
BACKLOG March 31,
--------------------------
1998 1997
------- -------
Number of units 387 379
Aggregate dollar volume $56,528 $45,852
Average price per unit $ 146 $ 121
</TABLE>
Data from the national and international retail land sales programs,
terminated in the second quarter of 1996, is as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1998 1997
------ ------
<S> <C> <C>
RETAIL LAND SALES OPERATIONS DATA
Sales volume $ -- $ --
Cost of sales -- --
Selling expense -- --
Deferred gross profit 1,133 1,028
Interest income 1,213 1,515
Loss on contract cancellations 52 386
Contract servicing expense 189 204
Interest expense 567 773
BALANCE SHEET DATA
Contracts and mortgage notes receivable, net 21,695 33,969
Debt collateralized by contracts and mortgage receivable 15,220 33,005
</TABLE>
Contract servicing expense and loss on contract cancellations are included under
the caption "Real estate expenses" on the consolidated statements of operations.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) --CONTINUED
Utilities revenues for the three months ended March 31, 1998, decreased
$210 or 2.3%, when compared to the same period in 1997. The decrease in
utilities revenues is primarily attributable to a decrease in water consumption
in 1998 when compared to 1997. Utilities expenses for the three months ended
March 31, 1998, increased $250 or 3.9%, when compared to the same period of
1997. The increase in utilities expenses is primarily attributable to increases
in maintenance and other operational expenses.
General and administrative expenses for the three months ended March
31, 1998 decreased by $106 or 4.1% compared to the same period in 1997. The
decrease is primarily attributed to a reduction in incentive compensation,
partially mitigated by increased executive compensation and professional fees.
Interest expense for the three months ended March 31, 1998 increased
$1,962 or 85.1%, compared to the same period in 1997. The increase is primarily
attributable to the interest expense incurred from the Notes (described below)
issued February 2, 1998. Also contributing to the increase in interest expense
is the reduction in capitalized interest in 1998 compared to 1997.
For the three months ended March 31, 1998, the Company recorded a
$2,308 extraordinary loss due to the early extinguishment of the $33,000
aggregate amount of 8% and 9% Senior Debentures due 2000. The extraordinary loss
resulted from the unamortized portion of the discounts associated with the
$33,000 aggregate amount of 8% and 9% Senior Debentures due 2000 written off
upon extinguishment.
LIQUIDITY AND CAPITAL RESOURCES
Management implemented a new real estate business strategy in 1997 to
capitalize on the Company's distinct competitive advantages and emphasize higher
profit margin businesses. Under its new strategy, the Company intends to
concentrate on development and management of active adult and other planned
communities, construction of custom and semi-custom homes, and development and
acquisition of commercial and industrial properties. The Company does not
anticipate that its new real estate business strategy will achieve or sustain
profitability or positive cash flow until the year 2000 or later. The Company's
primary business activities are capital intensive in nature. Significant capital
resources are required to finance homebuilding construction in process,
infrastructure for roads, water and wastewater utilities, selling expenses and
working capital needs, including funding of debt service requirements, operating
deficits and the carrying cost of land. The Company expects to fund its
operations and capital requirements through a combination of cash, operating
cash flows, proceeds from the sale of certain non-core assets and external
borrowings. There is no assurance that the sale of certain non-core assets will
be achieved. However, the Company believes that the Notes (described below) will
enhance the Company's liquidity resources.
On February 2, 1998 the Company issued $115,000 principal amount of 7%
Convertible Subordinated Notes due 2005 (the "Notes"). The Notes are convertible
into common stock of Avatar at the option of the holder at any time at or before
maturity, unless previously redeemed, at a conversion price of $31.80 per share.
These Notes are designed to enhance the Company's liquidity resources and to
give it increased operating and financial flexibility. The Notes are
subordinated to all present and future senior indebtedness of Avatar and are
effectively subordinated to all indebtedness and other liabilities of
subsidiaries of Avatar. The net proceeds of $111,550 after deducting expenses
were used to repay, on March 13, 1998, $33,000 aggregate
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) --CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
amount of 8% Senior Debentures due 2000 and 9% Senior Debentures due 2000. The
remaining proceeds will be used to implement the development of the Company's
new active adult communities, to expand its homebuilding operations, to reduce
higher interest rate borrowings, to provide additional working capital and for
other corporate purposes.
For the three months ended March 31, 1998, net cash used in operating
activities amounted to $7,400 as a result of an increase in inventories, which
included expenditures from land development and housing operations of $2,386, an
increase in other assets of $3,703 and an increase in accounts payable and
accrued and other liabilities of $1,684, partially offset by principal payments
collected on contract receivables of $1,947. Net cash used in investing
activities of $1,890 resulted primarily from investments in property, plant and
equipment. Net cash provided by financing activities of $54,774 resulted
primarily from proceeds of $115,000 from the Notes after repayment of $33,000 of
the 8% and 9% Senior Debentures due 2000 and $31,289 in land, construction and
development loans.
For the three months ended March 31, 1997, net cash used by operating
activities amounted to $3,618 as a result of an increase in inventories, which
included expenditures from land development and housing operations of $8,302,
partially offset by principal payments collected on contract receivables of
$3,979. Net cash used in investing activities of $2,612 resulted primarily from
investments in property, plant and equipment. Net cash provided by financing
activities of $3,362 resulted primarily from net proceeds from revolving lines
of credit and long-term borrowings of $16,261 less principal payments on
revolving lines of credit and long-term borrowings of $11,099.
At March 31, 1998, the Company's secured real estate lines of credit,
exclusive of timeshare credit facilities, amounted to $15,220, all of which were
fully utilized. These real estate lines are secured by contracts and mortgage
receivables aggregating $16,826 and are due to mature in the second quarter of
1999. Corporate secured lines of credit were $20,000 at March 31, 1998, the
unused and available portions were $5,000, and mature in the second quarter of
1999.
At March 31, 1998, utilities unsecured lines of credit were $15,000 and
the unused and available portion was $14,171. The utilities lines mature in the
second quarter of 2000.
The Company believes that high levels of automation and technology are
essential to its operations and has invested considerable resources in computer
hardware, system applications and networking capabilities. These systems
integrate all major aspects of the Company's business, including inventory
control, planning, labor utilization and financial reporting. During 1997 and
through the first quarter of 1998, the Company assessed the ability of the
information systems to handle the "Year 2000 Issue" and does not expect this
issue to be material to the Company's business.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) --CONTINUED
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-Q constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: the successful implementation of the Company's
new business strategy; shifts in demographic trends affecting active adult
communities and other real estate development; the level of immigration and
in-migration to the Company's regional market areas; national and local economic
conditions and events, including employment levels, interest rates, consumer
confidence, the availability of mortgage financing and demand for new and
existing housing; the Company's access to future financing; competition; changes
in, or the failure or inability to comply with, government regulations; and such
other factors as are described in greater detail in the Company's filings with
the Securities and Exchange Commission, including its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
4(a) Indenture, dated as of February 2, 1998, between Avatar
Holdings Inc. and The Chase Manhattan Bank, as Trustee, in
respect of 7% Convertible Subordinated Notes due 2005
(previously filed as exhibit 4 (d) to form 10-K for the year
ended December 31, 1997).
10(a) Registration Rights Agreement dated as of February 2,
1998, between Avatar Holdings Inc. and Leon Levy (previously
filed as exhibit 10 (1) to form 10-K for the year ended
December 31, 1997).
27 Financial Data Schedule (filed herewith)
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1998.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVATAR HOLDINGS INC.
Date: May 15, 1998 By: /s/ Charles L. McNairy
------------------ ---------------------------------------------
Charles L. McNairy
Executive Vice President, Treasurer and Chief
Financial Officer
Date: May 15, 1998 By: /s/ Michael P. Rama
------------------ ---------------------------------------------
Michael P. Rama
Chief Accounting Officer
17
<PAGE> 18
Exhibit Index
27 Financial Data Schedule (filed herewith)
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 54,467
<SECURITIES> 0
<RECEIVABLES> 36,159
<ALLOWANCES> (14,464)
<INVENTORY> 163,219
<CURRENT-ASSETS> 0<F1>
<PP&E> 187,356
<DEPRECIATION> 0
<TOTAL-ASSETS> 488,792
<CURRENT-LIABILITIES> 0
<BONDS> 204,449
9,170
0
<COMMON> 0
<OTHER-SE> 192,967
<TOTAL-LIABILITY-AND-EQUITY> 488,792
<SALES> 30,117
<TOTAL-REVENUES> 33,021
<CGS> 28,737
<TOTAL-COSTS> 35,633
<OTHER-EXPENSES> 2,628
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,268
<INCOME-PRETAX> (2,612)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,612)
<DISCONTINUED> (155)
<EXTRAORDINARY> (2,308)
<CHANGES> 0
<NET-INCOME> (5,075)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
<FN>
<F1>NOTE: Total Current Assets and Total Current Liabilities are not applicable
because Registrant does not present a classified balance sheet.
</FN>
</TABLE>