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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 September 30, 2002

or

o 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   x   No   o.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 8,788,358 shares of Avatar’s common stock ($1.00 par value) were outstanding as of October 31, 2002.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Balance Sheets

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Operations

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Basis of Statement Presentation and Summary of Significant Accounting Policies

     The consolidated balance sheets as of September 30, 2002 and December 31, 2001, and the related consolidated statements of operations for the nine and three month periods ended September 30, 2002 and 2001 and the consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001 have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) 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 accounting principles generally accepted in the United States 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 further information and a complete description of Avatar’s other accounting policies, refer to Avatar Holdings Inc.’s 2001 Annual Report on Form 10-K and the notes to Avatar’s consolidated financial statements included therein.

Reclassifications

     Certain 2001 financial statement items have been reclassified to conform to the 2002 presentation.

Earnings Per Share

     Earnings per share is computed based on the weighted average number of shares outstanding of 8,772,042 and 8,788,358 for the nine and three months ended September 30, 2002, respectively; and 8,431,759 and 8,482,559 for the nine and three months ended September 30, 2001. 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. In accordance with GAAP, the computation of earnings per share for the nine and three months ended September 30, 2002 and 2001 did not assume the conversion of the 7% Convertible Subordinated Notes (Notes) and the exercise of employee stock options because the effect is not dilutive. There is no difference between basic and diluted earnings per share for these periods.

Exchange of Notes

     During the first quarter of 2002, Avatar exchanged 193,000 shares of its common stock for Notes with a face value of $4,667. Avatar realized a net gain of $41 on these transactions. During the third quarter of 2001, Avatar exchanged 140,454 shares of its common stock for Notes with a face value of $3,436. Avatar realized a net loss of $59 on these transactions. These transactions were not induced exchanges.

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Notes to Consolidated Financial Statements (Unaudited) – continued

Goodwill

     In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. SFAS 142 no longer requires or permits the amortization of goodwill and indefinite-lived assets. These assets must be reviewed annually to ascertain impairment in accordance with this Statement. Other intangible assets will continue to be amortized over their useful lives. The impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. Avatar performed the required impairment tests of goodwill as of January 1, 2002 and determined no impairment existed. Application of the provisions of SFAS No. 142 resulted in the elimination of goodwill amortization expense as of January 1, 2002. Results reported for the nine and three months ended September 30, 2001 included goodwill amortization expense of $739 and $284, respectively.

Land and Other Inventories

     Inventories consist of the following:

     During the third quarter of 2002, Avatar closed on the acquisition of property in the community of Cory Lakes in Tampa, Florida, at a purchase price approximating $15,053 including a prior deposit of $6,429. The balance paid at closing approximated: $2,177 of cash, assumption of $3,492 Community Development District obligations and a purchase money note and mortgage of $2,765.

Subsequent Events

     On October 17, 2002, Avatar closed on the sale of substantially all of the assets of the Rio Rico Resort and golf course located in Arizona for a sales price of $5,500, subject to certain adjustments. As of September 30, 2002 and December 31, 2001, the assets of the Rio Rico Resort and golf course are classified as held for sale. In addition, the operating results for the nine and three months ended September 30, 2002 and 2001 have been reported as discontinued operations. The sales transaction will result in a pre-tax gain of approximately $2,500 and will be classified in Avatar’s consolidated statement of operations for the year ending December 31, 2002 as a gain from the sale of discontinued operations. The assets of the discontinued operations included in the accompanying consolidated balance sheets as of September 30, 2002 and 2001 consists of property, plant and equipment of $2,615 and $2,822, respectively, and inventories of $126 and $168, respectively.

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Notes to Consolidated Financial Statements (Unaudited) – continued

Subsequent Event – continued

     On October 30, 2002, Avatar closed on the sale of its remaining 692-acre tract in Cape Coral, Florida, at a sales price of approximately $9,000. This sale will result in a pre-tax gain from continuing operations of approximately $7,600 for the year ending December 31, 2002.

Contingencies

     Avatar is involved in various pending litigation matters primarily arising in the normal course of its business. Although the outcome of these matters cannot be determined, management believes that the resolution thereof will not have a material effect on Avatar’s business or financial statements.

Financial Information Relating To Industry Segments

     The following table summarizes Avatar’s information for reportable segments for the nine and three months ended September 30, 2002 and 2001:

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands except per share data)

RESULTS OF OPERATIONS

     In the preparation of its financial statements, Avatar applies accounting principles generally accepted in the United States of America. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. For a description of Avatar’s accounting policies, refer to Avatar Holdings Inc.’s Annual Report on Form 10-K.

     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 primary residential and active adult community homebuilding operations for the nine and three months ended September 30, 2002 and 2001 are summarized as follows:

     Results for Avatar’s active adult community, Solivita, included in the above table for the nine and three months ended September 30, 2002, are: 357 and 119 contracts written with an aggregate sales volume of $60,740 and $19,693, respectively; 204 and 69 homes closed, generating revenues from Solivita homebuilding operations of $33,277 and $11,243, respectively. Results for Solivita included in the above table for the nine and three months ended September 30, 2001, are: 221 and 71 contracts written with an aggregate sales volume of $36,920 and $11,701, respectively; 159 and 64 homes closed, generating revenues from Solivita homebuilding operations of $23,459 and $9,880, respectively. Backlog at September 30, 2002 and 2001 totaled 339 units at $57,964 and 214 units at $35,135, respectively.

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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

     Net loss for the nine and three months ended September 30, 2002 was $1,376 or $0.16 per share and $391 or $0.05 per share, respectively, compared to net income of $5,072 or $0.60 per share and $1,559 or $0.18 per share for the same periods of 2001. The decrease in net income for the nine months is primarily attributable to trading account profits in 2001 of $6,829. In addition, the decrease in net income for the nine and three months is attributable to decreases in interest income and other revenues and increases in general and administrative expenses, partially mitigated by increases in real estate operating results and decreases in other expenses.

     Real estate revenues for the nine and three months ended September 30, 2002 increased $21,872 or 21.2% and $7,727 or 20.6%, respectively, when compared to the same periods of 2001. These increases are generally a result of increased revenues generated from active adult community operations and primary residential communities operations, partially mitigated by the sale of the Natoma tract located in Woodland Hills, California in July 2001. Revenues from active adult community operations for the nine and three months ended September 30, 2002 increased $10,258 or 41.2% and $1,438 or 13.9%, respectively, when compared to the same periods of 2001, due to increased revenues from closings and amenity operations. Revenues from primary residential communities operations increased $20,917 or 34.1% and $17,158 or 120%, respectively, when compared to the same periods of 2001, due to increased closings at Poinciana, Harbor Islands and Rio Rico.

     Real estate expenses for the nine and three months ended September 30, 2002, increased by $21,465 or 22.1% and $8,298 or 24.8%, respectively, when compared to the same periods in 2001. These increases are generally a result of increased expenses generated from active adult community operations and primary residential communities operations.

     Trading account profit of $6,829 was recognized during the nine months ended September 30, 2001. 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.

     Interest income for the nine and three months ended September 30, 2002 decreased $2,166 or 44.4% and $785 or 45.7%, respectively, when compared to the same periods in 2001. These decreases are attributed to lower interest rates and lower interest income earned on a declining principal balance of contracts receivable.

     General and administrative expenses for the nine and three months ended September 30, 2002 increased $1,530 or 20.3% and $734 or 29.4%, respectively, as compared to the same periods in 2001. These increases are primarily due to accruals for executive compensation related to the Cash Bonus Award Agreement pursuant to the Executive Incentive Compensation Plan and the restricted stock units granted pursuant to the Amended and Restated 1997 Incentive and Capital Accumulation Plan, as amended. Exclusive of such accruals, general and administrative expenses increased $237 or 3.4% and $314 or 13.3% for the nine and three months ended September 30, 2002, respectively, compared to the same periods in 2001.

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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

     Interest expense for the nine and three months ended September 30, 2002 decreased $886 or 23.5% and increased $483 or 48.3%, respectively, when compared to the same periods in 2001. The decrease for the nine months is primarily attributable to an increase in capitalized interest and a reduction of the outstanding debt. The increase for the three months is primarily attributable to a decrease in capitalized interest.

     Other revenues and expenses for the nine months ended September 30, 2002 decreased $1,579 and $278, respectively, and for the three months ended September 30, 2002 decreased $494 and $42, respectively, compared to the same periods in 2001. These decreases were primarily attributable to the decline in management fees and expenses under a management agreement for water facility operations in Florida.

     Income tax (benefit) expense was provided for at an effective tax rate of 38.5% and 38.9% for the nine and three months ended September 30, 2002, respectively, as compared to an effective tax rate of 40.4% and 39.7% for the nine and three months ended September 30, 2001.

LIQUIDITY AND CAPITAL RESOURCES

     Avatar’s 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 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, partnership or management arrangements. Avatar’s primary business activities are capital intensive in nature. Significant capital resources are required to finance planned primary residential and 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.

     During the third quarter of 2002, Avatar closed on the acquisition of property in the community of Cory Lakes in Tampa, Florida, at a purchase price approximating $15,053 including a prior deposit of $6,429. The balance paid at closing approximated: $2,177 of cash, assumption of $3,492 Community Development District obligations and a purchase money note and mortgage of $2,765.

     During the first quarter of 2002, Avatar exchanged $4,667 principal amount of its Notes for 193,000 shares of common stock, reducing the outstanding balance of the Notes to $103,064 as of September 30, 2002. Avatar may consider future exchanges, thereby further reducing the outstanding balance of the Notes. These transactions were not induced exchanges.

     Cash and cash equivalents as of September 30, 2002 was $117,227. We anticipate that after expenditures for completion of development of Solivita and expenditures related to development at Harbor Islands, we will have sufficient liquidity to enable us to realize

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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

opportunities on existing landholdings. Depending upon new real estate or other business opportunities we may identify, we may have sufficient liquidity or we may consider financing alternatives or external borrowings.

     On October 17, 2002, Avatar closed on the sale of substantially all of the assets of the Rio Rico Resort and golf course located in Arizona for a sales price of $5,500, subject to certain adjustments. The sales transaction will result in a pre-tax gain of approximately $2,500. In addition, on October 30, 2002, Avatar closed on the sale of its remaining 692-acre tract in Cape Coral, Florida, at a sales price of approximately $9,000. This sale will result in a pre-tax gain of approximately $7,600 for the year ending December 31, 2002. Reference is made to the Subsequent Events section of the notes to the accompanying consolidated financial statements for additional information about these transactions.

     For the nine months ended September 30, 2002, net cash provided by operating activities amounted to $11,072, generally as a result of an increase in accounts payable and accrued and other liabilities of $7,827 and principal collected on contracts receivable of $2,991. Net cash used in investing activities of $4,952 resulted from investments in property, plant and equipment of $2,775 and $2,177 used in the acquisition of the Cory Lakes property. Net cash used in financing activities of $666 resulted from the repayment of notes payable.

     For the nine months ended September 30, 2001, net cash used in operating activities amounted to $8,615, mainly as a result of an increase in other assets and inventories of $9,609 and $4,872, respectively, partially mitigated by principal collected on contracts receivable of $2,840. Net cash provided by investing activities of $54,164 resulted from proceeds from marketable securities of $55,806 partially offset by investments in property, plant and equipment of $1,642. Net cash used in financing activities of $1,193 resulted from the repayment of real estate 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 September 30, 2002, none of these authorized expenditures had been made.

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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 constitutes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: 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, 2001.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

     There have been no material changes in Avatar’s market risk during the nine months ended September 30, 2002. For additional information regarding Avatar’s market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in Avatar’s 2001 Annual Report on Form 10-K.

Item 4. Controls and Procedures

     a) Based on their evaluation of Avatar’s disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, Avatar’s principal executive officer and principal financial officer have concluded that, as of the date of their evaluation, Avatar’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended) are effective.

    b) There have been no significant changes in Avatar’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this quarterly report on Form 10-Q.

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PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended September 30, 2002.

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.

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CERTIFICATIONS

I, Gerald D. Kelfer, certify that:

     1.     I have reviewed this quarterly report on Form 10-Q of Avatar Holdings Inc.;

     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

     6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Charles L. McNairy, certify that:

     1.     I have reviewed this quarterly report on Form 10-Q of Avatar Holdings Inc.;

     2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

     4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

     6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Exhibit Index