WCI COMMUNITIES INC - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)


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


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 1-9186

WCI COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)


Delaware		59-2857021




(State or other jurisdiction of		(I.R.S. Employer




incorporation or organization)		Identification No.)

24301 Walden Center Drive
Bonita Springs, Florida 34134
(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code) (239) 947-2600

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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

The number of shares outstanding of the issuer’s common stock, as of November 5, 2002 was 44,352,099.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
CERTIFICATIONS
CERTIFICATIONS
CERTIFICATION BY ALFRED HOFFMAN, JR.
CERTIFICATION BY JAMES P. DIETZ

WCI COMMUNITIES, INC.

Form 10-Q

For the Quarter Ended September 30, 2002

INDEX

Part I. Financial Information


		Page No.
Item 1.	Financial Statements




	Condensed Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and December 31, 2001	3




	Condensed Consolidated Statements of Income (Unaudited) For the Three and Nine Months Ended September 30, 2002 and 2001	4




	Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2002 and 2001	5




	Notes to Condensed Consolidated Financial Statements (Unaudited)	6




Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17




Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26




Item 4.	Controls and Procedures	26




Part II.	Other Information




Item 1.	Legal Proceedings	28




Item 6.	Exhibits and Reports on Form 8-K	28

SIGNATURE

Certifications

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WCI COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)


			September 30,			December 31,
			2002			2001

			(Unaudited)
		Assets




Cash and cash equivalents			$	33,821		$	57,993




Restricted cash				21,683			19,115




Contracts receivable				448,887			399,716




Mortgage notes and accounts receivable				59,742			58,774




Real estate inventories				971,398			774,443




Property and equipment				118,773			99,726




Other assets				143,328			124,361




Other intangible assets				8,228			8,460




Goodwill				28,821			28,604

		Total assets	$	1,834,681		$	1,571,192

		Liabilities and Shareholders’ Equity




Accounts payable and other liabilities			$	269,274		$	270,689




Customer deposits				173,621			162,561




Community development district obligations				32,288			36,286




Senior secured credit facility				—			250,000




Senior unsecured credit facility				79,560			—




Senior subordinated notes				554,532			354,936




Mortgages and notes payable				107,537			77,675

				1,216,812			1,152,147

Commitments and contingencies
Shareholders’ equity:




	Common stock, $.01 par value; 100,000,000 shares authorized, 44,448,898 and 36,513,898 shares issued, respectively			444			365




	Additional paid-in capital			277,315			139,193




	Retained earnings			342,988			282,739




	Treasury stock, at cost, 132,183 shares			(795	)		(795	)




	Accumulated other comprehensive loss			(2,083	)		(2,457	)

		Total shareholders’ equity		617,869			419,045

		Total liabilities and shareholders’ equity	$	1,834,681		$	1,571,192

The accompanying notes are an integral part of these condensed consolidated financial statements.

WCI COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands, except share data)
(unaudited)


					For the three months ended						For the nine months ended
					September 30,						September 30,

					2002			2001			2002			2001

				Revenues




Homebuilding					$	191,940		$	240,391		$	633,981		$	583,243




Amenity membership and operations						13,745			10,734			49,043			42,552




Real estate services, land sales and other						30,624			20,642			82,481			77,751

		Total revenues				236,309			271,767			765,505			703,546

			Cost of Sales




Homebuilding						138,655			158,176			425,719			392,402




Amenity membership and operations						11,428			9,865			38,980			34,580




Real estate services, land sales and other						25,028			16,891			65,370			59,316

		Total costs of sales				175,111			184,932			530,069			486,298

		Contribution margin				61,198			86,835			235,436			217,248

			Other Expenses




Selling, general, administrative and other						25,750			24,188			85,075			72,503




Interest expense, net						13,376			14,501			34,562			39,823




Real estate taxes, net						2,580			1,933			7,026			5,165




Depreciation						2,406			1,731			6,317			3,948




Amortization of intangible assets						120			110			357			330




Amortization of goodwill						—			803			—			2,410

		Total other expenses				44,232			43,266			133,337			124,179

Income before income taxes and extraordinary items						16,966			43,569			102,099			93,069




Income tax expense						(6,677	)		(17,183	)		(39,834	)		(37,035	)

Income before extraordinary items						10,289			26,386			62,265			56,034




Extraordinary items, net of tax




	Net loss on early repayment of debt					—			—			(2,016	)		(1,958	)

Net income						10,289			26,386			60,249			54,076

Other comprehensive gain (loss), net of tax




	Cumulative effect of a change in accounting principle					—			—			—			(746	)




	Unrealized derivative gains (losses)					53			(925	)		374			(2,296	)

Other comprehensive gain (loss)						53			(925	)		374			(3,042	)

Comprehensive income					$	10,342		$	25,461		$	60,623		$	51,034

Earnings (loss) per share:




Basic




	Income before extraordinary items				$	.23		$	.73		$	1.47		$	1.54




	Extraordinary items					—			—			(.05	)		(.05	)

	Net income				$	.23		$	.73		$	1.42		$	1.49

Diluted




	Income before extraordinary items				$	.22		$	.71		$	1.42		$	1.50




	Extraordinary items					—			—			(.05	)		(.05	)

	Net income				$	.22		$	.71		$	1.37		$	1.45

Weighted average number of shares
	Basic					44,316,715			36,381,715			42,282,099			36,381,715




	Diluted					45,884,666			37,244,733			43,949,387			37,277,246

The accompanying notes are an integral part of these condensed consolidated financial statements.

WCI COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)


				For the nine months ended
				September 30,

				2002			2001

Cash flows from operating activities:




	Net income			$	60,249		$	54,076




	Adjustments to reconcile net income to net cash used in operating activities:




		Net loss on early repayment of debt			2,016			1,958




		Deferred income taxes			2,269			10,748




		Depreciation and amortization			8,854			9,432




		Earnings from investments in joint ventures			(84	)		(1,648	)




		Contributions to investments in joint ventures, net			(4,923	)		(1,456	)




	Changes in assets and liabilities:




		Restricted cash			(2,568	)		(4,249	)




		Contracts receivable			(49,171	)		(95,880	)




		Accounts receivable			(2,504	)		217




		Real estate inventories			(196,590	)		(169,267	)




		Other assets			(7,182	)		(5,342	)




		Accounts payable and other liabilities			3,529			(9,061	)




		Customer deposits			11,060			43,938

			Net cash used in operating activities		(175,045	)		(166,534	)

Cash flows from investing activities:




	Additions to mortgage notes receivable				(3,021	)		(1,261	)




	Proceeds from repayment of mortgage notes receivable				4,557			8,527




	Additions to property and equipment, net				(26,891	)		(21,327	)

			Net cash used in investing activities		(25,355	)		(14,061	)

Cash flows from financing activities:




	Senior secured credit facility:




		Net repayments on revolving line of credit			—			(39,000	)




		Repayments on term loan			(250,000	)		—




	Net borrowings on senior unsecured credit facility				79,560			—




	Proceeds from borrowings on mortgages and notes payable				123,097			65,752




	Repayment of mortgages and notes payable				(103,355	)		(83,005	)




	Proceeds from issuance of senior subordinated notes				200,000			355,250




	Repayment of subordinated notes				—			(57,010	)




	Debt issue costs				(7,277	)		(12,123	)




	Repayment of finance subsidiary debt				—			(72,495	)




	Net (reductions) borrowings on community development district obligations				(3,998	)		11,353




	Net proceeds from issuance of common stock				138,201			—




	Proceeds from exercise of stock options				—			45

			Net cash provided by financing activities		176,228			168,767

Net decrease in cash and cash equivalents					(24,172	)		(11,828	)




Cash and cash equivalents at beginning of year					57,993			55,737

Cash and cash equivalents at end of period				$	33,821		$	43,909

Non-cash financing activity:




	Notes payable in connection with land acquisition			$	10,000		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except share data)

1. Basis of Presentation

The Company’s condensed consolidated financial statements and notes as of September 30, 2002 and for the three months and nine months ended September 30, 2002 and 2001 have been prepared by management without audit, pursuant to rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the December 31, 2001 audited financial statements contained in the Company’s Annual Report on Form 10-K for the year then ended. In the opinion of management, all normal, recurring adjustments necessary for the fair presentation of such financial information have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

The Company historically has experienced and expects to continue to experience variability in quarterly results. The consolidated statement of income for the three and nine months ended September 30, 2002 is not necessarily indicative of the results to be expected for the full year.

2. Changes in Shareholders’ Equity

During March 2002, the Company issued 7,935,000 shares of common stock in a public offering realizing approximately $138,201 in aggregate net proceeds. The net proceeds were used to repay approximately $51,095 of outstanding construction loans, $62,100 of the outstanding balance of the revolver portion of the senior secured credit facility and for general corporate purposes.

3. New Accounting Pronouncements

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supercedes SFAS 121 and APB 30. SFAS 144 retains the requirements of SFAS 121 for recognition and measurement of an impairment loss on long-lived assets, and establishes a single accounting model for all long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. The adoption of SFAS 144 did not have a material effect on the Company’s financial position and results of operations.

In April 2002, the Financial Accounting Standards Board (FASB) approved SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. In addition to rescinding SFAS 4, 44 and 64 and amending SFAS 13, SFAS 145 establishes a financial reporting standard for classification of extinguishment of debt in the financial statements in accordance with APB 30. SFAS 145 will be effective for the Company’s fiscal year 2003. Management does not expect the adoption of SFAS 145 to have a material effect on the Company’s financial position or results of operations.

In June 2002, the FASB approved SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 will be effective for the Company’s fiscal year 2003. Management does not expect the adoption of SFAS 146 to have a material effect on the Company’s financial position or results of operations.

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except share data)

4. Segment Information

The Company has reorganized its business segments to more accurately reflect its operational structure and, as a result, segment information for the prior period has been reclassified to conform to the current operating structure. The Company operates in four principal business segments: Mid- and High-rise Homebuilding; Single and Multi-family Homebuilding, which includes sales of lots; Amenity Membership and Operations; and Real Estate Services, which includes brokerage, mortgage banking, title and property management operations. Land sales and other has been disclosed for purposes of additional analysis. Asset information by business segment is not presented, since the Company does not prepare such information.

Three months ended September 30, 2002


	Mid- and		Single- and Multi-family				Amenity		Real		Land Sales
	High-rise						Membership		Estate		and		Segment
	Homes		Homes		Lots		and Operations		Services		Other		Totals

Revenues	$	73,928	$	112,127	$	5,885	$	13,745	$	22,726	$	7,562	$	235,973




Interest income		—		—		—		—		336		—		336




Contribution margin		23,205		26,951		3,129		2,317		3,074		2,522		61,198

Three months ended September 30, 2001


	Mid- and		Single- and Multi-family				Amenity		Real		Land Sales
	High-rise						Membership		Estate		and		Segment
	Homes		Homes		Lots		and Operations		Services		Other		Totals

Revenues	$	124,991	$	113,630	$	1,770	$	10,734	$	17,934	$	2,491	$	271,550




Interest income		—		—		—		—		217		—		217




Contribution margin		56,660		24,890		665		869		2,218		1,533		86,835

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except share data)

Nine months ended September 30, 2002


	Mid- and		Single- and Multi-family				Amenity		Real		Land Sales
	High-rise						Membership		Estate		and		Segment
	Homes		Homes		Lots		and Operations		Services		Other		Totals

Revenues	$	361,583	$	260,963	$	11,435	$	49,043	$	66,272	$	14,859		$	764,155




Interest income		—		—		—		—		1,350		—			1,350




Contribution margin		138,068		63,794		6,400		10,063		9,843		7,268			235,436

Nine months ended September 30, 2001


	Mid- and		Single- and Multi-family				Amenity		Real		Land Sales
	High-rise						Membership		Estate		and		Segment
	Homes		Homes		Lots		and Operations		Services		Other		Totals

Revenues	$	292,985	$	278,411	$	11,847	$	42,552	$	51,664	$	25,221	$	702,680




Interest income		—		—		—		—		866		—		866




Contribution margin		130,084		54,894		5,863		7,972		6,727		11,708		217,248

A reconciliation of total segment contribution margin to consolidated income before income taxes and extraordinary items for the three months and nine months ended September 30, 2002 and 2001 is as follows:


		For the three months ended						For the nine months ended
		September 30,						September 30,

		2002			2001			2002			2001

Segment contribution margin		$	61,198		$	86,835		$	235,436		$	217,248




Corporate overhead and costs			(28,330	)		(26,121	)		(92,101	)		(77,668	)




Interest expense, net			(13,376	)		(14,501	)		(34,562	)		(39,823	)




Depreciation and amortization			(2,526	)		(2,644	)		(6,674	)		(6,688	)

	Income before income taxes and extraordinary items	$	16,966		$	43,569		$	102,099		$	93,069

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except share data)

5. Real Estate Inventories

Real estate inventories are summarized as follows:


		September 30,		December 31
		2002		2001

Land		$	162,144	$	170,746




Work in progress:




	Land and improvements		250,974		194,071




	Tower residences		198,317		176,698




	Homes		218,314		161,426




Completed inventories:




	Lots and parcels		34,625		49,051




	Tower residences		58,053		6,564




	Homes		48,971		15,887

		$	971,398	$	774,443

6. Capitalized Interest

The following table is a summary of capitalized and amortized interest:


	For the three months ended						For the nine months ended
	September 30,						September 30,

	2002			2001			2002			2001

Total interest incurred	$	17,397		$	16,619		$	48,938		$	47,467




Debt issue cost amortization		698			972			2,584			2,923




Interest amortized		4,902			5,014			11,804			13,521




Interest capitalized		(9,621	)		(8,104	)		(28,764	)		(24,088	)

Interest expense, net	$	13,376		$	14,501		$	34,562		$	39,823

7. Earnings Per Share

Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of stock options.

Information pertaining to the calculation of earnings per share is as follows:


	For the three months ended				For the nine months ended
	September 30,				September 30,

	2002		2001		2002		2001

Basic weighted average shares		44,316,715		36,381,715		42,282,099		36,381,715




Stock options		1,567,951		863,018		1,667,288		895,531

Diluted weighted average shares		45,884,666		37,244,733		43,949,387		37,277,246

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except share data)

8. Goodwill and Other Intangibles and Implementation of SFAS 142

Effective January 1, 2002 the Company adopted SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 provides guidance on accounting for intangible assets and eliminates the amortization of goodwill and certain identifiable intangible assets. Under the provisions of SFAS 142, intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually. The Company completed the required tests for impairment of goodwill and does not currently believe its goodwill is impaired. In accordance with SFAS 142, the Company has allocated goodwill to its operating segments as follows:


Homebuilding	$	16,097




Amenity membership and operations		5,365




Real estate services		7,359

	$	28,821

Intangible assets subject to amortization had accumulated amortization of $1,509 and $1,152 at September 30, 2002 and December 31, 2001, respectively. The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:


2002	$	477




2003		480




2004		468




2005		313




2006		299

	$	2,037

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands, except share data)

A reconciliation of income before extraordinary item, net income and earnings per share to exclude amortization expense in the prior year period follows:


		For the three months ended				For the nine months ended
		September 30,				September 30,

		2002		2001		2002			2001

Reported income before extraordinary items		$	10,289	$	26,386	$	62,265		$	56,034




Add back: Goodwill amortization			—		803		—			2,410

Adjusted income before extraordinary items			10,289		27,189		62,265			58,444




Extraordinary items, net of tax			—		—		(2,016	)		(1,958	)

Adjusted net income		$	10,289	$	27,189	$	60,249		$	56,486

Earnings (loss) per share:




Basic




	Reported income before extraordinary items	$	.23	$	.73	$	1.47		$	1.54




	Goodwill amortization		—		.02		—			.06

	Adjusted income before extraordinary items		.23		.75		1.47			1.60




	Extraordinary items, net of tax		—		—		(.05	)		(.05	)

	Adjusted net income	$	.23	$	.75	$	1.42		$	1.55

Diluted




	Reported income before extraordinary items	$	.22	$	.71	$	1.42		$	1.50




	Goodwill amortization		—		.02		—			.06

	Adjusted income before extraordinary items		.22		.73		1.42			1.56




	Extraordinary items, net of tax		—		—		(.05	)		(.05	)

	Adjusted net income	$	.22	$	.73	$	1.37		$	1.51

9. Subsequent Event

In October 2002, the Company entered into a construction loan agreement with a group of financial institutions. The loan provides up to $187,000 that will be used to finance the construction of two towers. The loan is collateralized by first mortgages on the properties and interest is payable monthly in arrears based on LIBOR plus a spread of 185 to 200 basis points. The loan matures in October 2005.

10. Supplemental Guarantor Information

Obligations to pay principal and interest on the Company’s senior unsecured credit facility and senior subordinated notes are guaranteed fully and unconditionally by the Company’s wholly owned subsidiaries. Separate financial statements of the guarantors are not provided, as subsidiary guarantors are 100% owned by the Company and guarantees are full, unconditional, and joint and several. Supplemental condensed consolidating financial information of the Company’s guarantors is presented below.

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands)

CONDENSED CONSOLIDATING BALANCE SHEETS


				September 30, 2002

				WCI
				Communities,		Guarantor		Eliminating
				Inc.		Subsidiaries		Entries			Consolidated

			Assets




Cash and cash equivalents				$	27,718	$	6,103	$	—		$	33,821




Restricted cash					1,114		20,569		—			21,683




Contracts receivable					231,229		217,658		—			448,887




Mortgage notes and accounts receivable					16,650		48,162		(5,070	)		59,742




Real estate inventories					565,487		405,911		—			971,398




Property and equipment					43,807		74,966		—			118,773




Investment in guarantor subsidiaries					287,358		—		(287,358	)		—




Other assets					371,173		86,152		(276,948	)		180,377

	Total assets			$	1,544,536	$	859,521	$	(569,376	)	$	1,834,681

		Liabilities and Shareholders’ Equity




Accounts payable and other liabilities				$	238,506	$	513,695	$	(277,018	)	$	475,183




Senior unsecured credit facility					79,560		—		—			79,560




Senior subordinated notes					554,532		—		—			554,532




Mortgages and notes payable					54,069		58,468		(5,000	)		107,537

					926,667		572,163		(282,018	)		1,216,812




Shareholders’ equity					617,869		287,358		(287,358	)		617,869

	Total liabilities and shareholders’ equity			$	1,544,536	$	859,521	$	(569,376	)	$	1,834,681


				December 31, 2001

				WCI
				Communities,		Guarantor		Eliminating
				Inc.		Subsidiaries		Entries			Consolidated

			Assets




Cash and cash equivalents				$	45,382	$	12,611	$	—		$	57,993




Restricted cash					1,749		17,366		—			19,115




Contracts receivable					230,412		169,304		—			399,716




Mortgage notes and accounts receivable					11,411		47,363		—			58,774




Real estate inventories					414,481		359,962		—			774,443




Property and equipment					37,268		62,458		—			99,726




Investment in guarantor sudsidiaries					231,884		—		(231,884	)		—




Other assets					325,401		82,950		(246,926	)		161,425

	Total assets			$	1,297,988	$	752,014	$	(478,810	)	$	1,571,192

		Liabilities and Shareholders’ Equity




Accounts payable and other liabilities				$	262,313	$	454,149	$	(246,926	)	$	469,536




Senior secured credit facility					250,000		—		—			250,000




Senior subordinated notes					354,936		—		—			354,936




Mortgages and notes payable					11,694		65,981		—			77,675

					878,943		520,130		(246,926	)		1,152,147




Shareholders’ equity					419,045		231,884		(231,884	)		419,045

	Total liabilities and shareholders’ equity			$	1,297,988	$	752,014	$	(478,810	)	$	1,571,192

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


	For the three months ended September 30, 2002

	WCI
	Communities,			Guarantor			Eliminating
	Inc.			Subsidiaries			Entries			Consolidated

Total revenues	$	124,115		$	112,224		$	(30	)	$	236,309




Total cost of sales		90,523			84,588			—			175,111

Contribution margin		33,592			27,636			(30	)		61,198




Total other expenses		37,067			7,195			(30	)		44,232

(Loss) income before income taxes and equity in income of guarantor subsidiaries		(3,475	)		20,441			—			16,966




Income tax benefit (expense)		838			(7,515	)		—			(6,677	)




Equity in income of guarantor subsidiaries, net of tax		12,926			—			(12,926	)		—

Net income	$	10,289		$	12,926		$	(12,926	)	$	10,289


	For the three months ended September 30, 2001

	WCI
	Communities,			Guarantor			Eliminating
	Inc.			Subsidiaries			Entries			Consolidated

Total revenues	$	168,112		$	103,655		$	—		$	271,767




Total cost of sales		111,303			73,629			—			184,932

Contribution margin		56,809			30,026			—			86,835




Total other expenses		37,278			5,988			—			43,266

Income before income taxes and equity in income of guarantor subsidiaries		19,531			24,038			—			43,569




Income tax expense		(6,576	)		(10,607	)		—			(17,183	)




Equity in income of guarantor subsidiaries, net of tax		13,431			—			(13,431	)		—

Net income	$	26,386		$	13,431		$	(13,431	)	$	26,386

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


	For the nine months ended September 30, 2002

	WCI
	Communities,			Guarantor			Eliminating
	Inc.			Subsidiaries			Entries			Consolidated

Total revenues	$	394,396		$	371,179		$	(70	)	$	765,505




Total cost of sales		268,536			261,533			—			530,069

Contribution margin		125,860			109,646			(70	)		235,436




Total other expenses		113,097			20,310			(70	)		133,337

Income before income taxes, equity in income of guarantor subsidiaries and extraordinary items		12,763			89,336			—			102,099




Income tax expense		(5,366	)		(34,468	)		—			(39,834	)




Equity in income of guarantor subsidiaries, net of tax		54,377			—			(54,377	)		—

Income before extraordinary items		61,774			54,868			(54,377	)		62,265




Extraordinary items, net of tax




Net loss on early repayment of debt		(1,525	)		(491	)		—			(2,016	)

Net income	$	60,249		$	54,377		$	(54,377	)	$	60,249


	For the nine months ended September 30, 2001

	WCI
	Communities,			Guarantor			Eliminating
	Inc.			Subsidiaries			Entries			Consolidated

Total revenues	$	431,259		$	290,844		$	(18,557	)	$	703,546




Total cost of sales		290,021			196,277			—			486,298

Contribution margin		141,238			94,567			(18,557	)		217,248




Total other expenses		122,007			20,729			(18,557	)		124,179

Income before income taxes, equity in income of guarantor subsidiaries and extraordinary items		19,231			73,838			—			93,069




Income tax expense		(6,974	)		(30,061	)		—			(37,035	)




Equity in income of guarantor subsidiaries, net of tax		41,819			—			(41,819	)		—

Income before extraordinary items		54,076			43,777			(41,819	)		56,034




Extraordinary items, net of tax




Net loss on early repayment of debt		—			(1,958	)		—			(1,958	)

Net income	$	54,076		$	41,819		$	(41,819	)	$	54,076

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


				For the nine months ended September 30, 2002

				WCI
				Communities,			Guarantor			Eliminating
				Inc.			Subsidiaries			Entries			Consolidated

Cash flows from operating activities:




	Net income			$	60,249		$	54,377		$	(54,377	)	$	60,249




	Adjustments to reconcile net income to net cash (used in) provided by operating activities:




		Net loss on early repayment of debt			1,525			491			—			2,016




		Deferred income taxes			(2,439	)		(7	)		4,715			2,269




		Depreciation and amortization			4,138			4,716			—			8,854




		Losses (earnings) from investments in joint ventures			808			(892	)		—			(84	)




		Equity in earnings of guarantor subsidiaries			(54,377	)		—			54,377			—




		(Contributions to guarantor subsidiaries) distributions from parent, net			(1,097	)		1,097			—			—




	Changes in assets and liabilities:




		Contracts and accounts receivable			(6,992	)		(49,753	)		5,070			(51,675	)




		Real estate inventories			(150,641	)		(45,949	)		—			(196,590	)




		Other assets			(38,265	)		(6,397	)		29,989			(14,673	)




		Accounts payable and other			(11,409	)		60,772			(34,774	)		14,589

			Net cash (used in) provided by operating activities		(198,500	)		18,455			5,000			(175,045	)

Cash flows from investing activities:




	Proceeds from mortgages and notes receivable, net				936			600			—			1,536




	Additions to property and equipment, net				(9,888	)		(17,003	)		—			(26,891	)

			Net cash used in investing activities		(8,952	)		(16,403	)		—			(25,355	)

Cash flows from financing activities:




	Net borrowings on senior secured credit facility				(250,000	)		—			—			(250,000	)




	Net borrowings on senior unsecured credit facility				79,560			—			—			79,560




	Net borrowings (repayments) on mortgages and notes payable				32,375			(7,633	)		(5,000	)		19,742




	Proceeds from issuance of senior subordinated notes				200,000			—			—			200,000




	Net proceeds from issuance of common stock				138,201			—			—			138,201




	Other				(10,348	)		(927	)		—			(11,275	)

			Net cash provided by (used in) financing activities		189,788			(8,560	)		(5,000	)		176,228

Net decrease in cash and cash equivalents					(17,664	)		(6,508	)		—			(24,172	)




Cash and cash equivalents at beginning of year					45,382			12,611			—			57,993

Cash and cash equivalents at end of year				$	27,718		$	6,103		$	—		$	33,821

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(In thousands)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


				For the nine months ended September 30, 2001

				WCI
				Communities,			Guarantor			Eliminating
				Inc.			Subsidiaries			Entries			Consolidated

Cash flows from operating activities:




	Net income			$	54,076		$	41,819		$	(41,819	)	$	54,076




	Adjustments to reconcile net income to net cash (used in) provided by operating activities:




		Net loss on early repayment of debt			—			1,958			—			1,958




		Deferred income taxes			6,960			10,782			(6,994	)		10,748




		Depreciation and amortization			5,866			3,566			—			9,432




		Losses (earnings) from investments in joint ventures			129			(1,777	)		—			(1,648	)




		Equity in earnings of guarantor subsidiaries			(41,819	)		—			41,819			—




		Distributions from guarantor subsidiaries (contributions to parent), net			17,501			(17,501	)		—			—




		Repayment of investments in parent entities			—			44,572			(44,572	)		—




	Changes in assets and liabilities:




		Contracts and accounts receivable			(2,377	)		(92,394	)		(892	)		(95,663	)




		Real estate inventories			(55,879	)		(113,388	)		—			(169,267	)




		Other assets			(140,639	)		(2,726	)		132,318			(11,047	)




		Accounts payable and other			(23,721	)		182,231			(123,633	)		34,877

			Net cash (used in) provided by operating activities		(179,903	)		57,142			(43,773	)		(166,534	)

Cash flows from investing activities:




	Proceeds from mortgages and notes receivable net				6,007			1,259			—			7,266




	Additions to property and equipment, net				(15,666	)		(5,661	)		—			(21,327	)

			Net cash used in investing activities		(9,659	)		(4,402	)		—			(14,061	)

Cash flows from financing activities:




	Net repayments on senior secured credit facility				(39,000	)		—			—			(39,000	)




	Net repayments on mortgages and notes payable				(29,589	)		(60,159	)		—			(89,748	)




	Proceeds from issuance of senior subordinated notes				355,250			—			—			355,250




	Principal repayments on subordinated notes				(100,783	)		—			43,773			(57,010	)




	Other				(18,356	)		17,631			—			(725	)

			Net cash provided by (used in) financing activities		167,522			(42,528	)		43,773			168,767

Net (decrease) increase in cash and cash equivalents					(22,040	)		10,212			—			(11,828	)




Cash and cash equivalents at beginning of year					49,143			6,594			—			55,737

Cash and cash equivalents at end of year				$	27,103		$	16,806		$	—		$	43,909

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three and nine months ended September 30, 2002 compared to three and nine months ended September 30, 2001

Overview


	For the three months ended				For the nine months ended
(Dollars in thousands)	September 30,				September 30,

	2002		2001		2002			2001

Total revenues	$	236,309	$	271,767	$	765,505		$	703,546




Total contribution margin	$	61,198	$	86,835	$	235,436		$	217,248




Income before income taxes and extraordinary items	$	16,966	$	43,569	$	102,099		$	93,069




Extraordinary items, net of tax	$	—	$	—	$	(2,016	)	$	(1,958	)




Net income	$	10,289	$	26,386	$	60,249		$	54,076

Total revenues for the three and nine months ended September 30, 2002, decreased 13.0% and increased 8.8%, as compared to the same periods in 2001, respectively. During the first nine months of 2002, we achieved a significant increase in revenues and earnings driven primarily by a larger number and greater value of sold tower units under construction and higher margins and average unit selling price in traditional homebuilding operations. The decline in revenues, contribution margin and net income for the quarter ended September 30, 2002 as compared to the same period in the prior year is primarily attributable to the likely default of five tower unit purchasers on their contracts in one tower in the Southwest region and the likely cancellation of 48 contracts by purchasers in another tower in the Southwest region. The combined impact to revenues and contribution margin of the estimated defaults and cancellations on the quarter ended September 30, 2002 was approximately $35.4 million and $12.9 million, respectively.

For the nine months ended September 30, 2002, we recognized a $2.0 million (net of tax) extraordinary loss related to the write-off of unamortized debt issue costs associated with the early repayment of our senior secured credit facility and Sun City Center Golf Properties promissory note. For the nine months ended September 30, 2001, we recognized a $2.0 million (net of tax) extraordinary loss related to the write-off of unamortized debt issue costs associated with the early repayment of debt in conjunction with the offering of $250 million and $100 million in senior subordinated notes. Net income for the three and nine months ended September 30, 2002 decreased 61.0% and increased 11.4% as compared to the same periods in 2001, respectively. As of January 2002, we adopted Statement of Financial Accounting Standards 142 and accordingly, no longer amortize goodwill. For the three and nine months ended September 30, 2001, amortization of goodwill was approximately $803,000 and $2.4 million, respectively.

In March 2002, we issued 7,935,000 shares of common stock in a public offering realizing approximately $138.2 million in net proceeds. Our operating results for the nine months ended September 30, 2002 and the issuance of common stock contributed to a 47.4% increase in shareholders’ equity to $617.9 million at September 30, 2002. The increase in shareholders’ equity and the use of initial public offering proceeds for repayment of existing debt contributed to a reduction in the debt-to-capitalization ratio to 54.6% at September 30, 2002 compared to 62.0% at December 31, 2001.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

Homebuilding

Single and multi-family


	For the three months ended						For the nine months ended
	September 30,						September 30,
(Dollars in thousands)
	2002			2001			2002			2001

Revenues	$	112,127		$	113,630		$	260,963		$	278,411




Contribution margin	$	26,951		$	24,890		$	63,794		$	54,894




Contribution margin percentage		24.0	%		21.9	%		24.4	%		19.7	%




Homes closed (units)		356			387			828			994




Average selling price per home closed	$	315		$	294		$	315		$	280




Lot revenues	$	5,885		$	1,770		$	11,435		$	11,847




Net new orders for homes (units)		363			361			1,379			1,356




Contract values of new orders	$	117,783		$	118,675		$	446,314		$	441,678




Average selling price per new order	$	324		$	329		$	324		$	326


	As of September 30,

	2002		2001

Backlog (units)		1,167		1,115




Backlog contract values	$	452,456	$	398,632




Average sales price in backlog	$	388	$	358




Active selling communities		15		15

Revenues decreased 1.3% and 6.3% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively. The decrease in revenues for the respective periods was primarily attributable to the decrease in the number of homes delivered during the periods partially offset by an increase in the average selling price of these homes. The decrease in deliveries is directly related to reduced sales as a result of the events that occurred on September 11, 2001, which contributed to a decline in the unit backlog at the beginning of 2002 compared to the beginning of 2001. The average selling price per home closed in the respective periods as compared to the same periods in 2001 increased as a result of closing a larger proportion of homes in our higher priced communities located in the Southeast, Palm Beach and Southwest Florida regions.

Lot revenues increased 232.5% and decreased 3.5% for the three and nine month periods ended September 30, 2002 as compared to the same periods in 2001, respectively. The increase in lot revenues during the quarter as compared to the same period last year is primarily related to the sale of lots in close-out communities located in our Southwest and Southeast regions and the sale of additional lots in our Palm Beach region.

Home sales contribution margin percentage increased 210 and 470 basis points for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively. The increases were due primarily to our ability to raise home prices, higher margins on options and upgrades, and ongoing initiatives to reduce development and construction costs. Our ability to raise home prices in the future may be adversely impacted by the current economic and stock market conditions and softening in the demand for certain new home offerings.

The contract values of new orders decreased 0.8% and increased 1.1% for the three and nine month periods ended September 30, 2002 as compared to the same periods in 2001, respectively. The increase in net new orders for the nine months was primarily attributable to the addition of three new communities in the Palm Beach, Southwest

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

and Central Florida regions, and increased sales at existing communities throughout other regions, offset by the sell out and/or reduced available inventory in four communities located in the Southeast, Southwest, Central and Palm Beach Florida regions. The average sales price per new order for the three and nine months ended September 30, 2002 as compared to the same periods in 2001 was down slightly due to the mix of units sold. The 13.5% increase in backlog contract values was primarily the result of an 8.4% increase in the average sales price of homes under contract to $388,000 in 2002 compared to $358,000 in 2001.

Mid-rise and high-rise homebuilding


	For the three months ended						For the nine months ended
	September 30,						September 30,
(Dollars in thousands)
	2002			2001			2002			2001

Revenues	$	73,928		$	124,991		$	361,583		$	292,985




Contribution margin	$	23,205		$	56,660		$	138,068		$	130,084




Contribution margin percentage		31.4	%		45.3	%		38.2	%		44.4	%




Net new orders (units)		200			224			360			409




Contract values of new orders	$	156,326		$	304,139		$	345,500		$	484,457




Average selling price per new order	$	782		$	1,358		$	960		$	1,184


	As of September 30,

	2002			2001

Cumulative contracts (units)		805			594




Cumulative contract values	$	908,535		$	806,816




Less: Cumulative revenues recognized		(448,886	)		(324,626	)

Backlog contract values	$	459,649		$	482,190

Towers under construction recognizing revenue		11			11

Revenues decreased 40.9% and increased 23.4% for the three and nine month periods ended September 30, 2002 as compared to the same periods in 2001, respectively. Contribution margin percentage decreased to 31.4% from 45.3% and to 38.2% from 44.4% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively. The decline in contribution margin percentage was due primarily to the cancellation and default of contracts for 53 units described below and also reflects an anticipated decline compared to prior periods due to (1) a change in the mix of units sold and in backlog toward a greater proportion of lower-priced, lower-margin units and (2) the completion during August and September 2002 of two high-margin towers.

A portion of the decrease in revenues ($35.4 million) for the three months ended September 30, 2002 compared to the same period in 2001 was due to the reversal of revenue previously recognized on a total of 53 units located in two towers in our Southwest region. The remaining decrease in revenues ($15.7 million) for the current quarter compared to the third quarter of 2001 is due to changes in timing of initial tower revenue recognition between periods. In 2001, two luxury towers containing a total of 69 sold units reported initial revenues in the third quarter. Only one small tower currently under construction reported initial revenues in the third quarter of 2002.

During the third quarter of 2002, we were notified that the purchasers of five units with a contract value of $10.1 million in a tower located in our Southwest region intended to default on their contracts. We intend to retain the deposits totaling $2.9 million, securing performance of such contracts, but we also continue to negotiate to accomplish some of the closings for these five units. Based upon these likely defaults, we have reversed the

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

revenue and resulting contribution margin previously recognized on these five units, net of forfeited deposits, which had a $3.9 million impact on third quarter 2002 contribution margin.

Additionally, earlier this year during the course of construction of an 82 unit tower located in our Southwest region, we failed to include the proper notification required under Florida administrative rules when sending out amendments of condominium documents to purchasers. This required notice is now being given to the purchasers of the 48 units affording them a 15 day right to rescind their contracts. Of the 82 units, 48 were previously subject to sales contracts aggregating $31.0 million. Because of the deterioration in the economic conditions since mid 2001, we expect that most, if not all, of the purchasers of these 48 units will exercise their rescission rights and cancel their contracts. Based upon the foregoing, we have reversed the revenue and resulting contribution margin previously recognized on these units during the quarter ended September 30, 2002, resulting in a reduction of revenue and contribution margin in the amounts of $25.3 million and $9.0 million, respectively.

The increase in revenues for the nine months ended September 30, 2002, compared to the same period in 2001, was primarily attributable to an increase in the cumulative contract values in those towers that qualified for recognition of revenue, offset by a reversal of revenue from the two towers discussed above. We delivered tower units or met the requirements for percentage of completion revenue recognition in 17 towers in the nine months ended September 30, 2002, as compared to 13 towers in the same period in 2001.

The contract values of new orders decreased 48.6% and 28.7% for the three and nine months ended September 30, 2002, as compared to the same periods in 2001. The average selling price of new orders decreased 42.4% and 18.9% for the three and nine months ended September 30, 2002 as compared to the same periods in 2001. The decrease in contract values of new orders and average selling price relates to the cancellation and default of contracts for 53 units valued at $41.1 million in two towers in our Southwest region and a shift in product mix toward less expensive tower units being sold compared to the same periods last year. While it was expected that the average selling price for tower units being sold during 2002 would be lower than the same period last year due to a planned shift of mix of buildings being initially marketed this year, the average selling price is also lower because market conditions have accelerated absorption of lower priced units and slowed absorption of higher priced units.

The decrease in backlog contract values is due to the increased amount of cumulative revenues recognized in the towers under construction, which reflects the advancing percentage of completion of those towers, offset by a 12.6% increase in the cumulative value of all units under contract with purchasers. This increase in cumulative contract values reflects a 35.5% increase in the number of tower units under contract at September 30, 2002, compared to September 30, 2001, offset by a 21.4% decrease in the average value of these units to $1.1 million as compared to $1.4 million one year earlier.

Amenity membership and operations

Amenity membership and operating revenues increased 28.1% and 15.3% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively. Equity membership and marina slip sales increased 93.4% and 69.2% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively, while membership dues and amenity service revenues increased 1.1% and decreased 4.4% for the same periods. The increase in equity membership and marina slip revenues for the three and nine months was attributable primarily to marina slip sales at our Gulf Harbour community. The decrease in operating revenues was attributable primarily to the turnover of our Gateway Golf and Country Club to its members in December 2001, and the reduction in marina slip rental revenues at Gulf Harbour due to the slip sales program, offset by revenues from several new club facilities located in the Southwest Florida region.

Amenity membership and operations contribution margin increased 880 and 180 basis points for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively. The

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

increase in the respective periods was attributable to an increase in the sales of higher margin equity membership and marina slip sales offset by operating deficits associated with the opening of amenity operations at our new communities during the respective periods.

Future amenity contribution margins may be adversely impacted by the reduced availability of marina slips, increased operating deficits associated with new amenity operations and general market conditions.

Real estate services, land sales and other

As further discussed below, real estate services, land sales and other revenues increased 48.4% and 6.1% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively.

Real Estate Services

Real estate services revenues, including brokerage, mortgage banking and title operations, for the three and nine months ended September 30, 2002, were $23.1 million and $67.6 million, respectively, compared to $18.2 million and $52.5 million, respectively, for the same periods in 2001. Real estate services revenues increased during the respective periods as a result of the increase in brokerage and title revenues, which was related to an increase in the volume of transactions and an increase in the average sales price per transaction from third-party, non-WCI homebuilding customers. Real estate services contribution margin increased 110 and 180 basis points for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively, as a result of the growth in volume of transactions and controlling overhead costs in the respective periods.

Land Sales

Land sales for the three and nine months ended September 30, 2002 were $7.4 million and $11.1 million, respectively, compared to $660,000 and $19.1 million, respectively, for the same periods in 2001. The increase in land revenues for the three months ended was primarily attributable to the planned sale of several commercial parcels located in our Southeast region. The decrease in land sales revenues for the nine months ended was primarily attributable to the sell-out of the few residential parcels that were not designated for homebuilding, while commercial parcel sales decreased primarily as a result of fewer available parcels for sale. Land sales contribution margin increased 765 and 280 basis points for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively, as a result of the change in mix and location of the parcels sold.

Other

Other revenues, including equity in earnings of joint ventures, management fees and other non-operating income, for the three and nine months ended September 30, 2002 were $193,000 and $3.8 million, respectively compared to $1.8 million and $6.1 million, respectively for the same period in 2001. The decrease in the respective periods is primarily related to the decline in equity in earnings of joint ventures. Certain joint ventures contributed to the decline in equity in earnings including a residential joint venture which is approaching sell-out and a timeshare joint venture which is in the process of marketing the first phase of development.

Interest expense, net of capitalization

Interest expense, net of capitalization, decreased 7.8% and 13.2% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively. Interest incurred for the respective periods increased 4.7% and 3.1%. Amortization of previously capitalized interest declined 2.2% and 12.7% for

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

the three and nine months ended 2002, respectively, compared to the same periods in 2001. The decline in amortization is due primarily to the decrease in homebuilding units closed in the respective periods. Interest capitalized increased 18.7% and 19.4% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively, due to a greater book value of new and existing properties undergoing active development.

Selling, general and administrative expenses, including real estate taxes

Selling, general and administrative expenses, including real estate taxes (SG&A), increased 8.5% and 18.6% for the three and nine month periods ended September 30, 2002, as compared to the same periods in 2001, respectively. The increase for each period was primarily due to (1) increased wages, benefits costs and administrative expenses associated with the increase in personnel to support our growth; (2) increased sales and marketing expenditures related to newly introduced communities, subdivisions and towers under development; and (3) increases in insurance premiums. As a percentage of total revenues, SG&A increased to 12.0% from 9.6% in the third quarter of 2002 as compared to the same period in 2001. For the nine months ended September 30, 2002, SG&A increased to 12.0% of total revenue as compared to 11.0% for the same period in 2001. The increase in SG&A as a percentage of revenue in the respective periods is primarily related to lower tower revenues reported in the mid-rise and high-rise homebuilding section and the increase in SG&A expenses in the respective periods.

Liquidity and capital resources

We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We finance our land acquisitions, land improvements, homebuilding, development and construction activities from internally generated funds, credit agreements with financial institutions and other debt. As of September 30, 2002, we had cash and cash equivalents of $33.8 million and $273.9 million available for draw under existing lines of credit.

Net cash used in operations was $175.0 million for the nine months ended September 30, 2002, as compared to cash used in operations of $166.5 million for the same period in 2001. Excluding increases in net inventory additions of $196.6 million and $169.3 million and contracts receivable of $49.2 million and $95.9 million, net cash flows provided by operations were $70.8 million and $98.7 million for the nine months ended September 30, 2002 and 2001, respectively. Land acquisitions were $53.2 million for the nine months ended September 30, 2002 compared to $74.4 million in 2001. Net inventory additions are primarily related to single- and multi-family home inventories that are under contract for delivery during the next six to nine months, land development activities, land acquisitions and, to a lesser degree, tower inventories that have not yet qualified for revenue recognition. We expect real estate inventories will continue to increase as we are currently negotiating and searching for additional opportunities to obtain control of land for future communities.

Contracts receivable increased 12.3% during the nine month period reflecting the increase in the value of tower units under contract that are now being constructed and that have met the requirements for percentage of completion revenue recognition. We expect to collect a substantial portion of these receivables during the next three to nine months as seven towers are planned to be completed, allowing delivery of units to residents. If we do not collect these contract receivables due to various contingencies, including buyer defaults, we may receive less cash than we expect. Historically, approximately 1% of firm contracts have resulted in cancellation or default. However, the recent events involving two Southwest region towers as described above may indicate an increase in potential contract defaults of those tower units with a significant proportion of purchasers who intend to use those units for second homes and/or investments. Future defaults may limit our ability to deliver units from backlog and collect contract receivables upon the completion of towers under construction.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Investing activities for the period ended September 30, 2002, included $26.9 million of net additions to property and equipment compared to $21.3 million in the same period in the prior year. We anticipate cash used in investing activities will continue to increase with development of current and future amenity operations.

Financing activities provided cash of $176.2 million for the nine months ended September 30, 2002, compared to cash provided of $168.8 million in the same period in 2001. The net cash inflow for the period ended September 30, 2002, was primarily the result of the issuance of 7.9 million shares of common stock in March 2002, ($138.2 million) and net borrowings of $38.0 million.

In April 2002, we entered into an amendment of one of our tower construction loans that increased the amount available for borrowing to approximately $121.2 million, and extended the maturity date to April 17, 2004.

In April 2002, we issued $200.0 million of 9 1/8% senior subordinated notes (the Notes) in a private placement and subsequently exchanged the unregistered Notes for notes registered under the Securities Act of 1933, as amended. The Notes mature May 1, 2012 and interest is payable semi-annually in arrears on each May 1 and November 1 commencing on November 1, 2002. The Notes are subordinated to all existing and future senior debt. Proceeds from the Notes were used to repay $174.8 million of the senior secured credit facility, $11.2 million of other debt and for general corporate purposes.

In June 2002, we repaid the outstanding balance of our senior secured credit facility. Simultaneously with the repayment, we entered into a senior unsecured revolving credit agreement (the Credit Facility) which replaces the previously outstanding senior secured credit facility. The Credit Facility includes substantially the same banking institutions as the senior secured credit facility. The Credit Facility provides for a $350.0 million revolving loan, which may increase to $425.0 million if certain conditions are met. The loan matures June 30, 2005, subject to a one-year extension, at our election, and allows for prepayments and additional borrowing to the maximum amount, provided an adequate borrowing base is maintained. The loan allows an allocation of the unused balance for issuance of a maximum of $75.0 million of stand-by letters of credit. The initial interest rate is the lender’s prime rate or the LIBOR base rate plus a spread of 180 basis points, payable in arrears. The LIBOR base rate can be reduced by up to 30 basis points or increased by 20 basis points if the credit rating of the facility is revised. As of September 30, 2002, we had $270.4 million available for borrowing under the senior credit facility and $8.5 million committed pursuant to letters of credit.

As of September 30, 2002, $3.5 million was available for borrowing under the $18.0 million warehouse facility maintained by our wholly owned finance subsidiary, Financial Resources Group, Inc.

The amount of community development district and improvement district bond obligations issued with respect to our communities totaled $204.2 million at September 30, 2002. We have accrued $32.3 million as of September 30, 2002, as our estimate of the amount of bond obligations that we may be required to fund. We may, subject to limitations under our various debt agreements, use district financing to a greater extent in the future.

In October 2002, we entered into a $187.0 million construction loan agreement to finance the construction of two towers. The loan is collateralized by first mortgages on the properties and interest is payable monthly in arrears based on LIBOR plus a spread of 185 to 200 basis points. The loan matures in October 2005.

We released seven towers for reservation and commenced construction on four towers during the nine months ended September 30, 2002. We intend to use construction loans and customer deposits to construct high-rise towers. After the construction loans are repaid from the proceeds of closings with buyers, remaining proceeds will be available for general use. As of September 30, 2002, we had construction loans in place for 10 towers

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

with $83.0 million outstanding and $257.1 million of remaining undrawn commitments. We expect to begin construction on six towers and complete and begin the delivery of units to residents in one tower for the remainder of 2002.

During the course of future operations, we plan to acquire developed and undeveloped land, which will be used in the homebuilding, tower and amenities lines of business. As of September 30, 2002, we had contracts or options aggregating $91.1 million, to acquire approximately 680 acres of land that are expected to yield approximately 2,600 residential units.

CRITICAL ACCOUNTING POLICIES

The Company’s critical accounting policies are those related to (1) percentage of completion recognition of revenues and margins related to tower homebuilding; (2) real estate inventories and cost of sales; (3) community development district obligations; and (4) impairment of long-lived assets. These policies are more fully described in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

FORWARD-LOOKING STATEMENTS

Investors are cautioned that certain statements contained in this document, as well as some statements by the Company in periodic press releases and some oral statements by Company officials to securities analysts and stockholders during presentations about the Company are “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements. Forward-looking statements are based on current expectations and beliefs concerning future events and are subject to risks and uncertainties about the Company, economic and market factors and the homebuilding industry, among other things. These statements are not guaranties of future performance.

Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements made by the Company or Company officials due to a number of factors. The principal factors that could cause the Company’s actual results to differ materially from the forward-looking statements include but are not limited to, the ability to raise capital and grow the Company’s operations on a profitable basis, the ability to compete in the Florida real estate market, the ability to obtain necessary permits and approvals for the development of our land, the ability to pay principal and interest on outstanding debt, the ability to borrow and obtain surety bonds in the future, adverse legislation or regulation, availability of labor or material costs or significant increase in their costs, increases in interest rates, the level of consumer confidence, the availability and cost of land in desirable areas and ability to expand successfully into these areas, natural disasters, unanticipated litigation or legal proceedings, conditions in the capital, credit and homebuilding markets, the ability to sustain or increase historical revenues and profit margins, the ability to deliver homes from backlog and collect contract receivables upon the completion of towers under construction, risks associated with increased insurance costs or unavailability of adequate coverage, perceived risk of travel and changes in economic conditions due to recent events and the continuation of current trends and the general economic conditions.

All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. If one or more of these risks or uncertainties materializes, or if

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)

underlying assumptions provide incorrect, our actual results may vary materially from those expected, estimated or projected.

The Company undertakes no obligation to update any forward-looking statements in this Report or elsewhere.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk on the variable rate portion of our debt. We hedge a portion of our exposure to changes in interest rates by entering into interest rate swap agreements to lock in a fixed interest rate. The swap agreements effectively fix the variable rate cash flows on approximately $90.0 million of our variable rate debt and expire February 2003 ($40.0 million) and February 2004 ($50.0 million). The swap agreements have been designated as cash flow hedges and are reflected at fair value in the consolidated balance sheet.

Our Annual Report on Form 10-K for the year ended December 31, 2001 contains information about market risks under “Item 7A. Quantitative and Qualitative Disclosure About Market Risk.”

The following table sets forth, as of September 30, 2002, the Company’s debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table sets forth the notional amounts and weighted average interest rates of the Company’s interest rate swaps.

(Dollars in thousands)


																						FMV at
		2002			2003			2004			2005			2006		Thereafter			Total			9/30/02

Debt:




	Fixed rate	$	30		$	20		$	10,000		$	—		$	—	$	550,000		$	560,050		$	531,550




	Average interest rate		10.03	%		10.03	%		10.08	%		—			—		9.99	%		10.03	%




	Variable rate	$	14,470		$	60,477		$	22,540		$	79,560		$	—	$	—		$	177,047		$	177,047




	Average interest rate		3.93	%		3.91	%		3.84	%		3.83	%		—		—			3.89	%




Interest Rate Swaps:




	Variable to fixed	$	—		$	40,000		$	50,000		$	—		$	—	$	—		$	90,000		$	(3,392	)




	Average pay rate		—			5.69	%		5.68	%		—			—		—			5.69	%




	Average receive rate		*			*			*			*			*		*			*

90-Day Libor

ITEM 4. CONTROLS AND PROCEDURES

The Company’s Board of Directors and management are cognizant of the importance of disclosure controls and internal controls and the necessity to file timely, complete and accurate reports as required under the Securities Exchange Act of 1934. In contemplation of the additional disclosure requirements imposed by the SEC and as required under the Sarbanes — Oxley Act of 2002, the Company undertook a formal review of its disclosure controls and procedures. In addition, management has established a disclosure committee with responsibility for considering the materiality of information and determining disclosure obligations on a timely basis. In September 2002, a matter was brought to the attention of senior managers related to a failure by certain managers to include the notification to condominium purchasers required under Florida administrative rules when sending out amendments of condominium documents. These managers have been terminated, and we have implemented additional procedures and controls designed to prevent these failures from re-occurring. This incident has prompted us to conduct a wider review of the effectiveness of our existing controls and procedures and to the extent that additional controls are determined to be appropriate, we are implementing such controls and procedures as promptly as possible.

ITEM 4. CONTROLS AND PROCEDURES(continued)

Our Chief Executive Officer and Chief Financial Officer evaluated, together with other members of senior management, the effectiveness of our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)). Based on this review, which was completed within 90 days of the filing of this report, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There were no other significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company has been involved in various litigation matters involving ordinary and routine claims incidental to its business. The Company does not believe the resolution of these matters will have a material adverse effect on the Company’s financial condition or results of operations.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


3.1		Certificate of Incorporation of WCI Communities, Inc. (1)




3.2		By-laws of WCI Communities, Inc. (1)




4.1		Indenture, dated as of April 24, 2002, by and among WCI Communities, Inc., certain of its subsidiaries and The Bank of New York, relating to $200,000,000 in aggregate principal amount of 9 1/8 % Senior Subordinated Notes due 2012. (1)




99.1		Certification by Alfred Hoffman, Jr., Chief Executive Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002.




99.2		Certification by James P. Dietz, Chief Financial Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

(1)

Incorporated by reference to the exhibits in the Registration Statement on Form S-4 previously filed by WCI Communities, Inc. (Registration No. 333-87250)

(b) Reports on Form 8-K

We filed a current report on Form 8-K dated September 5, 2002, which provided information relating to the distribution of shares held by Communities Investor Limited Partnership to the partners, the resignation of two members of the Board of Directors of the Company and the distribution of WCI common stock held by the Chairman of the Board to a family limited partnership.

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.


		WCI COMMUNITIES, INC.









Date:	November 8, 2002	/s/ JAMES P. DIETZ James P. Dietz Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

CERTIFICATIONS

I, Alfred Hoffman, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of WCI Communities, 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 officers 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; and

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.


		WCI COMMUNITIES, INC.









Date:	November 7, 2002	/s/ ALFRED HOFFMAN, JR. Alfred Hoffman, Jr. Chief Executive Officer and Director

CERTIFICATIONS

I, James P. Dietz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of WCI Communities, Inc.;

(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;

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


		WCI COMMUNITIES, INC.









Date:	November 7, 2002	/s/ JAMES P. DIETZ James P. Dietz Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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1.		Basis of Presentation

		The Company’s condensed consolidated financial statements and notes as of September 30, 2002 and for the three months and nine months ended September 30, 2002 and 2001 have been prepared by management without audit, pursuant to rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the December 31, 2001 audited financial statements contained in the Company’s Annual Report on Form 10-K for the year then ended. In the opinion of management, all normal, recurring adjustments necessary for the fair presentation of such financial information have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

		The Company historically has experienced and expects to continue to experience variability in quarterly results. The consolidated statement of income for the three and nine months ended September 30, 2002 is not necessarily indicative of the results to be expected for the full year.

2.		Changes in Shareholders’ Equity

		During March 2002, the Company issued 7,935,000 shares of common stock in a public offering realizing approximately $138,201 in aggregate net proceeds. The net proceeds were used to repay approximately $51,095 of outstanding construction loans, $62,100 of the outstanding balance of the revolver portion of the senior secured credit facility and for general corporate purposes.

3.		New Accounting Pronouncements

		Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets which supercedes SFAS 121 and APB 30. SFAS 144 retains the requirements of SFAS 121 for recognition and measurement of an impairment loss on long-lived assets, and establishes a single accounting model for all long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. The adoption of SFAS 144 did not have a material effect on the Company’s financial position and results of operations.

		In April 2002, the Financial Accounting Standards Board (FASB) approved SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. In addition to rescinding SFAS 4, 44 and 64 and amending SFAS 13, SFAS 145 establishes a financial reporting standard for classification of extinguishment of debt in the financial statements in accordance with APB 30. SFAS 145 will be effective for the Company’s fiscal year 2003. Management does not expect the adoption of SFAS 145 to have a material effect on the Company’s financial position or results of operations.

		In June 2002, the FASB approved SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 addresses the financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 will be effective for the Company’s fiscal year 2003. Management does not expect the adoption of SFAS 146 to have a material effect on the Company’s financial position or results of operations.

4.		Segment Information

		The Company has reorganized its business segments to more accurately reflect its operational structure and, as a result, segment information for the prior period has been reclassified to conform to the current operating structure. The Company operates in four principal business segments: Mid- and High-rise Homebuilding; Single and Multi-family Homebuilding, which includes sales of lots; Amenity Membership and Operations; and Real Estate Services, which includes brokerage, mortgage banking, title and property management operations. Land sales and other has been disclosed for purposes of additional analysis. Asset information by business segment is not presented, since the Company does not prepare such information.

5.		Real Estate Inventories

		Real estate inventories are summarized as follows:

6.		Capitalized Interest

		The following table is a summary of capitalized and amortized interest:

7.		Earnings Per Share

		Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of stock options.

		Information pertaining to the calculation of earnings per share is as follows:

		8. Goodwill and Other Intangibles and Implementation of SFAS 142

		Effective January 1, 2002 the Company adopted SFAS 142, Goodwill and Other Intangible Assets. SFAS 142 provides guidance on accounting for intangible assets and eliminates the amortization of goodwill and certain identifiable intangible assets. Under the provisions of SFAS 142, intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually. The Company completed the required tests for impairment of goodwill and does not currently believe its goodwill is impaired. In accordance with SFAS 142, the Company has allocated goodwill to its operating segments as follows:

9.		Subsequent Event

		In October 2002, the Company entered into a construction loan agreement with a group of financial institutions. The loan provides up to $187,000 that will be used to finance the construction of two towers. The loan is collateralized by first mortgages on the properties and interest is payable monthly in arrears based on LIBOR plus a spread of 185 to 200 basis points. The loan matures in October 2005.

10.		Supplemental Guarantor Information

		Obligations to pay principal and interest on the Company’s senior unsecured credit facility and senior subordinated notes are guaranteed fully and unconditionally by the Company’s wholly owned subsidiaries. Separate financial statements of the guarantors are not provided, as subsidiary guarantors are 100% owned by the Company and guarantees are full, unconditional, and joint and several. Supplemental condensed consolidating financial information of the Company’s guarantors is presented below.