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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 June 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: 8,733,885 shares of Avatar’s common stock ($1.00 par value) were outstanding as of July 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
Consolidated Statements of Cash Flows (Unaudited)
For the Six months ended June 30, 2003 and 2002
(Dollars in Thousands)

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 consolidated balance sheets as of June 30, 2003 and December 31, 2002, and the related consolidated statements of operations for the six and three months ended June 30, 2003 and 2002 and the consolidated statements of cash flows for the six months ended June 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.

     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 (Unaudited) — continued

Other Assets

     Other assets are summarized as follows (dollars in thousands):

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 six months ended June 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 $1.0 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 $1.0 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. In addition, holders of $343 principal amount of the Notes which were not called for redemption also elected to convert, resulting in the issuance of 10,786 of shares of Avatar’s common stock. As a result of this transaction, Avatar will record a net pre-tax loss of approximately $1,300 in the consolidated statements of operations for the quarter ended September 30, 2003. As of July 31, 2003, there were 8,733,885 shares of Avatar common stock and $34,086 principal amount of the Notes outstanding.

     On July 31, 2003, Avatar entered into a six-month $30,000 Revolving Line of Credit Facility (the “Facility”) secured by certain real property. The lender has first opportunity to furnish a long-term facility in the amount of $100,000 (the “Future Facility”). There are no assurances that Avatar will be able to secure the Future Facility. However, if the lender does not furnish a commitment by October 1, 2003, the Facility can be extended for one additional six-month term. The interest rate for the Facility is LIBOR plus 2.5%. The proceeds of the Facility are to be used for general corporate purposes, including, but not limited to, additional redemption(s) of Notes, the financing of potential land acquisitions, site development and/or construction expenditures.

Earnings Per Share

     Avatar presents earnings per share in accordance with SFAS No. 128, “Earnings Per Share". Earnings per share is computed based on the weighted average number of shares outstanding of 8,519,786, and 8,446,504 for the six and three months ended June 30, 2003, respectively; and 8,763,749 and 8,788,358 for the six and three months ended June 30, 2002, respectively. 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.

     Earnings per share amounts are calculated as follows for the six and three months ended June 30, 2003 and 2002:

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

Earnings Per Share — continued

     In accordance with SFAS No. 128, the computation of earnings per share for 2003 and 2002 did not assume the conversion of the 7% Convertible Subordinated Notes (Notes) and the exercise of employee stock options because the effect of both is antidilutive. There is no difference between basic and diluted earnings per share for 2003 and 2002.

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 June 30, 2003 is $26,350. On June 11, 2003 Avatar’s Board of Directors authorized a partial redemption of the Notes (see “Notes, Mortgage Notes and Other Debt”).

     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 average market value of Avatar’s stock on the date of the grant. For restricted stock units granted, compensation expense of $862 and $518 has been accrued for the six and three months ended June 30, 2003, respectively, and compensation expense of $555 and $249 has been accrued for the six and three months ended June 30, 2002, respectively.

     The following table summarizes pro forma income (loss) from continuing operations, net income (loss) and earnings per share in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation” for the six and three months ended June 30, 2003 and 2002 (in thousands, except per share amounts):

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

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 up to 250 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. As of June 30, 2003, Avatar funded $16,989 of its commitment to fund the Joint Venture.

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

     Avatar’s share of the net loss from the Joint Venture is $599 and $295 for the six and three months ended June 30, 2003, respectively, and is included in real estate expenses in Avatar’s accompanying consolidated statements of operations for the six months and three months ended June 30, 2003. The following is the Joint Venture’s statement of operations for the six and three months ended June 30, 2003:

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

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 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. Under Interpretation 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 September 30, 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.

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 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 six and three months ended June 30, 2003 and 2002:

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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 2002 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 communities homebuilding operations for the six and three months ended June 30, 2003 and 2002 is summarized as follows: