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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, 2003

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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: 8,742,027 shares of Avatar’s common stock ($1.00 par value) were outstanding as of October 31, 2003.

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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

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

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AVATAR HOLDINGS INC. AND SUBSIDIARIES

Basis of Statement Presentation and Summary of Significant Accounting Policies

     The accompanying consolidated financial statements include the accounts of Avatar Holdings Inc. and its subsidiaries (“Avatar”). All significant intercompany accounts and transactions have been eliminated in consolidation.

     The consolidated balance sheets as of September 30, 2003 and December 31, 2002, and the related consolidated statements of operations for the nine and three months ended September 30, 2003 and 2002 and the consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002 have been prepared in accordance with accounting principles generally accepted in the United States 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.

     The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

     For a complete description of Avatar’s other accounting policies, refer to Avatar Holdings Inc.’s 2002 Annual Report on Form 10-K and the notes to Avatar’s consolidated financial statements included therein.

Reclassifications

     Certain 2002 financial statement items have been reclassified to conform to the 2003 presentation.

Land and Other Inventories

     Inventories consist of the following:

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

Other Assets

     Other assets are summarized as follows:

Warranty Costs

     Generally, the homebuyer is provided a limited warranty that is underwritten through a third party warrantor. This limited warranty covers defects in materials and workmanship for the first year after closing and defects in electrical, plumbing and mechanical systems for the first two years after closing. This limited warranty also covers major structural defects for up to 10 years after closing. Avatar may have recourse against the subcontractors for claims relating to workmanship and materials. Estimated warranty costs are recorded at the time of closing.

     During the nine months ended September 30, 2003 changes in the warranty accrual consisted of the following:

Notes, Mortgage Notes and Other Debt

     On July 1, 2003, Avatar called for partial redemption on July 31, 2003, of $60,000 of the $94,429 in aggregate principal amount outstanding of its 7% Convertible Subordinated Notes due April 2005 (the “Notes”). The redemption price was $1.02 per $1.00 principal amount, plus accrued interest from April 1, 2003 to the redemption date.

     The Notes are convertible into Avatar’s common stock at a conversion price of $31.80 per share, or 31.447 shares per $1.00 principal amount of the Notes. Rights of holders to effect conversion of the Notes called for redemption expired at the close of business on July 29, 2003. No interest for the period from April 1, 2003 to the date of conversion was paid with respect to any Notes that were surrendered for conversion.

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

Notes, Mortgage Notes and Other Debt – continued

     Of the $60,000 principal amount of the Notes called for redemption, $49,913 principal amount of the Notes were redeemed for a total of $50,911 inclusive of redemption premium, plus accrued interest of $1,165. Holders of $10,087 principal amount elected to convert their Notes into 317,199 shares of Avatar’s common stock. As a result of this transaction, Avatar recorded a net pre-tax loss of approximately $1,329 in the consolidated statements of operations for the nine and three months ended September 30, 2003. In addition, holders of $352 principal amount of the Notes which were not called for redemption also elected to convert, resulting in the issuance of 11,069 shares of Avatar’s common stock. As of September 30, 2003, there was $34,077 principal amount of the Notes outstanding.

     On October 24, 2003, Avatar called for redemption on November 25, 2003, all outstanding Notes. The redemption price is $1.02 per $1.00 principal amount of Notes. Rights of holders to effect conversion of the 7% Notes called for redemption will expire at the close of business on November 21, 2003. No interest for the period from October 1, 2003 to the date of conversion will be paid with respect to any Notes that are surrendered for conversion.

     On July 31, 2003, Avatar entered into a six-month $30,000 Revolving Line of Credit Facility (the “Short-Term Facility”) with an interest rate of LIBOR plus 2.5% which is secured by certain real property with a book value of $38,306 as of September 30, 2003. As of September 30, 2003 Avatar drew and had outstanding $5,000 on the Short-Term Facility.

     The lender under the Short-Term Facility, as lead arranger, is syndicating a $100,000 long-term Secured Revolving Line of Credit Facility (the “Long-Term Facility”) and has committed to fund up to $40,000 thereof. The Long-Term Facility will be secured by certain real property, including the real property securing the Short-Term Facility, having an aggregate book value of $163,974, as of September 30, 2003. The proceeds may be used for general corporate purposes, the financing of potential land acquisitions, site development and/or construction expenditures. The interest rate for the Long-Term Facility will range from LIBOR plus 2.5% to LIBOR plus 3.0%. Avatar anticipates closing the Long-Term Facility during the fourth quarter of 2003.

Earnings Per Share

     Avatar presents earnings per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share is computed by dividing earnings available 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.

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

Earnings Per Share — continued

     The following table represents a reconciliation of weighted average shares outstanding for the nine and three months ended September 30, 2003 and 2002:

     In accordance with SFAS No. 128, the computation of diluted earnings per share for 2003 and 2002 did not assume the conversion of the Notes because the effect is antidilutive. In addition, the diluted earnings per share for the nine months ended September 30, 2002 did not assume the effect of restricted stock and employee stock options because the effect is antidilutive.

Repurchase and Exchange of Common Stock and Notes

     From January 1 through May 6, 2003, Avatar repurchased $8,875 of its common stock representing 379,758 shares and $7,585 principal amount of its Notes. On March 20, 2003, Avatar’s Board of Directors authorized the expenditure of up to $30,000 to purchase, from time to time, shares of its common stock and/or Notes in the open market, through privately negotiated transactions or otherwise, depending on market and business conditions and other factors. The balance of this authorization as of September 30, 2003 is $26,350.

     During the first quarter of 2002, Avatar exchanged 193,000 shares of its common stock for Notes with a face value of $4,667. These transactions were not induced exchanges.

Stock-Based Compensation

     Avatar has accounted for stock-based compensation using the intrinsic value based method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. For stock options granted, no compensation expense has been recognized because all stock options granted have exercise prices greater than the market value of Avatar’s stock on the date of the grant. For restricted stock units granted, compensation expense of $1,260 and $398 has been accrued for the nine and three months ended September 30, 2003, respectively, and compensation expense of $556 and $1 has been accrued for the nine and three months ended September 30, 2002, respectively.

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

Stock-Based Compensation — continued

     SFAS No. 123, as amended by SFAS No. 148, requires disclosure of pro forma income and pro forma income per share as if the fair value based method had been applied in measuring compensation expense. The following table summarizes pro forma net income (loss) and earnings per share in accordance with SFAS No. 123, for the nine and three months ended September 30, 2003 and 2002 had compensation expense for Avatar’s option plan been based on fair value at the grant date:

Income Taxes

     The components of income tax expense (benefit) from continuing operations for the nine and three months ended September 30, 2003, and 2002 are as follows:

     During the nine and three months ended September 30, 2003, Avatar recorded a tax benefit of $8,639 as the result of the elimination of certain income tax reserves. The effect of this adjustment on basic earnings per share was $1.01 and $1.00 for the nine and three months ended September 30, 2003, respectively. The effect of this adjustment on diluted earnings per share was $1.00 and $0.99 for the nine and three months ended September 30, 2003, respectively.

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

Income Taxes — continued

     Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Additional paid in capital was credited for $321 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 September 30, 2003 and December 31, 2002 are as follows:

     A reconciliation of income tax expense (benefit) before discontinued operations to the expected income tax expense at the federal statutory rate of 35% for the nine months ended September 30, 2003 and 2002 is as follows:

Joint Venture

     In late-December 2002, Avatar entered into a joint venture (the “Joint Venture”) in which it has committed to fund up to $25,000 for the development of a 3.5 acre site and construction of a 38-story oceanfront condominium of 240 units in Hollywood, Florida. Avatar has a 50% voting interest in the Joint Venture. Accordingly, Avatar is accounting for its investment in the Joint Venture under the equity method as it evaluates the impact of FASB Interpretation No. 46 “Consolidation of Variable Interest Entities” as discussed below in the section titled Recently Issued Accounting Pronouncements. As of September 30, 2003, Avatar funded $19,944 of its commitment to fund the Joint Venture.

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

Joint Venture — continued

     The following is the Joint Venture’s balance sheet as of September 30, 2003:

     Avatar’s share of the net loss from the Joint Venture is $788 and $189 for the nine and three months ended September 30, 2003, respectively, and is included in real estate expenses in Avatar’s accompanying consolidated statements of operations for the nine months and three months ended September 30, 2003.

     The following is the Joint Venture’s statement of operations for the nine and three months ended September 30, 2003:

Recently Issued Accounting Pronouncements

     In January 2003, the FASB issued Interpretation No. 46 (Interpretation No. 46), “Consolidation of Variable Interest Entities". Interpretation No. 46 expands upon and strengthens Accounting Research Bulletin No. 51, “Consolidation of Financial Statements” that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Interpretation No. 46 also requires expanded disclosures by the

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

Recently Issued Accounting Pronouncements — continued

primary beneficiary, as defined, of a variable interest entity and by an enterprise that holds significant variable interest in a variable interest entity but is not the primary beneficiary. Interpretation No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. However, on October 8, 2003 the FASB deferred the effective date of Interpretation No. 46 for variable interests held by public companies for all entities that were acquired prior to February 1, 2003. The deferral will require the adoption of provisions of Interpretation No. 46 at periods ending after December 15, 2003. Under Interpretation No. 46 a change in a contractual agreement may change the status of a variable interest entity. Avatar has evaluated the Joint Venture and the potential impact of Interpretation No. 46 and believes that consolidation will be determined based upon the availability of construction financing to the Joint Venture. If construction financing is not obtained by December 31, 2003, then Avatar may be required to consolidate the Joint Venture; however, Avatar may be required to unconsolidate when financing is obtained. Currently, the Joint Venture is negotiating construction financing with a third-party lender.

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for the first interim period beginning after June 15, 2003. The implementation of SFAS No. 150 did not have a material impact on Avatar’s financial condition, results of operations or cash flows.

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.

     In addition, on July 22, 2003, a holder of the Notes filed a lawsuit against Avatar and certain of its officers in the federal district court of Delaware seeking class action status and alleging that Avatar violated Section 12(a)(2) of the Securities Act of 1933 with respect to its announcement of a partial redemption of $60,000 of the Notes. Avatar believes that the allegations contained in the lawsuit are without merit and intends to take all appropriate actions to vigorously defend its position.

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Notes to Consolidated Financial Statements (dollars in thousands except per share data) (Unaudited) – continued

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, 2003 and 2002: