10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001

or

 Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the transition period from
_______ to ________

Commission file number 0-7616

I.R.S. Employer Identification Number 23-1739078

Avatar Holdings Inc.

(a Delaware Corporation)
201 Alhambra Circle
Coral Gables, Florida 33134
(305) 442-7000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No .

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,467,610 shares of Avatar’s common stock ($1.00 par value) were outstanding as of July 31, 2001.

1

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Operations For the Six and Three months ended June 30, 2001 and 2000
		Consolidated Statements of Cash Flows (Unaudited) For the Six months ended June 30 , 2001 and 2000
		Notes to Consolidated Financial Statements (Unaudited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands except per share data)
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXECUTIVE INCENTIVE COMPENSATION PLAN

AVATAR HOLDINGS INC. AND SUBSIDIARIES

INDEX

			PAGE
PART I. Financial Information
	Item 1. Financial Statements (Unaudited)
		Consolidated Balance Sheets — June 30, 2001 and December 31, 2000		3
		Consolidated Statements of Operations — Six months and three months ended June 30, 2001 and 2000		4
		Consolidated Statements of Cash Flows — Six months ended June 30, 2001 and 2000		5
		Notes to Consolidated Financial Statements		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
PART II. Other Information
	Item 4. Submission of Matters to a Vote of Security Holders			17
	Item 6. Exhibits and Reports on Form 8-K			18

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)

				June 30,			December 31,
				2001			2000
Assets
Cash and cash equivalents				$	92,238		$	49,161
Restricted cash					1,089			869
Investments — marketable securities					20,999			69,966
Contracts and mortgage notes receivable, net					4,065			5,061
Other receivables, net					5,183			6,374
Land and other inventories					172,522			171,906
Property, plant and equipment, net					51,988			51,764
Other assets					21,951			12,679
Deferred income taxes					4,188			1,412
			Total Assets	$	374,223		$	369,192
Liabilities and Stockholders’ Equity
Liabilities
Notes, mortgage notes and other debt:
		Corporate		$	112,367		$	112,367
		Real estate			1,300			2,493
Estimated development liability for sold land					18,490			18,320
Accounts payable					2,525			2,414
Accrued and other liabilities					32,559			30,611
			Total Liabilities		167,241			166,205
Stockholders’ Equity
Common Stock, par value $1 per share
	Authorized: 50,000,000 shares
	Issued: 9,170,102 shares				9,170			9,170
Additional paid-in capital					157,719			157,237
Retained earnings					52,642			49,129
					219,531			215,536
Treasury stock, at cost, 764,164 shares					(12,549	)		(12,549	)
	Total Stockholders’ Equity				206,982			202,987
		Total Liabilities and Stockholders’ Equity		$	374,223		$	369,192

See notes to consolidated financial statements.

3

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Operations
For the Six and Three months ended June 30, 2001 and 2000
(Unaudited)
(Dollars in thousands except per share data)

		Six Months					Three Months
		2001		2000			2001		2000
Revenues
Real estate sales		$	69,207	$	61,188		$	36,215	$	33,725
Deferred gross profit			771		1,114			377		520
Interest income			3,158		3,851			1,629		1,840
Trading account profit (loss)			6,829		(5,965	)		5,250		414
Other			2,151		4,538			1,126		3,043
	Total revenues		82,116		64,726			44,597		39,542
Expenses
Real estate expenses			67,378		59,683			35,681		32,916
General and administrative expenses			5,042		5,226			2,916		2,684
Interest expense			2,771		2,966			1,323		1,468
Other			1,001		1,766			526		917
	Total expenses		76,192		69,641			40,446		37,985
Income (loss) before income taxes			5,924		(4,915	)		4,151		1,557
Income tax expense (benefit)			2,411		(1,066	)		1,720		565
Net income (loss)		$	3,513	$	(3,849	)	$	2,431	$	992
Basic and Diluted EPS:
Net income (loss)		$	0.42	$	(0.46	)	$	0.29	$	0.12

See notes to consolidated financial statements.

4

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
For the Six months ended June 30 , 2001 and 2000
(Dollars in Thousands)

				2001			2000
OPERATING ACTIVITIES
Net income (loss)				$	3,513			($3,849	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
		Depreciation and amortization			2,801			2,010
		Deferred gross profit			(771	)		(1,114	)
		Trading account (profit) loss			(6,829	)		5,965
		Deferred income taxes			(2,294	)		(710	)
		Changes in operating assets and liabilities:
			Restricted cash		(220	)		1,742
			Principal payments on contracts receivable		2,015			3,064
			Receivables		(248	)		(505	)
			Other receivables		1,162			(2,242	)
			Inventories		(699	)		(9,896	)
			Other assets		(9,957	)		(1,672	)
			Accounts payable and accrued and other liabilities		2,059			(18,807	)
NET CASH (USED IN) OPERATING ACTIVITIES					(9,468	)		(26,014	)
INVESTING ACTIVITIES
Investment in property, plant and equipment					(2,068	)		(16,192	)
Proceeds from sale (investment in) marketable securities					55,806			(3,107	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES					53,738			(19,299	)
FINANCING ACTIVITIES
Principal payments on revolving lines of credit and long-term borrowings					(1,193	)		(4,608	)
NET CASH USED IN FINANCING ACTIVITIES					(1,193	)		(4,608	)
INCREASE (DECREASE ) IN CASH					43,077			(49,921	)
Cash and cash equivalents at beginning of period					49,161			143,259
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	92,238		$	93,338
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
	Cash paid during the period for:
		Interest — net of amount capitalized of $1,588 and $1,482 in 2001 and 2000, respectively		$	2,671		$	2,787
		Income taxes paid			—		$	1,700

See notes to consolidated financial statements.

5

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 June 30, 2001 and December 31, 2000, and the related consolidated statements of operations for the six and three month periods ended June 30, 2001 and 2000 and the consolidated statements of cash flows for the six months ended June 30, 2001 and 2000 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 Avatar’s other accounting policies, refer to Avatar Holdings Inc.’s 2000 Annual Report on Form 10-K and the notes to Avatar’s consolidated financial statements included therein.

Reclassifications

     Certain 2000 financial statement items have been reclassified to conform to the 2001 presentation.

Earnings Per Share

     Earnings per share is computed based on the weighted average number of shares outstanding of 8,405,938 for the six and three months ended June 30, 2001 and 2000. Basic earnings per share is computed by dividing earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of Avatar. The computation of earnings per share for the six and three months ended June 30, 2001 and 2000 did not assume the conversion of the Notes and employee stock options, as the effect of both is anti-dilutive. There is no difference between basic and diluted earnings per share for 2001 and 2000.

Repurchase of Common Stock and Notes

     On January 27, 2000, Avatar’s Board of Directors authorized the expenditure of up to $20,000 to purchase, from time to time, shares of its common stock and/or its 7% Convertible Subordinated Notes (the “Notes”) in the open market, through privately negotiated transactions or otherwise, depending on market and business conditions and other factors. As of June 30, 2001, none of these authorized expenditures had been made.

6

Notes to Consolidated Financial Statements (Unaudited) – continued

Cash and Cash Equivalents and Restricted Cash

     Avatar 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 $1,089 and $869 as of June 30, 2001 and December 31, 2000, respectively. These balances are comprised primarily of housing deposits from customers that will become available when the housing contracts close.

Stock Options

     Under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” companies are allowed 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, “Accounting for Stock Issued to Employees” (APB 25). Avatar 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.

Investments – Marketable Securities

     Investments in marketable securities are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity.” Avatar’s portfolio consists of held-to-maturity securities and trading securities. Under SFAS No. 115, held-to-maturity securities include debt securities with the intent and ability to hold to maturity and are measured at amortized cost. During 2000, Avatar invested in U.S. Government issues, which mature in one year or less. The amortized cost balance at June 30, 2001 and December 31, 2000 was $20,999 and $41,968, respectively. Under SFAS No. 115, trading securities include debt and marketable equity securities held for resale in anticipation of earning profits from short-term movements in market prices. Trading account securities are measured at fair market value and both realized and unrealized gains and losses are included in net trading account profit in the accompanying consolidated statements of operations. Fair values for actively traded debt securities and equity securities are based on quoted market prices on national markets.

     During the second quarter of 2001, Avatar sold substantially all of its trading securities investment portfolio for $34,806. The aggregate purchase price of the trading securities sold was $19,393 producing a total pre-tax realized gain of $15,413, which includes a pre-tax realized gain of $6,829 and $5,250 for the six and three months ended June 30, 2001.

7

Notes to Consolidated Financial Statements (Unaudited) – continued

Contracts and Mortgage Notes Receivables

     Contracts and mortgage notes receivables are summarized as follows:

		June 30,		December 31,
		2001		2000
Contracts and mortgage notes receivable		$	8,471	$	10,369
Less:
	Deferred gross profit		3,891		4,657
	Other reserves		515		651
			4,406		5,308
		$	4,065	$	5,061

Other Assets

     Other assets are summarized as follows:

	June 30,		December 31,
	2001		2000
Prepaid expenses	$	5,430	$	1,411
Goodwill		3,236		3,941
Deposits		8,020		320
Other		5,265		7,007
	$	21,951	$	12,679

Land and Other Inventories

     Inventories consist of the following:

	June 30,		December 31,
	2001		2000
Land developed and in process of development	$	79,427	$	79,908
Land held for future development or sale		25,521		25,524
Dwelling units completed or under construction and community development in process		66,995		65,988
Other		579		486
	$	172,522	$	171,906

8

Notes to Consolidated Financial Statements (Unaudited) – continued

Income Taxes

     The components of income tax expense (benefit) from continuing operations for the six and three months ended June 30, 2001, and 2000 are as follows:

		Six Months						Three Months
		2001			2000			2001			2000
Current
	Federal	$	4,024		$	(304	)	$	4,121		$	(661	)
	State		681			(52	)		698			(113	)
Total current			4,705			(356	)		4,819			(774	)
Deferred
	Federal		(1,962	)		(607	)		(2,650	)		1,145
	State		(332	)		(103	)		(449	)		194
Total deferred			(2,294	)		(710	)		(3,099	)		1,339
	Total income tax expense (benefit)	$	2,411		$	(1,066	)	$	1,720		$	565

     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. Additional paid in capital was credited for $482 representing the benefit of utilizing deferred income tax assets, which were generated in years prior to reorganization on October 1, 1980. Significant components of Avatar’s deferred income tax assets and liabilities as of June 30, 2001 and December 31, 2000 are as follows:

			June 30,			December 31,
			2001			2000
Deferred income tax assets
	Tax over book basis of land inventory		$	21,000		$	21,000
	Unrecoverable land development costs			1,000			1,000
	Tax over book basis of depreciable assets			4,000			4,000
	Other			5,188			5,412
Total deferred income tax assets				31,188			31,412
	Valuation allowance for deferred income tax assets			(26,000	)		(26,000	)
Deferred income tax assets after valuation allowance				5,188			5,412
Deferred income tax liabilities
		Book over tax income recognized on homesite sales		(1,000	)		(1,000	)
		Unrealized gain on marketable securities		—			(3,000	)
Total deferred income tax liabilities				(1,000	)		(4,000	)
Net deferred income taxes			$	4,188		$	1,412

9

Notes to Consolidated Financial Statements (Unaudited) – continued

Income Taxes – continued

     A reconciliation of income tax expense to the expected income tax expense (credit) at the federal statutory rate of 35% for the six months ended June 30, 2001 and 2000 is as follows:

	2001		2000
Income tax expense (credit) computed at statutory rate	$	2,073	$	(1,720	)
State income tax (credit), net of federal effect		213		(175	)
Other, net		125		(171	)
Change in valuation allowance on deferred tax assets		—		1,000
Income tax expense (benefit)	$	2,411	$	(1,066	)

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 believes that the resolution of these matters will not have a material effect on Avatar’s business or financial statements.

     In May 1995, a wastewater rate increase was filed for the North Fort Myers Division of Florida Cities Water Company (FCWC), a utilities subsidiary of Avatar. In November 1995, the Florida Public Service Commission (FPSC) issued an order authorizing a rate increase of approximately 18% (an annualized revenue increase of approximately $378). Following a challenge to the order by the Office of Public Counsel (the customer advocate) and certain customers, FCWC requested implementation of the rates granted in the order. After a hearing, the FPSC issued a new order in September 1996 authorizing final rates, which were approximately 5% lower than rates in effect prior to the rate increase filing. FCWC filed an appeal with the District Court of Appeal of Florida, First District (DCA) and in January 1998, DCA reversed and remanded the September 1996 order. By order dated April 14, 1998, the FPSC ordered the record reopened and scheduled a hearing in December 1998 to take testimony on one issue remanded by the DCA. FCWC’s challenge of this FPSC action was denied by the DCA on June 17, 1998 and the remand hearing was held on December 8 and 9, 1998. On April 8, 1999, the FPSC rendered its Final order, which did not reflect a material change in its position on the issue in dispute. On April 15, 1999, FCWC sold the plant assets, which are the subject of this rate matter, however, this sale did not jeopardize FCWC’s right to appeal the FPSC Final order. On May 10, 1999, FCWC filed a notice of appeal of the FPSC Final Order to the DCA dated December 6, 1998. The rates implemented in January 1996 were collected by FCWC until April 15, 1999 and approximately $1,030 (including interest of $183) is subject to refund pending ultimate resolution of this matter. After the sale of the plant assets, which are the subject of this matter, FCWC recorded a reserve on its balance sheet to cover refunds and interest liability applicable thereto. FCWC appealed the order, which was affirmed by the DCA by opinion dated December 22, 2000. During the second quarter of 2001, FCWC effected the refund process by refunding $746 (including interest of $133). The refund process should be completed during the third quarter of 2001. Upon the completion of the refund this matter will be considered closed.

10

Notes to Consolidated Financial Statements (Unaudited) — continued

Financial Information Relating To Industry Segments

     Avatar is primarily engaged in real estate operations in Florida and Arizona. The principal real estate operations are conducted at Poinciana in central Florida near Orlando, Harbor Islands on Florida’s east coast and Rio Rico, south of Tucson, Arizona. Avatar owns and develops land, primarily in various locations in Florida and Arizona. Current and planned real estate operations include the following segments: the development, sale and management of active adult communities; the development and sale of residential communities (including construction of upscale custom and semi-custom homes, mid-priced single- and multi-family homes); the development, leasing and management of improved commercial and industrial properties; operation of amenities and resorts; cable television operations; and property management services.

     The following table summarizes Avatar’s information for reportable segments for the six and three months ended June 30, 2001 and 2000:

					Six Months					Three Months
					2001			2000			2001			2000
Revenues:
Segment revenues
		Residential communities		$	46,803		$	52,729		$	24,260		$	29,376
		Active adult communities			14,499			97			8,115			97
		Resorts			3,512			4,029			1,727			1,904
		Commercial and industrial			980			709			447			271
		Rental, leasing, cable and other real estate operations			3,301			2,798			1,890			1,713
		All other			2,112			5,194			797			3,290
					71,207			65,556			37,236			36,651
Unallocated revenues
		Deferred gross profit			771			1,114			377			520
		Interest income			3,158			3,851			1,629			1,840
		Trading account profit, net			6,829			(5,965	)		5,250			414
		Other			151			170			105			117
Total revenues				$	82,116		$	64,726		$	44,597		$	39,542
Operating income (loss):
Segment operating income (loss)
		Residential communities		$	8,017		$	7,323		$	3,842		$	4,566
		Active adult communities			(4,979	)		(4,886	)		(2,261	)		(3,107	)
		Resorts			(411	)		37			(332	)		(68	)
		Commercial and industrial			553			473			(104	)		88
		Rental, leasing, cable and other real estate operations			767			425			418			234
		All other			979			2,971			509			2,312
					4,926			6,343			2,072			4,025
		Unallocated income (expenses)
			Deferred gross profit		771			1,114			377			520
			Interest income		3,158			3,851			1,629			1,840
			Trading account profit (loss)		6,829			(5,965	)		5,250			414
			General and administrative expenses		(5,042	)		(5,226	)		(2,916	)		(2,684	)
			Interest expense		(2,771	)		(2,966	)		(1,323	)		(1,468	)
			Other		(1,947	)		(2,066	)		(938	)		(1,090	)
	Income (loss) from continuing operations before income taxes			$	5,924			($4,915	)	$	4,151		$	1,557

11

Notes to Consolidated Financial Statements (Unaudited) — continued

Financial Information Relating To Industry Segments – continued

		June 30,		December 31,
		2001		2000
Assets:
Segment assets
	Residential communities	$	51,023	$	55,976
	Active adult communities		88,047		88,763
	Resorts		4,937		5,360
	Commercial and industrial		9,826		9,194
	Rental, leasing, cable and other real estate operations		4,459		4,651
	Unallocated assets		215,931		205,248
Total assets		$	374,223	$	369,192

(a)	Avatar’s businesses are primarily conducted in the United States.
(b)	Identifiable assets by segment are those assets that are used in the operations of each segment.
(c)	No significant part of the business is dependent upon a single customer or group of customers.
(d)	Bulk land sales, Arizona utilities, the cost to carry land and the sale of Cape Coral assets do not qualify individually as separate reportable segments and are included in “All Other”. Also included in “All Other” for the six and three months ended June 30, 2001, are results of management services and water facility operating results, which Avatar retained in Florida.
(e)	There is no interest expense from residential development, active adult communities, resorts and rental/leasing included in segment profit/(loss) for the six and three months ended June 30, 2001 and 2000.
(f)	Included in operating profit/(loss) for the six months ended in 2001 is depreciation expense of $382, $827, $373, $104 and $51 from residential development, active adult communities, resorts, rental/leasing and unallocated corporate, respectively. Included in operating profit/(loss) for the six months ended in 2000 is depreciation expense of $131, $0, $312, $305 and $85 from residential development, active adult communities, resorts, rental/leasing and unallocated corporate, respectively. Included in operating profit/(loss) for the three months ended in 2001 is depreciation expense of $190, $413, $215, $50 and $29 from residential development, active adult communities, resorts, rental/leasing and unallocated corporate, respectively. Included in operating profit/(loss) for the three months ended in 2000 is depreciation expense of $76, $0, $158, $155 and $41 from residential development, active adult communities, resorts, rental/leasing and unallocated corporate, respectively.

12

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 Avatar’s financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

     Data from residential and active adult communities homebuilding operations for the six and three months ended June 30, 2001 and 2000 are summarized as follows:

		Six Months				Three Months
		2001		2000		2001		2000
Units closed
	Number of units		332		259		186		134
	Aggregate dollar volume	$	60,016	$	52,299	$	31,670	$	29,349
	Average price per unit	$	181	$	202	$	170	$	219
Units sold, net
	Number of units		497		242		257		142
	Aggregate dollar volume	$	81,127	$	36,021	$	41,081	$	20,441
	Average price per unit	$	163	$	149	$	160	$	144

		June 30,
		2001		2000
Backlog
	Number of units		558		322
	Aggregate dollar volume	$	92,611	$	74,043
	Average price per unit	$	166	$	230

     For the six and three months ended June 30, 2001, 150 and 73 contracts were written with an aggregate sales volume of $25,219 and $12,749, respectively, at Solivita, Avatar’s active adult community in Poinciana. For the six and three months ended June 30, 2001, 95 and 54 homes closed generating revenues from homebuilding operations of $13,579 and $7,728, respectively.

     Net income for the six and three months ended June 30, 2001 was $3,513 or $0.42 per share and $2,431 or $0.29 per share, respectively, compared to net income (loss) of ($3,849) or ($0.46) per share and $992 or $0.12 per share for the same periods of 2000. The increase in net income for the six and three months was primarily attributable to an increase in trading account profit (loss) from investments in marketable securities, partially mitigated by a decrease in interest income and other revenues. An increase in real estate operating results and a decrease in general and administrative expenses contributed to the increase in net income for the six months ended June 30, 2001. However, a decrease in real estate operating results and an increase in general and administrative expenses partially mitigated the increase in net income for the three months ended June 30, 2001.

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

     Avatar’s real estate revenues for the six and three months ended June 30, 2001 increased $8,019 or 13.1% and $2,490 or 7.4%, respectively, while real estate expenses increased by $7,695 or 12.9% and $2,765 or 8.4% when compared to the same periods of 2000. The increase in real estate revenues and expenses for the six and three months ended June 30, 2001 is attributed to results from operations at Solivita. The increase in real estate margins for the six months ended June 30, 2001 is due to improved residential development operating income partially offset by a decrease in resort operating results. The decrease in real estate margins for the three months ended June 30, 2001, is primarily attributable to decreases in residential development operating income and resort operating results partially offset by a decrease in active adult communities operating losses. For the six months ended June 30, 2001, residential development operating income increased $596 or 8.1% and decreased $822 or 18.0% for the three months ended June 30, 2001. The increase in residential development operating income for the six-month period is primarily due to increased closings in Poinciana. However, the decrease in residential operating income for the three-month period is generally due to the decrease in closings at Harbor Islands. For the six months ended June 30, 2001, active adult operating losses increased $93 or 1.9% and decreased $846 or 27.2% for the three months ended June 30, 2001. The decrease in losses for the three-month period is due to the closing of housing units at Solivita. Initial sales and marketing efforts at Solivita commenced during the second quarter of 2000.

     Interest income for the six and three months ended June 30, 2001 decreased $693 or 18.0% and $211 or 11.5%, respectively, when compared to the same periods in 2000. These decreases are attributed to lower interest rates on cash and cash equivalents and lower interest income earned on contracts receivable.

     General and administrative expenses for the six months ended June 30, 2001 decreased $184 or 3.5% and increased $232 or 8.6% for the three months ended June 30, 2001 as compared to the same periods in 2000. The decrease for the six-month period was primarily due to reductions in professional fees and rental expense. The increase for the three-month period was primarily due to the recording of $375 in executive compensation related to the restricted stock units granted pursuant to the Amended and Restated 1997 Incentive and Capital Accumulation Plan.

     Trading account profit (loss) of $6,829 and $5,250 was recognized during the six and three months ended June 30, 2001, respectively, as compared to a trading account profit (loss) of ($5,965) and $414 during the six and three months ended June 30, 2000. Trading account profits or losses represent realized and unrealized gains or losses related to the trading investment portfolio, and include commissions payable to investment brokers.

     Other revenues and expenses for the six months ended June 30, 2001 decreased $2,387 and $765, respectively, and decreased $1,917 and $391 for the three months ended June 30, 2001. These decreases are primarily attributable to the decline in operating revenues and expenses associated with the management services and water facility operations that Avatar retained in Florida and to revenues of $1,480 recognized and earned during the second quarter of 2000 from escrowed funds associated with the Florida Utilities sale that closed on April 15, 1999.

14

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

     Income taxes were provided for at an effective tax rate of 40.7% and 41.4% for the six and three months ended June 30, 2001, respectively, as compared to the effective tax rate of 21.7% and 36.3% for the six and three months ended June 30, 2000. For the six months ended June 30, 2000, Avatar increased the valuation allowance for deferred income tax assets by $1,000, which is the primary cause for the increase in the effective tax rate for June 30, 2001. Reference is made to the Income Taxes note to the Consolidated Financial Statements included in Item 1 of Part I of this Report.

LIQUIDITY AND CAPITAL RESOURCES

     Avatar’s current real estate business strategy is designed to capitalize on its distinct competitive advantages and emphasize higher profit margin businesses by concentrating on the development and management of active adult communities, upscale custom and semi-custom homes and communities, and commercial and industrial properties in its existing community developments. Avatar also seeks to identify additional sites that are suitable for development consistent with its business strategy and anticipates that it will acquire or develop them directly or through joint venture or management arrangements. Avatar’s primary business activities are capital intensive in nature. Significant capital resources are required to finance planned active adult communities, homebuilding construction in process, community infrastructure, selling expenses and working capital needs, including funding of debt service requirements, operating deficits and the carrying cost of land. Avatar 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.

     Avatar’s portfolio consists of held-to-maturity securities and trading securities. Held-to-maturity securities include debt securities with the intent and ability to hold to maturity and are measured at amortized cost. During 2000, Avatar invested in U.S. Government issues, which mature in one year or less. The amortized cost balance at June 30, 2001 and December 31, 2000 was $20,999 and $41,968, respectively. The decrease in the held-to-maturity securities is due to the maturity of a U.S. Government issue. Trading securities include debt and marketable equity securities held for resale in anticipation of earning profits from short-term movements in market prices. Trading account securities are measured at fair market value and both realized and unrealized gains and losses are included in net trading account profit in the accompanying consolidated statements of operations. Fair values for actively traded debt securities and equity securities are based on quoted market prices on national markets.

     During the second quarter of 2001, Avatar sold substantially all of its trading securities investment portfolio for $34,806. The aggregate purchase price of the trading securities sold was $19,393 producing a total pre-tax realized gain of $15,413, which includes a pre-tax realized gain of $6,829 and $5,250 for the six and three months ended June 30, 2001.

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

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

     For the six months ended June 30, 2000, net cash used in operating activities amounted to $26,014, primarily as a result of a decrease in accounts payable and accrued and other liabilities of $18,807, and expenditures on land development and housing operations of $9,896, partially offset by principal payments collected on contract receivables of $3,064. Net cash used in investing activities of $19,299 resulted from investments in property, plant and equipment of $16,192 and marketable securities of $3,107. Net cash used in financing activities of $4,608 resulted from the repayment of notes payable.

     On January 27, 2000, Avatar’s Board of Directors authorized the expenditure of up to $20,000 to purchase, from time to time, shares of its common stock and/or the Notes in the open market, through privately negotiated transactions or otherwise, depending on market and business conditions and other factors. As of June 30, 2001, none of these authorized expenditures had been made.

FORWARD–LOOKING STATEMENTS

     Certain of the matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q 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 achievement of results, to differ materially from any future results, performance or achievement expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: the successful implementation of Avatar’s business strategy; shifts in demographic trends affecting active adult communities and other real estate development; the level of immigration and in-migration to Avatar’s regional market areas; national and local economic conditions and events, including employment levels, interest rates, consumer confidence, the availability of mortgage financing and demand for new and existing housing; Avatar’s access to future financing; competition; changes in, or the failure or inability to comply with, government regulations; and such other factors as are described in greater detail in Avatar’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

16

PART II — OTHER INFORMATION

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

     Avatar’s Annual Meeting of Stockholders was held on May 31, 2001, in Coral Gables, Florida, for the purpose of electing nine directors; approving the appointment of Ernst & Young LLP, independent accountants, as auditors for the year ending December 31, 2001; approving an amendment to the Avatar Holdings Inc. Amended and Restated 1997 Incentive and Capital Accumulation Plan; and approving the Avatar Holdings Inc. Executive Incentive Compensation Plan. Proxies were solicited from holders of 8,405,938 outstanding shares of Common Stock as of the close of business on March 31, 2001, as described in Avatar’s Proxy Statement dated April 30, 2001. All of management’s nominees for directors were elected, the appointment of Ernst & Young LLP was approved, the proposal to amend the Amended and Restated 1997 Incentive and Capital Accumulation Plan was approved, and the Avatar Holdings Inc. Executive Incentive Compensation Plan was approved by the following votes:

ELECTION OF DIRECTORS

Name	Votes FOR		WITHHELD
Leon Levy		7,283,869		453,862
Milton Dresner		7,281,369		456,362
Gerald Kelfer		7,173,840		563,891
Martin Meyerson		7,283,819		453,912
Elizabeth B. Moynihan		7,281,148		456,583
Kenneth T. Rosen		7,284,130		453,601
Fred Stanton Smith		7,281,575		456,156
William G. Spears		7,281,630		456,101
Beth A. Stewart		7,281,203		456,528

APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Shares Voted	Shares Voted		Shares
FOR	AGAINST		ABSTAINED
7,708,105		24,666		4,960

APPROVAL OF PROPOSAL TO AMEND THE AMENDED AND RESTATED 1997 INCENTIVE AND CAPITAL ACCUMULATION PLAN

Shares Voted	Shares Voted		Shares
FOR	AGAINST		ABSTAINED
6,478,130		1,241,957		17,644

APPROVAL OF THE AVATAR HOLDINGS INC. EXECUTIVE INCENTIVE COMPENSATION PLAN

Shares Voted	Shares Voted		Shares
FOR	AGAINST		ABSTAINED
6,836,289		799,110		102,332

17

Item 6. Exhibits and Reports on Form 8-K

Exhibits

     10(a) Executive Incentive Compensation Plan (filed herewith).

Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended June 30, 2001.

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:	August 13, 2001	By: /s/ Charles L. McNairy
		Charles L. McNairy Executive Vice President Chief Financial Officer and Treasurer
Date:	August 13, 2001	By: /s/ Michael P. Rama
		Michael P. Rama Controller

18 EX-10.(A) 3 g70956ex10-a.txt EXECUTIVE INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10(a) AVATAR HOLDINGS INC. EXECUTIVE INCENTIVE COMPENSATION PLAN 1. Purpose. The purpose of the Avatar Holdings Inc. Executive Incentive Compensation Plan (the "Plan") is to advance the interests of Avatar Holdings Inc. (the "Company") and its stockholders by providing incentives in the form of periodic cash bonus awards ("Awards") to certain executive employees of the Company and its subsidiaries and affiliates, thereby motivating such executives to attain performance goals articulated under the Plan. 2. Administration. (a) The Plan shall be administered by a committee (the "Committee") of the Company's Board of Directors (the "Board") and shall be comprised solely of not less than two members who shall be "outside directors" within the meaning of Treasury Regulation Section 1.162-27(e)(3) under Section 162(m) of the United States Internal Revenue Code of 1986, as amended (the "Code"). (b) The Committee shall have the exclusive authority to select the executives to be granted Awards under the Plan, to determine the size and terms and conditions of the Awards (subject to the limitations imposed on Awards in Section 4 below) including any restrictions or conditions on payment of Awards, to modify the terms and conditions of any Award that has been granted (except for any modification that would increase the amount of the Award payable to an executive), to determine the time when Awards will be made and the performance period to which they relate, to establish performance objectives in respect of such performance periods, and to certify that such performance objectives were attained. The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent that the Committee deems necessary or desirable. All determinations and interpretations made by the Committee shall be binding and conclusive on all Participants (as defined herein) and their legal representatives. No member of the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, except in circumstances involving his or her bad faith, gross negligence or willful misconduct, or for any act or failure to act hereunder by any other member or employee or by any agent to whom duties in connection with the administration of this Plan have been delegated. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company or any of its subsidiaries, against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's bad faith, gross negligence or willful misconduct. The costs and expenses of administering the Plan shall be borne by the Company. (c) The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable, and the Committee, or any person to whom it has delegated duties as aforesaid, may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan; provided, however, that no delegation shall be made regarding the selection of executives who shall be granted Awards under the Plan, the amount and timing thereof, or the objectives and conditions relating thereto. The Committee may employ such legal or other counsel, consultants, advisors and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from such counsel, consultant, advisor or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant, advisor or agent shall be paid by the Company, or the subsidiary or affiliate whose employees have benefited from the Plan, as determined by the Committee. 2 3. Participants. Awards may be granted to executives of the Company or its subsidiaries or affiliates. An executive to whom an Award is granted shall be a "Participant." Designation of a Participant with respect to any Award shall not require the Committee to designate such person to receive any additional Awards. The Committee shall consider such factors as it deems pertinent in selecting Participants and in determining the type and amount of their respective Awards. 4. Awards. (a) The terms and conditions of any Award shall be determined by the Committee in its sole discretion. As determined by the Committee in its sole discretion, either the granting or vesting of such Awards is to be based upon one or more of the following criteria: net sales, pretax income before allocation of corporate overhead and bonus, budget, earnings per share, net income, division, group or corporate financial goals, return on stockholders' equity, return on assets, appreciation in and/or maintenance of the price of common stock of the Company or any other publicly-traded securities of the Company, market share, net profits, gross profits, cash flow, earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization, economic value-added models and comparisons with various stock market indices, reductions in costs, containment of costs or any combination of the foregoing. The foregoing criteria may relate to the Company, one or more of its subsidiaries or affiliates or one or more of its divisions, units, projects, developments or real estate communities, or any combination of the foregoing, and may be applied on an absolute basis or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. With respect to a Participant's Award, (i) the Committee shall establish in writing (x) the performance goals applicable to a given period, and such performance goals shall state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the Participant if such performance goals are obtained and (y) the individual Participants to which such performance-based goals apply, no later than ninety (90) days after the commencement of such period (but in no event after 25% of such period has elapsed) and while the outcome for that performance period is substantially uncertain. The maximum amount which may be paid to any individual Participant under the Plan shall not exceed $5 million. (b) The Committee shall determine whether the performance goals have been met with respect to any Participant and, if they have, so certify and ascertain the amount of the applicable Award. No Awards shall be payable to or vest with respect to, as the case may be, any Participant for a given period until the Committee certifies in writing that the objective performance goals (and any other material terms) applicable to such period have been satisfied. After the establishment of a performance goal, the Committee shall not revise such performance goal or increase the amount of compensation payable thereunder (as determined in accordance with Section 162(m) of the Code) upon the attainment of such performance goal. The amount of the Award actually paid to any Participant (or, if such Participant is deceased, the Participant's estate) may be less than the amount determined by the applicable performance goal formula, at the discretion of the Committee. The amount of the Award determined by the Committee for a performance period shall be paid to the Participant within seventy-five (75) days after the end of that performance period or as otherwise determined by the Committee. Awards shall be payable in cash. 5. Amendment and Termination. The Committee may, at any time or from time to time, suspend or terminate the Plan in whole or in part or amend it in such respects as the Committee may deem appropriate. However, no action authorized by this Section 5 shall reduce the amount of any existing Award or change the terms and conditions thereof without the affected Participant's consent. No amendment of the Plan may be made without the approval of the stockholders of the Company if the amendment will: (i) increase the maximum amount which can be paid to any Participant under the Plan; (ii) change the types of criteria on which Awards are to be based under the Plan; or (iii) modify the requirements as to eligibility for participation in the Plan. 6. Miscellaneous. (a) Determinations made by the Committee under the Plan need not be uniform and may be made selectively among eligible individuals under the Plan, whether or not such eligible individuals are similarly situated. A Participant's right, if any, to continue to serve the 2 3 Company or any of its subsidiaries or affiliates as a director, officer, employee or otherwise, shall not be enlarged or otherwise affected by his or her designation as a Participant under the Plan and the right to terminate the employment of or performance of services by any Participant at any time and for any reason or no reason is specifically reserved to the Company and its subsidiaries and affiliates. (b) No Award shall be considered as compensation under any employee benefit plan of the Company or any subsidiary or affiliate, except as otherwise may be provided in such employee benefit plan. No reference in the Plan to any other plan or program maintained by the Company shall be deemed to give any Participant or other person a right to benefits under such other plan or program. (c) Except as otherwise may be required by law or approved by the Committee, a Participant's rights and interest under the Plan may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of a Participant's death) including, without limitation, execution, levy, garnishment, sale, transfer, attachment, pledge, bankruptcy or in any other manner; provided, however, that, subject to applicable law, any amounts payable to any Participant hereunder are subject to reduction to satisfy any liabilities owed by the Participant to the Company or any of its subsidiaries or affiliates. (d) All payments and distributions of Awards made pursuant to the Plan shall be net of any amounts required to be withheld pursuant to applicable federal, state, local and foreign tax withholding requirements. (e) Participants have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974, as amended. (f) The Plan, Awards granted hereunder and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under the applicable Delaware principles of conflict of laws). (g) The Plan shall be effective as of October 20, 2000, the date on which the Plan was adopted by the Committee, provided that the Plan is approved by the stockholders of the Company at an annual meeting or any special meeting of stockholders of the Company prior to the date any compensation is first paid with respect to any Award hereunder, and such approval of stockholders shall be a condition to the right of each Participant to receive any benefits hereunder. Any Awards granted under the Plan prior to such approval of stockholders shall be effective as of the date of grant (unless, with respect to any Award, the Committee specifies otherwise at the time of grant), but no such Award may be paid out prior to such stockholder approval, and if stockholders fail to approve the Plan as specified hereunder, any such Award shall be cancelled. (h) No Awards shall be granted under the Plan after December 31, 2005. 3 GRAPHIC 4 g70956xbox.gif GRAPHIC begin 644 g70956xbox.gif M1TE&.#EA#``,`/?^``````$!`0("`@,#`P0$!`4%!08&!@<'!P@("`D)"0H* M"@L+"PP,#`T-#0X.#@\/#Q`0$!$1$1(2$A,3$Q04%!45%186%A<7%Q@8&!D9 M&1H:&AL;&QP<'!T='1X>'A\?'R`@("$A(2(B(B,C(R0D)"4E)28F)B7IZ>GM[>WQ\?'U]?7Y^?G]_?X"`@(&!@8*" M@H.#@X2$A(6%A8:&AH>'AXB(B(F)B8J*BHN+BXR,C(V-C8Z.CH^/CY"0D)&1 MD9*2DI.3DY24E)65E9:6EI>7EYB8F)F9F9J:FIN;FYRGI^?GZ"@ MH*&AH:*BHJ.CHZ2DI*6EI::FIJ>GIZBHJ*FIJ:JJJJNKJZRLK*VMK:ZNKJ^O MK["PL+&QL;*RLK.SL[2TM+6UM;:VMK>WM[BXN+FYN;JZNKN[N[R\O+V]O;Z^ MOK^_O\#`P,'!P<+"PL/#P\3$Q,7%Q<;&QL?'Q\C(R,G)RWM_?W^#@X.'AX>+BXN/CX^3DY.7EY>;FYN?GY^CHZ.GIZ>KJZNOK MZ^SL[.WM[>[N[N_O[_#P\/'Q\?+R\O/S\_3T]/7U]?;V]O?W]_CX^/GY^?KZ M^OO[^_S\_/W]_?[^_O___R'Y!`$``/X`+``````,``P`!PA>`/]%8T:PH,%_ M&0`H7,@0(3UF_R)&C*8N`T)P"O1(1"4@F$6+UB@0^H=*P2V$*/]94\!$P$F4 J%B/^`1!%XL>('#-EC'BSY,F0(S]& GRAPHIC 5 g70956box.gif GRAPHIC begin 644 g70956box.gif M1TE&.#EA#``,`/?^``````$!`0("`@,#`P0$!`4%!08&!@<'!P@("`D)"0H* M"@L+"PP,#`T-#0X.#@\/#Q`0$!$1$1(2$A,3$Q04%!45%186%A<7%Q@8&!D9 M&1H:&AL;&QP<'!T='1X>'A\?'R`@("$A(2(B(B,C(R0D)"4E)28F)B7IZ>GM[>WQ\?'U]?7Y^?G]_?X"`@(&!@8*" M@H.#@X2$A(6%A8:&AH>'AXB(B(F)B8J*BHN+BXR,C(V-C8Z.CH^/CY"0D)&1 MD9*2DI.3DY24E)65E9:6EI>7EYB8F)F9F9J:FIN;FYRGI^?GZ"@ MH*&AH:*BHJ.CHZ2DI*6EI::FIJ>GIZBHJ*FIJ:JJJJNKJZRLK*VMK:ZNKJ^O MK["PL+&QL;*RLK.SL[2TM+6UM;:VMK>WM[BXN+FYN;JZNKN[N[R\O+V]O;Z^ MOK^_O\#`P,'!P<+"PL/#P\3$Q,7%Q<;&QL?'Q\C(R,G)RWM_?W^#@X.'AX>+BXN/CX^3DY.7EY>;FYN?GY^CHZ.GIZ>KJZNOK MZ^SL[.WM[>[N[N_O[_#P\/'Q\?+R\O/S\_3T]/7U]?;V]O?W]_CX^/GY^?KZ M^OO[^_S\_/W]_?[^_O___R'Y!`$``/X`+``````,``P`!P@Z`/\)'$APX)L? 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EX-10.(A)

   1

                                                                   EXHIBIT 10(a)

                              AVATAR HOLDINGS INC.

                     EXECUTIVE INCENTIVE COMPENSATION PLAN

     1. Purpose.  The purpose of the Avatar Holdings Inc. Executive Incentive
Compensation Plan (the "Plan") is to advance the interests of Avatar Holdings
Inc. (the "Company") and its stockholders by providing incentives in the form of
periodic cash bonus awards ("Awards") to certain executive employees of the
Company and its subsidiaries and affiliates, thereby motivating such executives
to attain performance goals articulated under the Plan.

     2. Administration.  (a) The Plan shall be administered by a committee (the
"Committee") of the Company's Board of Directors (the "Board") and shall be
comprised solely of not less than two members who shall be "outside directors"
within the meaning of Treasury Regulation Section 1.162-27(e)(3) under Section
162(m) of the United States Internal Revenue Code of 1986, as amended (the
"Code").

     (b) The Committee shall have the exclusive authority to select the
executives to be granted Awards under the Plan, to determine the size and terms
and conditions of the Awards (subject to the limitations imposed on Awards in
Section 4 below) including any restrictions or conditions on payment of Awards,
to modify the terms and conditions of any Award that has been granted (except
for any modification that would increase the amount of the Award payable to an
executive), to determine the time when Awards will be made and the performance
period to which they relate, to establish performance objectives in respect of
such performance periods, and to certify that such performance objectives were
attained. The Committee is authorized to interpret the Plan, to establish, amend
and rescind any rules and regulations relating to the Plan, and to make any
other determinations that it deems necessary or desirable for the administration
of the Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan in the manner and to the extent that the
Committee deems necessary or desirable. All determinations and interpretations
made by the Committee shall be binding and conclusive on all Participants (as
defined herein) and their legal representatives. No member of the Committee and
no employee of the Company shall be liable for any act or failure to act
hereunder, except in circumstances involving his or her bad faith, gross
negligence or willful misconduct, or for any act or failure to act hereunder by
any other member or employee or by any agent to whom duties in connection with
the administration of this Plan have been delegated. The Company shall indemnify
members of the Committee and any agent of the Committee who is an employee of
the Company or any of its subsidiaries, against any and all liabilities or
expenses to which they may be subjected by reason of any act or failure to act
with respect to their duties on behalf of the Plan, except in circumstances
involving such person's bad faith, gross negligence or willful misconduct. The
costs and expenses of administering the Plan shall be borne by the Company.

     (c) The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee, or any person to whom it has delegated duties as aforesaid, may
employ one or more persons to render advice with respect to any responsibility
the Committee or such person may have under the Plan; provided, however, that no
delegation shall be made regarding the selection of executives who shall be
granted Awards under the Plan, the amount and timing thereof, or the objectives
and conditions relating thereto. The Committee may employ such legal or other
counsel, consultants, advisors and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion or computation received
from such counsel, consultant, advisor or agent. Expenses incurred by the
Committee in the engagement of such counsel, consultant, advisor or agent shall
be paid by the Company, or the subsidiary or affiliate whose employees have
benefited from the Plan, as determined by the Committee.
   2

     3. Participants.  Awards may be granted to executives of the Company or its
subsidiaries or affiliates. An executive to whom an Award is granted shall be a
"Participant." Designation of a Participant with respect to any Award shall not
require the Committee to designate such person to receive any additional Awards.
The Committee shall consider such factors as it deems pertinent in selecting
Participants and in determining the type and amount of their respective Awards.

     4. Awards.  (a) The terms and conditions of any Award shall be determined
by the Committee in its sole discretion. As determined by the Committee in its
sole discretion, either the granting or vesting of such Awards is to be based
upon one or more of the following criteria: net sales, pretax income before
allocation of corporate overhead and bonus, budget, earnings per share, net
income, division, group or corporate financial goals, return on stockholders'
equity, return on assets, appreciation in and/or maintenance of the price of
common stock of the Company or any other publicly-traded securities of the
Company, market share, net profits, gross profits, cash flow, earnings before
interest and taxes, earnings before interest, taxes, depreciation and
amortization, economic value-added models and comparisons with various stock
market indices, reductions in costs, containment of costs or any combination of
the foregoing. The foregoing criteria may relate to the Company, one or more of
its subsidiaries or affiliates or one or more of its divisions, units, projects,
developments or real estate communities, or any combination of the foregoing,
and may be applied on an absolute basis or be relative to one or more peer group
companies or indices, or any combination thereof, all as the Committee shall
determine. With respect to a Participant's Award, (i) the Committee shall
establish in writing (x) the performance goals applicable to a given period, and
such performance goals shall state, in terms of an objective formula or
standard, the method for computing the amount of compensation payable to the
Participant if such performance goals are obtained and (y) the individual
Participants to which such performance-based goals apply, no later than ninety
(90) days after the commencement of such period (but in no event after 25% of
such period has elapsed) and while the outcome for that performance period is
substantially uncertain. The maximum amount which may be paid to any individual
Participant under the Plan shall not exceed $5 million.

     (b) The Committee shall determine whether the performance goals have been
met with respect to any Participant and, if they have, so certify and ascertain
the amount of the applicable Award. No Awards shall be payable to or vest with
respect to, as the case may be, any Participant for a given period until the
Committee certifies in writing that the objective performance goals (and any
other material terms) applicable to such period have been satisfied. After the
establishment of a performance goal, the Committee shall not revise such
performance goal or increase the amount of compensation payable thereunder (as
determined in accordance with Section 162(m) of the Code) upon the attainment of
such performance goal. The amount of the Award actually paid to any Participant
(or, if such Participant is deceased, the Participant's estate) may be less than
the amount determined by the applicable performance goal formula, at the
discretion of the Committee. The amount of the Award determined by the Committee
for a performance period shall be paid to the Participant within seventy-five
(75) days after the end of that performance period or as otherwise determined by
the Committee. Awards shall be payable in cash.

     5. Amendment and Termination.  The Committee may, at any time or from time
to time, suspend or terminate the Plan in whole or in part or amend it in such
respects as the Committee may deem appropriate. However, no action authorized by
this Section 5 shall reduce the amount of any existing Award or change the terms
and conditions thereof without the affected Participant's consent. No amendment
of the Plan may be made without the approval of the stockholders of the Company
if the amendment will: (i) increase the maximum amount which can be paid to any
Participant under the Plan; (ii) change the types of criteria on which Awards
are to be based under the Plan; or (iii) modify the requirements as to
eligibility for participation in the Plan.

     6. Miscellaneous.  (a) Determinations made by the Committee under the Plan
need not be uniform and may be made selectively among eligible individuals under
the Plan, whether or not such eligible individuals are similarly situated. A
Participant's right, if any, to continue to serve the


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Company or any of its subsidiaries or affiliates as a director, officer,
employee or otherwise, shall not be enlarged or otherwise affected by his or her
designation as a Participant under the Plan and the right to terminate the
employment of or performance of services by any Participant at any time and for
any reason or no reason is specifically reserved to the Company and its
subsidiaries and affiliates.

     (b) No Award shall be considered as compensation under any employee benefit
plan of the Company or any subsidiary or affiliate, except as otherwise may be
provided in such employee benefit plan. No reference in the Plan to any other
plan or program maintained by the Company shall be deemed to give any
Participant or other person a right to benefits under such other plan or
program.

     (c) Except as otherwise may be required by law or approved by the
Committee, a Participant's rights and interest under the Plan may not be
assigned or transferred, hypothecated or encumbered in whole or in part either
directly or by operation of law or otherwise (except in the event of a
Participant's death) including, without limitation, execution, levy,
garnishment, sale, transfer, attachment, pledge, bankruptcy or in any other
manner; provided, however, that, subject to applicable law, any amounts payable
to any Participant hereunder are subject to reduction to satisfy any liabilities
owed by the Participant to the Company or any of its subsidiaries or affiliates.

     (d) All payments and distributions of Awards made pursuant to the Plan
shall be net of any amounts required to be withheld pursuant to applicable
federal, state, local and foreign tax withholding requirements.

     (e) Participants have no right, title, or interest whatsoever in or to any
investments which the Company may make to aid it in meeting its obligations
under the Plan. Nothing contained in the Plan, and no action taken pursuant to
its provisions, shall create or be construed to create a trust of any kind, or a
fiduciary relationship between the Company and any Participant, beneficiary,
legal representative or any other person. To the extent that any person acquires
a right to receive payments from the Company under the Plan, such right shall be
no greater than the right of an unsecured general creditor of the Company. All
payments to be made hereunder shall be paid from the general funds of the
Company and no special or separate fund shall be established and no segregation
of assets shall be made to assure payment of such amounts except as expressly
set forth in the Plan. The Plan is not intended to be subject to the Employee
Retirement Income Security Act of 1974, as amended.

     (f) The Plan, Awards granted hereunder and actions taken in connection
herewith shall be governed and construed in accordance with the laws of the
State of Delaware (regardless of the law that might otherwise govern under the
applicable Delaware principles of conflict of laws).

     (g) The Plan shall be effective as of October 20, 2000, the date on which
the Plan was adopted by the Committee, provided that the Plan is approved by the
stockholders of the Company at an annual meeting or any special meeting of
stockholders of the Company prior to the date any compensation is first paid
with respect to any Award hereunder, and such approval of stockholders shall be
a condition to the right of each Participant to receive any benefits hereunder.
Any Awards granted under the Plan prior to such approval of stockholders shall
be effective as of the date of grant (unless, with respect to any Award, the
Committee specifies otherwise at the time of grant), but no such Award may be
paid out prior to such stockholder approval, and if stockholders fail to approve
the Plan as specified hereunder, any such Award shall be cancelled.

     (h) No Awards shall be granted under the Plan after December 31, 2005.

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