Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9186

WCI COMMUNITIES, INC.

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

Securities registered pursuant to Section 12 (b) of the Act:

Securities registered pursuant to Section 12 (g) of the Act:
NONE
(Title of class)

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 ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). YES (X)  NO ( )

As of June 28, 2002, the aggregate market value of the Common Stock held by non-affiliates (all persons other than officers and directors of Registrant) of the Registrant was approximately $982,630,300.

As of February 26, 2003, there were 44,430,645 shares of Common Stock outstanding.

Documents Incorporated by Reference

Table of Contents

WCI COMMUNITIES, INC.
TABLE OF CONTENTS

Table of Contents

PART I

ITEM 1. BUSINESS

GENERAL

WCI Communities, Inc. (the Company or WCI), a Delaware corporation, is a fully integrated homebuilding and real estate services company with over 50 years of experience in the design, construction and operation of leisure-oriented, amenity-rich master-planned communities. When this report uses the words “we,” “us,” and “our,” these words refer to WCI Communities, Inc. and its subsidiaries, unless the context otherwise requires. Prior to August 31, 2001, the Company was a wholly-owned subsidiary of Watermark Communities Inc. (Watermark). Watermark was formed in August 1998 to buy, manage, own, develop and sell real estate assets and amenity facilities. On August 31, 2001, Watermark was merged into the Company.

We offer a full complement of products and services to enhance our customers’ lifestyles and increase our recurring revenues. We design, sell and build single- and multi-family homes serving move-up, pre-retirement and retirement home buyers. We also design, sell and build luxury residential towers targeting affluent, leisure-oriented home purchasers. We have developed master-planned communities where today there are over 150,000 residents who enjoy lifestyle amenities like award-winning golf courses, country clubs, deep-water marinas, tennis and recreational facilities, luxury hotels, upscale shopping and a variety of restaurants. Our master-planned communities offer a wide range of residential products from moderately priced homes to higher priced semi-custom, single- and multi-family homes and luxury residential towers.

By serving as the master developer in our communities, and by retaining control of operations like amenities and real estate services, we believe we can ensure a high level of quality and generate greater long term returns. We acquire and develop the land in our communities, construct the residences, design, build and operate the amenities in many of our communities and otherwise control all aspects of the planning, design, development, construction and operation of our communities. We profit from the efficiencies created by our integrated delivery of all aspects of community development. We believe that this integrated approach reduces risk and increases our profitability as it provides us with greater control over our costs and provides us with recurring amenities and real estate services revenues. We typically begin a master-planned community by purchasing undeveloped or partially developed real estate. We then construct infrastructure improvements and build amenities in accordance with our development permits. Following completion of these improvements and the building of the amenities, we build a full range of homes for sale to move-up, pre-retirement and retirement home buyers. In certain situations, we elect to sell parcels and lots to third party builders or end users.

Our master-planned communities are in Florida, a highly sought-after retirement and leisure-oriented home destination, and one of the nation’s fastest growing economies. Our communities are located in prime locations on Florida’s gulf coast in or near Marco Island, Naples, Ft. Myers, Sarasota and Tampa, and on the East Coast in or near Miami, Ft. Lauderdale, Palm Beach and Palm Coast.

As of December 31, 2002, we had 30 master-planned communities where we are building single- and multi-family homes or mid- and high-rise residential units or operating amenity facilities. We expect these master-planned communities to contain 504 holes of golf, over 1,100 marina slips and various country clubs, tennis and recreational facilities and other amenities. In total, we control over 14,400 acres of land, where we have approval under the state and local planning laws to develop up to approximately 26,800 future residences.

Since we market our products to move-up, pre-retirement and retirement leisure-oriented home purchasers, we expect to benefit from favorable demographic and economic trends, including the aging of the “baby-boom” generation, the growing inter-generational wealth transfer, and the increasing affluence of the pre-retirement and retirement-aged population.

Our principal business lines include single- and multi-family homebuilding, mid- and high-rise homebuilding, amenity membership and operations and real estate services, each of which contributes to our profitability. See Note 3 to the consolidated financial statements for further information regarding our business segments for each of the three years ended December 31, 2002, 2001 and 2000.

HOMEBUILDING ACTIVITIES

We design, sell and build single- and multi-family homes serving primary, second and retirement home buyers. Our homes range from approximately 1,050 square feet to 8,000 square feet in living space and are priced from approximately $117,000 to $4.9 million, with an average selling price per new order for the year ended December 31, 2002 of $320,000. We build

1

Table of Contents

most of these homes within our master-planned communities, where we create attractive amenities, at times through affiliations with hotel operators and golf course designers like The Ritz-Carlton, The Hyatt, Raymond Floyd and Greg Norman. We believe that this approach increases the value of our homes and communities and helps us attract affluent purchasers. Additionally, we sometimes sell selected lots directly to buyers for the design and construction of large custom homes.

We also design, sell and build luxury mid-rise and high-rise residential towers targeted to affluent, leisure-oriented home purchasers. Residences available for sale in our towers range in size from approximately 1,160 square feet to 11,700 square feet in living space and are priced from approximately $195,000 to $11.8 million. The average selling price per new order for a tower unit in 2002 was approximately $994,000. Our towers range in size from six to 30 stories and include 23 to 210 residences. Our sales contracts for these towers require non-refundable cash deposits, generally ranging from 10% to 30% of the purchase price, and we typically do not start construction of towers until there are sufficient pre-sales to cover the majority of the costs to construct the towers.

Single- and multi-family homes

Sales. We maintain sales centers with community scale models and lifestyle and home demonstration displays. The sales centers are staffed with licensed professionals who are employees of WCI. We also maintain professionally decorated model homes, which demonstrate the benefits and features of our products and the community lifestyles. We maintain and carefully manage an inventory of homes that are available immediately or within a few months. For semi-custom and custom-built homes or homes selected from inventory at an early stage of construction, we offer customers a wide selection of standard options and upgrades to finish their homes. We also allow customization of the structural design in many of our product lines through our in-house design group. In addition, some of our larger communities offer design studios staffed with professional designers where the many options and upgrades available to purchasers of our products are displayed and demonstrated prior to incorporation into a home.

Construction. We typically act as the general contractor in the construction of single- and multi-family residences. Our employees provide purchasing and quality assurance for, and construction management of, the homes we build, while the material and labor components of our houses are provided by subcontractors. We generally contract for most of our materials and labor at fixed prices during the construction period of the home. This process allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins and the time the home closes. We comply with local and state building codes, including Florida’s stringent hurricane and energy efficiency regulations. Depending upon the size and complexity of a home’s design, our construction time ranges from about 90 to 300 calendar days for our single-family homes and up to 250 calendar days for our multi-family homes.

Mid-rise and high-rise tower residences

Sales. Once the design for a mid-rise or high-rise tower has been completed and its construction costs have been estimated, marketing of the residences commences. Brochures, scaled architectural models, walk-in kitchen and bathroom models and other marketing materials are used to assist sales associates in explaining and demonstrating the residences to be built.

Unless we elect to register a tower with the U.S. Department of Housing and Urban Development, Federal and Florida law generally require that condominiums be completed and delivered to a consumer within 24 months following a consumer’s execution of a purchase contract. To facilitate our sales process, we engage in a “reservation” selling process by which buyers select specific residences, sign a reservation agreement and pay a refundable deposit. Once a sufficient number of residences are “reserved” indicating substantial consumer acceptance, reservations are converted to contracts and the customer’s deposit becomes nonrefundable after a 15-day rescission period under Florida law.

Generally, but not in all cases, construction is not commenced until a substantial number of units are under firm contracts. We will generally collect from each purchaser a deposit ranging from 10% to 30% of a residence purchase price to cover a portion of estimated construction costs. Under Florida law, a portion of the deposit representing 10% of the purchase price

2

Table of Contents

must be deposited into an escrow account, unless we have provided a letter of credit or surety bond. Any amount of the down payment in excess of this 10% may be used to fund construction. Once construction is completed, closings of sold residences usually occur within one month, at which time we are paid the balance of the purchase price for the residences sold. Over our 14 year history of building towers, approximately 1% of the contracts for which nonrefundable contract deposits were collected by us defaulted on the obligation to close the purchase of the tower unit; however, there can be no assurance that our cancellation or defaults will not increase in the future.

Construction. We hire experienced and bonded third party general contractors specializing in the construction of towers to construct these buildings. Typically, we negotiate a guaranteed maximum price with these contractors for the construction and delivery of completed towers. By hiring experienced general contractors to construct our towers, we mitigate many of the risks associated with the construction of these structures. As the developer of the towers that we build, we manage the entire process from planning to closing of completed residences and turnover of the condominium association to residents.

Financing. We generally obtain separate construction financing for our tower projects. A construction loan is generally available from a commercial lender when the value of sales contracts on a project is sufficient to cover a substantial portion of the cost of the project’s construction. We then generally seek a construction loan commitment to cover remaining construction costs, based on the number of residences sold at the time of the commitment. To the extent that we sell additional residences during the course of construction, subsequent deposits may also be utilized to fund construction, resulting in a lower amount outstanding under the construction loan than originally committed. We have developed a financing concept with banks to bundle multiple high-rise projects in a single construction loan facility.

AMENITIES DEVELOPMENT AND OPERATION

General. Our amenities, like championship golf courses with clubhouses, fitness, tennis and recreational facilities, guest lodging, marinas and a variety of restaurants, is central to our mission to deliver high quality residential lifestyles. To ensure that the amenities in our communities are designed, constructed and operated at a level of quality consistent with the residences that we build, we have established an amenities development and operations group.

Ownership. Amenities at our communities are owned by either community residents or non-residents in equity membership programs, unaffiliated third parties, or retained by us. As we plan the development of new communities, the ownership of the amenities is structured to cater to the preferences and expectations of community residents.

In communities offering higher-priced homes, all or a select group of residents or non-residents own the golf and other amenities assets on an equity membership basis. The conveyance of amenities assets to residents is accomplished through an equity subscription and sales process at an established price.

Due to the high costs of entry at equity clubs, we have found that in communities offering homes at lower price points, residents often prefer non-equity membership programs, which require lower initiation fees. Under a non-equity membership program, ownership and operation of the amenities are retained by us. Since residents’ preferences change over time, we may choose to sell the ownership and operation of the amenities to a resident group on an equity basis, or to an unaffiliated third party.

An alternative to non-equity membership programs, bundled home and amenities membership structures allow home buyers in moderately priced communities to receive club memberships bundled with their home purchase. In these cases, the amenities are owned and operated by the community homeowners association.

Operation. In communities with bundled or equity ownership structures, we typically enter into an operating agreement with the association or club entity which holds title to the facilities. The operating agreements generally provide that we will continue to control, manage and operate the amenities’ facilities until substantially all of the homes in the community, in the case of bundled ownership, or all of the equity ownership interests, in the case of equity ownership, have been sold. Generally, during the development and start-up phase we fund losses until a sufficient number of memberships have been sold to achieve a breakeven or profit, upon which we will retain the profits.

REAL ESTATE SERVICES

Realty brokerage

3

Table of Contents

maintain this exclusive arrangement we must substantially grow our market share in each of these exclusive areas during the six-year franchise period. As consideration under the agreement, we pay Prudential a royalty based on gross commission revenue on a monthly basis. Additionally, through a separate subsidiary we provide new home and certain resale brokerage services. At December 31, 2002, our realty brokerage operations had 26 offices and 1,188 sales agents.

Title insurance

Mortgage banking

Property management

We provide privacy services to gated master community associations throughout Florida. Privacy services include 24 hour gate monitoring at each community as well as privacy patrol in several of the communities. The privacy company derives revenues primarily through hourly billing to the community associations and through monthly maintenance and servicing fees.

Development services

We provide various services for the property owner during both the design and construction phases of a project. We manage, coordinate and supervise each step in the development process. During the design phase we consult on all project aspects from obtaining zoning approvals, to selection of the design team, to managing the design process. We then develop project budgets and schedules and assist in selecting the general contractor. During construction, we act as the owner’s representative to oversee the general contractor.

PARCEL SALES

We leverage our expertise and experience in master planning by strategically selling parcels at premium prices within our communities for construction of products we do not choose to build. This enables us to create a more, well rounded community by selling parcels to developers who will construct residential, commercial, industrial and rental properties, which we ordinarily do not develop. We sometimes sell selected lots directly to buyers for the design and construction of large custom homes.

OTHER INVESTMENTS

We selectively enter into business relationships through the form of partnerships and joint ventures with unrelated parties. These partnerships and joint ventures are utilized to acquire, develop, market and operate homebuilding, timeshare, amenities, and real estate services projects. As of December 31, 2002, we participate in seven real estate joint ventures. We do not consolidate investments in joint ventures where unanimous consent by all partners is required for making major decisions and we do not have control directly or indirectly. We may be required to make additional cash contributions to the partnerships pursuant to agreements. As of December 31, 2002, none of our partnerships have debt balances. The joint ventures include the following:

Pelican Isle Yacht Club Limited Partnership. Our investment includes a 49% interest in a partnership that owns and operates the Pelican Isle Yacht Club located in the Pelican Isle community in Naples, Florida.

4

Table of Contents

Walden Woods Business Center Ltd. We are a 50% partner in a limited partnership, which was formed to develop a 550-acre mixed-use industrial park in Plant City, Florida.

Tiburon Golf Ventures Limited Partnership. We own a 51% interest in the partnership which was formed with an affiliate of Host Marriott Corporation in 1998 to construct and operate a 36-hole, Greg Norman-designed golf course and clubhouse in our Tiburon Naples community.

Norman Estates at Tiburon Limited Partnership. The partnership was formed in 1998 for the purpose of constructing and developing a community that consists of 27 villas. We hold a combined 50% partnership interest in the venture. The last three homes are expected to close in 2003.

Pelican Landing Golf Resort Ventures Limited Partnership. The partnership was formed with Hyatt Equities, LLC in 1998 to develop and operate a 27-hole golf course. The first 18-holes and clubhouse began operations in 2001. We retain a 51% interest in the venture.

Pelican Landing Timeshare Ventures Limited Partnership. We own a 51% limited partnership interest in the venture, which was formed with an affiliate of the Hyatt Hotels Corporation during 1998 to develop up to 339 upscale timeshare residences on 32 acres within the resort golf course being constructed by Pelican Landing Golf Resort Ventures Limited Partnership. The first phase of the project is currently under development.

Bighorn Development Limited Partnership. We have a Class B limited partnership interest in Bighorn Development, L.P., which owns two-thirds of Bighorn Development L.L.C., the owner and developer of Bighorn, an exclusive community located in Palm Desert, California.

MARKETING

Targeting move-up, pre-retirement, retirement and affluent second home buyers, we develop and execute award-winning, multi-media marketing plans for our homes and communities. We employ an experienced staff of copywriters, creative art directors and graphic designers who are responsible for the design and development of most of our marketing materials and advertising messages, including newspaper and magazine print, direct mail and billboards.

We believe our proprietary marketing systems and the depth of experience of our marketing group create an increased number of selling opportunities for us and has generally enhanced our marketing presence and brand recognition. Our marketing program reaches prospective purchasers, locally, nationally and internationally through advertisements placed in demographic specific periodicals and other media. Our Internet website displays a comprehensive review of each of our communities including locations, promotions, amenities, calendars of activities, lifestyle testimonials, product floor plans, elevations and views of most of the homes we build. The advertisements and website include response mechanisms, such as a coupon, automatic e-mail or toll-free number, by which a prospective purchaser may request additional information about our housing products. When a prospective purchaser responds to one of our advertisements or our web-site, purchaser-specific information is entered into our database creating a personalized customer record, which is used to record every interaction we have with this purchaser.

As a prospective purchaser’s interest in our products and communities evolves, we individualize our marketing program by tailoring direct mail, regular e-mail and telephone follow-up that will apprise the prospective purchaser of relevant activities, developments and products being offered. Our targeted marketing allows us to develop a relationship with prospective purchasers, tending to predispose them toward visits to our communities during their home shopping or vacation trips to Florida.

We believe that our relationship and database marketing results in the efficient use of expenditures. The relative success and productivity of each of our marketing programs is measured to determine which programs yield the most qualified leads, prospects and customers per dollar spent. The results of these measurements are the primary determining factors for where future marketing expenditures will be directed. In addition, our database is a source of ongoing customer research, which influences our homebuilding design and the type and price range of the amenities to be integrated within our master-planned communities.

OUR COMMUNITIES

Our expertise in development and in-depth market knowledge enables us to successfully identify attractive land acquisition opportunities, typically in highly sought-after Florida coastal markets, efficiently manage the development and maximize the land value.

5

Table of Contents

While we believe that long-term demographic trends, including the aging of the “baby-boom” generation, the increase in the number of affluent households, and the strength of Florida’s population, employment and income growth, will drive and support our growth, we are currently exploring additional geographical areas for expansion.

As of December 31, 2002 our communities are located in nine Florida counties including Collier County and Lee County on the west coast near Marco Island, Naples and Ft. Myers; Hillsborough County near Tampa; Sarasota County and Manatee County on the west coast near Sarasota; Dade County, Broward County and Palm Beach County on the east coast encompassing much of Miami, Ft. Lauderdale, Boca Raton and West Palm Beach; and Flagler County on the east coast between St. Augustine and Daytona Beach. The following table sets forth summary information about our communities, including remaining acres, remaining entitled units and remaining number of tower sites.

Our communities
As of December 31, 2002

EMPLOYEES

At December 31, 2002, we had approximately 2,900 employees. We have no unionized employees and believe that our relationship with our employees is good.

SEASONALITY

We have historically experienced, and in the future expect to continue to experience, seasonal variability in revenue, profit and cash flow. Factors expected to contribute to this variability include: the timing of the introduction and start of construction of new towers; the timing of tower residence sales; the timing of closings of homes, lots and parcels; our ability to continue to acquire land and options on land on acceptable terms; the timing of receipt of regulatory approvals for development and construction; the condition of the real estate market and general economic conditions in Florida; the prevailing interest rates and the availability of financing, both for us and for the purchasers of our homes; and the cost and availability of materials and labor.

6

Table of Contents

Our historical financial performance is not necessarily a meaningful indicator of future results and, in particular, we expect financial results to vary from project to project and from quarter to quarter. Our revenue may therefore fluctuate significantly on a quarterly basis, and we believe that quarter-to-quarter comparisons of our results should not be relied upon as an indication of future performance.

COMPETITION

The homebuilding industry and real estate development is highly competitive. In each of our business components, we compete against numerous developers and others in the real estate business in and near the areas where our communities are located. We, therefore, may be competing for investment opportunities, financing, available land, raw materials and skilled labor with entities that possess greater financial, marketing and other resources. Competition generally may increase the bargaining power of property owners seeking to sell, and industry competition may be increased by future consolidation in the real estate development industry.

REGULATORY AND ENVIRONMENTAL MATTERS

Our operations are subject to Federal, state and local laws and regulations. In particular, development of property in Florida is subject to comprehensive Federal and State environmental legislation. This regulatory framework, in general, encompasses areas like traffic considerations, availability of municipal services, use of natural resources, impact of growth, utility services, conformity with local and regional plans, together with a number of other safety and health regulations. Permits and approvals mandated by regulation for development of any magnitude are often numerous, significantly time-consuming and onerous to obtain, and not guaranteed. Such permits, once expired, may or may not be renewed and development for which the permit is required may not be completed if such renewal is not granted. These requirements have a direct bearing on our ability to further develop communities in Florida. Our mortgage activities and title insurance agencies must also comply with various Federal and State laws, consumer credit rules and regulations and other rules and regulations unique to such activities. Although we believe that our operations are in full compliance in all material respects with applicable Federal, State and local requirements, our growth and development opportunities in Florida may be limited and more costly as a result of legislative, regulatory or municipal requirements.

Our operating costs may also be affected by the cost of complying with existing or future environmental laws, ordinances and regulations, which require a current or previous owner or operator of real property to bear the costs of removal or remediation of hazardous or toxic substances on, under or in the property. Environmental site assessments conducted at our properties have not revealed any environmental liability or compliance concerns that we believe would have a material adverse effect on our business, assets, results of operations or liquidity, nor are we aware of any material environmental liability or concerns. Although we conduct environmental site assessments with respect to our own properties, there can be no assurance that the environmental assessments that we have undertaken have revealed all potential environmental liabilities, or that an environmental condition does not otherwise exist as to any one or more of our properties that could have a material adverse effect on our business, results of operations and financial condition.

AVAILABLE INFORMATION

The Company makes available free of charge on or through its Internet website (http://www.wcicommunities.com) the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13-(a) or 15-(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after the Company electronically files such material with, or furnishes it to the Securities and Exchange Commission.

ITEM 2. PROPERTIES

As of December 31, 2002, we own and use approximately 315,000 square feet of office and amenity space throughout Florida. In addition, we lease approximately 113,900 square feet of office space in Bonita Springs, which serves as our corporate headquarters, and approximately 259,000 square feet of office space in other locations throughout Florida, which serve our divisional homebuilding operations and as branch office space for our related real estate services businesses.

ITEM 3. LEGAL PROCEEDINGS

The Company and certain of its subsidiaries have been named as defendants in various claims, complaints and other legal actions arising in the normal course of business. In the opinion of management, the outcome of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

7

Table of Contents

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s common stock is traded on the New York Stock Exchange (Symbol:WCI).

The following table sets forth the high and low price of the shares of WCI common stock as reported on the New York Stock Exchange. We completed our initial public offering in March 2002 and therefore no share price information is presented for 2001

The Company has not paid any cash dividends on its common stock to date and expects that, for the foreseeable future, it will not do so; rather it expects to follow a policy of retaining earnings in order to finance the continued development of its business.

The payment of dividends is within the discretion of the Company’s Board of Directors and any decision to pay dividends in the future will depend upon an evaluation of a number of factors, including the earnings, capital requirements, operating and financial condition of the Company, and any contractual limitations then in effect. In this regard, the Company’s senior subordinated notes contain restrictions on the amount of dividends the Company may pay on its common stock. In addition, the Company’s senior credit facility and senior subordinated debt require the maintenance of minimum consolidated stockholders’ equity, which restricts the amount of dividends the Company may pay.

As of February 26, 2003, there were approximately 90 record holders of the Company’s common stock.

The following table provides information as of December 31, 2002 with respect to the shares of WCI common stock that may be issued under existing equity compensation plans, all of which have been approved by the shareholders.

Please refer to the discussion of the Company’s equity incentive plans in Note 15 to the Company’s consolidated financial statements for a description of the plans and the types of grants, in addition to options, that may be made under the plans.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data for each of the five years in the period ended December 31, 2002. Balance sheet data as of December 31, 2002 and 2001 and statements of operations data for the years ended December 31, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements which are included in Item 8 of this report. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited historical consolidated financial statements, including the introductory paragraphs and related notes thereto, appearing in Items 7 and 8 of this report.

8

Table of Contents

9

Table of Contents

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue recognition — Single- and Multi-family Homebuilding. We recognize homebuilding revenues when homes close and title to and possession of the property is formally transferred to the buyer. Virtually all of our homebuilding revenues are received in cash within one or two days subsequent to closing. We include amounts in transit from title companies at the end of each reporting period in cash and cash equivalents. We either retain or refund to the home buyer deposits on canceled sales contracts, depending upon the provisions of the contracts.

Revenue recognition — Mid-rise and high-rise. Revenue for tower residences under construction is recognized on the percentage-of-completion method. Revenue is recorded as a portion of the value of non-cancelable tower unit contracts when (1) construction is beyond a preliminary stage, (2) the buyer is committed to the extent of being unable to require a refund except for non-delivery of the residence, (3) a substantial percentage of residences are under firm contracts, (4) collection of the sales price is assured and (5) costs can be reasonably estimated. Revenue recognized is calculated based upon the percentage of total costs incurred in relation to estimated total costs. The percentage-of-completion method is applied since we meet applicable requirements under SFAS 66, Accounting for Sales of Real Estate. Actual revenues and costs to complete in the future could differ from our current estimates. If our estimates of tower revenues and development costs are significantly different from actual amounts, then our revenues, related cumulative profits and costs of sales may be revised in the period that estimates change.

Contracts receivable. Amounts due under tower sales contracts, to the extent recognized as revenue under the percentage-of-completion method, are recorded as contracts receivable. We review the collectibility of contracts receivable on a quarterly basis and provide for estimated losses due to potential customer defaults. Historically, approximately 1% of the contracts for which refundable contract deposits were collected by us defaulted on the obligation to close the purchase of the tower unit. Due to a diversity of factors, including deteriorating economic conditions, actual contract defaults may differ from our current estimates.

Real estate inventories and cost of sales. In accordance with SFAS 67, Accounting for Costs and Initial Rental Operations for Real Estate Projects, real estate inventories including land, common development costs and estimates for costs to complete, are allocated to each parcel or lot based on the estimated relative sales value of each parcel or lot, as compared to the sales value of the total project, while site specific development costs are allocated directly to the benefited land. We use the specific identification method for the purpose of accumulating costs associated with home and tower construction. We amortize all applicable land acquisition, land development and related costs (both incurred and estimated to be incurred) to cost of sales for homes closed based upon the relative sales values of homes expected to be closed in each project.

When a home is closed, we usually have not yet recorded and paid all incurred costs necessary to complete the home. Each month we record as a liability and as a charge to cost of sales the amount we have incurred and expect to pay related to completed homes that have been closed as of the end of that month. Actual costs to complete in the future could differ from our current estimated amounts.

Warranty costs. We establish warranty reserves by charging cost of sales and crediting a warranty liability for each home closed. The amounts charged are estimated by management to be adequate to cover expected warranty-related costs for materials and labor required under our warranty obligation periods. Our warranty cost accruals are based upon our historical warranty cost experience in each market in which we operate and are adjusted as appropriate to reflect qualitative risks associated with the type of homes we build and the geographic areas in which we build them. Actual future warranty costs could differ from our currently estimated amounts.

10

Table of Contents

Capitalized interest and real estate taxes. We capitalize interest, up to an amount not to exceed total interest incurred, and real estate taxes on parcels, lots, towers and amenity facilities (the “Projects”) while under active development. The capitalization period ends when the asset is substantially complete and ready for its intended use or sale. The amount of interest capitalized in an accounting period is determined by applying the Company’s weighted average annualized interest rate to the amount of accumulated expenditures related to the Projects under development during the period. For homebuilding projects and amenities conveyed through equity membership sales, capitalized interest and real estate taxes are apportioned on relative sales value and amortized to interest and real estate tax expense, respectively, with each home closing or membership sold. For tower buildings, capitalized interest and real estate taxes are amortized to interest and real estate tax expense under the percentage of completion method. For owned and operated assets, capitalized interest and real estate taxes are included in the base cost of the assets and depreciated. If the various underlying estimates related to interest capitalization and amortization are revised, then more or less interest and real estate taxes would be capitalized and/or amortized to expensed.

Community development district obligations. In connection with certain development activities, bond financing is utilized in many of our communities to construct on-site and off-site infrastructure improvements. Some bonds are repaid directly by us while other bonds only require us to pay non-ad valorem assessments related to lots not yet delivered to residents. We also guarantee district shortfalls under certain bond debt service agreements. In accordance with EITF, 91-10, Accounting for Special Assessments and Tax Increment Financing Entities, we annually estimate the amount of bond obligations that we may be required to fund in the future. If our estimates of the amount of bond obligations that we may be required to fund are significantly different from actual amounts funded, our real estate inventories and costs of sales may be over or understated.

Impairment of long-lived assets and long-lived assets to be disposed of. Real estate inventories are carried at the lower of cost or fair value. Property and equipment are recorded at cost less accumulated depreciation and depreciated on the straight-line method over their estimated useful lives. Whenever events or circumstances indicate that the carrying value of our long-lived assets may not be recoverable, we compare the carrying amount of the asset to the undiscounted expected future cash flows. If this comparison indicates that the asset is impaired, the amount of the impairment is calculated using discounted expected future cash flows. If our estimate of the future cash flows is significantly different from actual cash flows, we may prematurely impair the value of the asset, we may underestimate the value of the calculated impairment or we may fail to record an impairment.

Goodwill. Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the goodwill to its carrying amount. If the carrying amount of the goodwill exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Several factors are used to evaluate goodwill, including management’s plans for future operations, recent operating results and estimated future revenues and costs. Due to the uncertainties associated with such estimates, our conclusion regarding goodwill impairment could change and result in a future goodwill impairment.

Litigation. The Company is involved in litigation incidental to its business, the disposition of which is expected to have no material effect on the Company’s financial position or results of operations. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s estimates and assumptions related to these proceedings, or due to the ultimate resolution of the litigation

NEW ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standards (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 requires all gains and losses from extinguishment of debt to be included as an item of income from continuing operations 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.

11

Table of Contents

In November 2002, FASB issued Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB 5, 57 and 107 and rescission of FASB Interpretation 34. The Interpretation clarifies the requirements for a guarantor’s accounting for and disclosure of certain guarantees issued and outstanding. This Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for the Company’s fiscal year 2002. Management does not expect the adoption of Interpretation 45 to have a material effect on the Company’s financial position or results of operations.

In December 2002, the FASB approved SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of SFAS 123. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation and APB 28, Interim Financial Reporting to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock based employee compensation. The Company has elected to use the intrinsic value method of accounting for stock compensation in accordance with APB 25, Accounting for Stock Issued to Employees.

SFAS 148 also amends the disclosure provisions to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions and requires disclosure about those effects in interim financial information. The disclosure provisions are required to be adopted by all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS 123 or the intrinsic value method of APB 25. The disclosure provisions of SFAS 148, effective for fiscal years ending after December 15, 2002, have been adopted by the Company with the appropriate disclosures in the notes to the consolidated financial statements included in the Form 10-K. Management does not expect the adoption of the other provisions of SFAS 148 to have a material effect on its financial position or results of operations.

In January 2003, FASB issued Interpretation 46, Consolidation of Variable Interest Entities, an interpretation of ARB 51. The Interpretation addresses consolidation by business enterprises of variable interest entities. This interpretation is intended to achieve more consistent application of consolidation policies to variable interest entities and, thus, improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities. This interpretation applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. If applicable, it apples to the Company’s interim period beginning July 1, 2003 for variable interest entities in which the Company holds a variable interest that it acquired before February 1, 2003. Management has not determined the effect of the adoption of Interpretation 46 on the Company’s financial position or results of operations.

RESULTS OF OPERATIONS

Overview

Total revenues and net income were $1.2 billion and $104.8 million for 2002, the highest in our Company’s history, an increase of 9.7% and 2.5% over 2001, respectively. We achieved an 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 selling price in traditional homebuilding operations. As of January 2002, we adopted SFAS 142 and accordingly, no longer amortize goodwill. For the years ended December 31, 2001 and 2000, amortization of goodwill was approximately $3.2 million and $2.8 million, respectively.

For 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 2001, we recognized a $2.0 million (net of tax) extraordinary loss related to the write-off of unamortized debt issue costs associated with debt restructuring in conjunction with the offering of $250 million and $100 million in senior subordinated notes.

12

Table of Contents

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 2002 and the issuance of common stock contributed to a 58.3% increase in shareholders’ equity to $663.5 million at December 31, 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 52.4% at December 31, 2002 compared to 62.0% at December 31, 2001.

The increases in total revenues and contribution margin for 2001, was primarily due to an increase in homebuilding revenues and contribution margin. Net income increased 24.8% primarily due to the corresponding increase in total revenues and contribution margin. The Company’s 2001 operating results contributed to a 31.3% increase in shareholders’ equity to $419.0 million at December 31, 2001.

In 2002, we increased revenue and net income despite a challenging economic environment brought on by an unpredictable stock market, geopolitical risks and an uncertain economic outlook. Assuming the current economic environment continues without significant improvement, we expect 2003 to produce a similar level of earnings as 2002. If economic conditions deteriorate, it may be difficult to achieve similar results.

Homebuilding

Single and multi- family

Year ended December 31, 2002 compared to year ended December 31, 2001

Revenues decreased 6.4% primarily due to the decrease in the number of homes delivered during the period, 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 period as compared to 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 decreased slightly for the year ended December 31, 2002 as compared to 2001. In 2003, we expect two new communities will begin sales activities, four new communities will begin delivering homes and four communities are expected to close-out.

Home sales contribution margin percentage increased 280 basis points 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 2.0% increase in the contract values of new orders was primarily attributable to the addition of three new communities in the Palm Beach, Southwest and Central Florida regions, and increased sales at existing communities throughout other regions, offset by the sell out and/or reduced available inventory in seven communities throughout our other regions, and

13

Table of Contents

slower absorption in our second/luxury home Tiburon community located in the Southwest region. The average sales price per new order was down slightly due to the mix of units.

The 27.8% increase in backlog contract values was primarily the result of a 253 unit increase in the number of units in backlog offset by a decrease in the average sales price of homes under contract to $390,000 from $431,000. The increase in backlog units was primarily attributed to three new selling communities located in the Palm Beach, Southwest and Central Florida regions. We expect that substantially all homes in backlog at December 31, 2002 will be delivered in 2003.

We serve a broad range of customer segments that are performing well, including the affordable retirement and primary move-up segments. The affordable retirement and primary move-up segments new order units increased approximately 8.0% and 21.0%, respectively, as compared to 2001. The luxury/second home segment new order units declined approximately 21.0% in 2002 reflecting a softening in demand that we believe is related in general to the current economic and equity market conditions.

Year ended December 31, 2001 compared to year ended December 31, 2000

Revenues increased 29.2% primarily due to a 118 unit or 7.3% increase in the number of homes closed and a 20.3% increase in the average price of homes closed to $284,000 from $236,000. The increase in the number of homes closed was a direct result of the larger backlog at January 1, 2001 as compared to January 1, 2000, and increased home sales in newly introduced subdivisions in one of our Southeast communities and in two of our newly introduced master-planned communities in the Southwest region. The increase in the average selling price was primarily attributable to increasing prices in our existing communities that were possible due to strong market demand, an increase in the number of higher priced units sold and an increase in the dollar amount of options and lot premiums that our home buyers selected. During 2001, the Company’s homebuyers purchased options and lot premiums valued at approximately 14.8% of the base selling price of homes sold compared to 11.8% in 2000.

Lot revenues decreased 54.4% primarily due to the sell out of lots in subdivisions located in our Bay Colony, Pelican Landing and Heron Bay communities, which was offset by the introduction of a new lot sales program in our Tiburon community.

Home sales contribution margin percentage increased 300 basis points due primarily to a higher average sales price and reduced costs of construction and land development.

The 10.1% increase in the value of net new contracts was primarily the result of a 21.0% increase in the average price of homes contracted to $328,000 from $271,000. The increase in the average price was the result of both price increases and sales mix factors such as location, size and product demand. The decline in the number of net new contracts to 1,595 from 1,754 was primarily the result of the final close out of three communities located in Palm Beach and Southeast regions and reduced sales traffic and contract activity due to travel disruption after September 11. The 12.7% increase in backlog contract values was primarily the result of a 37.7% increase in the average sales price of homes under contract to $431,000 from $313,000.

14

Table of Contents

Mid-rise and high-rise homebuilding

Year ended December 31, 2002 compared to year ended December 31, 2001

Revenues increased 29.6% due primarily to an increase in the number of towers under construction that qualified for recognition of revenue during the respective periods, offset by a reversal of revenue from two towers discussed below. We met the requirements for percentage of completion revenue recognition in 20 towers for 2002, as compared to 15 towers in 2001. We released seven towers for reservation and commenced construction on nine towers during 2002.

The increase in revenues was offset by the reversal of $35.4 million of revenue previously recognized on a total of 53 units located in two towers in our Southwest region. 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 retained deposits totaling $2.9 million, securing performance of such contracts. Based upon these likely defaults, we reversed the revenue and resulting contribution margin previously recognized on these five units, net of forfeited deposits, which had a $3.9 million impact on 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 was given to the purchasers of the 48 units at the end of the third quarter, 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 economic conditions since mid-2001, purchasers of all 48 units exercised their rescission rights and cancelled their contracts. Based upon the foregoing, we reversed the revenue and resulting contribution margin previously recognized on these units during the third quarter, resulting in a reduction of revenue and contribution margin in the amounts of $25.3 million and $9.0 million, respectively.

Contribution margin percentage decreased to 35.5% from 43.1% primarily due to 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. The cancellation and default of 53 contracts as discussed above and the use of selective incentives to spur sales also contributed to this margin reduction.

The decrease in contract values of new orders and average selling price relates to the cancellation and default of contracts for 53 units as discussed above and a shift in product mix toward less expensive tower units being sold compared to the same period 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. We believe the slowed absorption reflects our customers concerns with the national economy and prolonged stock market uncertainty.

15

Table of Contents

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 2.6% increase in the cumulative value of all units under contract with purchasers. This increase in cumulative contract values reflects a 24.1% increase in the number of tower units under contract offset by a 17.8% decrease in the average sale price per unit to $1.11 million from $1.35 million.

Year ended December 31, 2001 compared to year ended December 31, 2000

Revenues increased 77.1% due primarily to an increase in the number of towers that qualified for revenue recognition and an increase in the value of sold units in those towers. We met the requirements for percentage-of-completion revenue recognition in 15 towers in 2001 compared to 8 towers in 2000. Contribution margin percentage remained unchanged at 43.1% for 2001 and 2000.

The value of net new contracts increased 48.2% primarily as a result of an increase in the number of towers that converted from reservation to contract during the period. Ten towers converted from reservation to contract in 2001 compared to six towers in 2000. The 62.6% increase in backlog contract values was due primarily to the increased number of net new contracts and the 16.7% increase in the average price of total tower units under contract to $1.4 million from $1.2 million. The increase in the average price of units under contract was primarily attributable to product mix adjustments enabling us to serve the strong demand in 2001 for more expensive, luxury residential towers.

Amenity membership and operations

Year ended December 31, 2002 compared to year ended December 31, 2001

The 8.0% decrease in equity membership and marina slip revenues was attributable primarily to the decrease in available marina slips at our Gulf Harbour and Deering Bay communities offset by the introduction of a marina slip sales program at the Jupiter Yacht Club and opening of the Colony Clubhouse. The 3.8% decrease in membership dues and amenity service 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 and increase in membership dues as a result of increases in memberships at existing clubs.

The decrease in total amenity contribution margin percentage was attributable to a decrease in sales of higher margin equity membership and marina slip sales and higher operating deficits associated with the opening or start-up of amenity operations at our new communities.

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

Year ended December 31, 2001 compared to year ended December 31, 2000

The 28.7% increase in equity membership and marina slip revenues was primarily attributed to the introduction of a marina slip sales program in the Gulf Harbour community offset by a decrease in the Bay Colony Golf Club and Pelican Marsh Club membership sales. The Bay Colony Golf Club sold its last membership in 2000. The 6.9% decrease in membership dues and amenity service revenues was attributable primarily to turnover of the Bay Colony Golf Club to its members and the sale of the Burnt Store Marina and restaurant operations in December 2000.

Amenity membership and operations contribution margin increased to 32.9% from 21.4% primarily due to the introduction of a high margin marina slip sales program in the Gulf Harbour community, offset by the sell-out of high margin equity memberships in the Bay Colony Golf Club.

16

Table of Contents

Real estate services, land sales and other

Year ended December 31, 2002 compared to year ended December 31, 2001

Real Estate Services

Land Sales
The increase in revenues was primarily attributable to the planned sale of non-strategic parcels located in our Southwest, Southeast and Palm Beach regions. Land sales contribution margin increased primarily as a result of the sale of selected land parcels obtained in the MacArthur land portfolio acquired in 1999, which have subsequently increased in value.

Other Revenues
The decrease in other revenues was primarily related to the decline in equity in earnings of joint ventures and decrease in the sale of non-core assets. Certain joint ventures contributed to the decline including a residential joint venture which is approaching sell-out, a golf course development in the initial 15 months of operations and a timeshare joint venture which is in the process of marketing the first phase of development. In 2001, we recognized approximately $5.0 million in gains from the sale of non-core assets compared to $550,000 in 2002.

Year ended December 31, 2001 compared to year ended December 31, 2000

Real Estate Services
The increase in revenues was primarily attributed to a $13.0 million increase in real estate brokerage revenues and a $2.3 million increase in the mortgage banking operations, offset by a $1.0 million decrease in title revenues. The increase in real estate brokerage revenues was primarily attributed to the overall sales force. The increase in mortgage banking revenues was primarily the result of increased home purchases and mortgage refinancings. Real estate services contribution margin decreased 260 basis points, primarily due to an increase in the proportion of lower margin real estate brokerage operations.

Land Sales
Sales of residential parcels decreased due to management’s decision to hold most developed and undeveloped land inventory for homebuilding purposes and 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. The decrease in contribution margin percentage was due primarily to the change in mix of parcel and lot sales closed in the respective periods.

Other Revenues

17

Table of Contents

Selling, general and administrative expenses, including real estate taxes

Selling, general and administrative expenses, including real estate taxes (SG&A), increased 15.8% in 2002 as compared to 2001, and increased 23.0% in 2001 as compared to 2000. 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 10.5% in 2002 as compared to 10.0% and 10.2% in 2001 and 2000, respectively.

Interest expense, net of capitalization

Interest expense, net of capitalization, decreased slightly in 2002 as compared to 2001, and increased 21.1% in 2001 as compared to 2000. Interest incurred for the respective periods increased 4.8% and 2.0% primarily due to a marginal increase in our level of debt offset by a decrease in our effective borrowing rate. Amortization of previously capitalized interest increased 13.5% in 2002 as compared to 2001, due primarily to the increase in the number of towers recognizing revenue under the percentage of completion method, offset by the decrease in the number of home closings in the respective periods. Amortization of previously capitalized interest increased 29.6% in 2001 as compared to 2000 primarily due to increased home closings and land sales in the respective periods. Interest capitalized increased 14.9% in 2002 as compared to 2001 and declined 11.8% in 2001 as compared to 2000. The increase in 2002 is primarily due to a greater book value of new and existing properties undergoing active development. The decline in 2001 as compared to 2000 is due primarily to a change in the mix of properties undergoing active development.

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 December 31, 2002, we had cash and cash equivalents of $49.8 million and $305.1 million undrawn under our existing senior credit facility.

Net cash used in operations was $109.0 million for 2002, as compared to cash used in operations of $128.0 million for the same period in 2001. Excluding increases in net inventory additions of $152.8 million and $123.9 million and contracts receivable of $115.3 million and $171.0 million, net cash flows provided by operations were $159.1 million and $166.9 million 2002 and 2001, respectively. Land acquisitions were $56.9 million for 2002 compared to $80.7 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 tower inventories. We expect real estate inventories will continue to increase as we are currently searching for and negotiating additional opportunities to obtain control of land for future communities.

Contracts receivable increased 28.8% during 2002 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 portion of these receivables during the next three to nine months as nine 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 contacts 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 investment properties. Future defaults may limit our ability to deliver units from backlog and collect contract receivables upon the completion of towers under construction.

Investing activities for 2002, included $41.8 million of net additions to property and equipment compared to $24.3 million in 2001. We anticipate cash used in investing activities will continue to increase with development of current and future amenity operations which are owned and operated by the Company.

Financing activities provided cash of $162.5 million for 2002, compared to cash provided of $146.3 million in 2001. The net cash inflow for 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 $24.3 million.

In April 2002, we issued $200.0 million of 9 1/8% senior subordinated notes (the 9 1/8% Notes) in a private placement and subsequently exchanged the unregistered Notes for notes registered under the Securities Act of 1933, as amended. The 9 1/8% Notes mature May 1, 2012 and interest is payable semi-annually in arrears on each May 1 and November 1 commencing on

18

Table of Contents

November 1, 2002. The 9 1/8% Notes are subordinated to all existing and future senior debt. Proceeds from the 9 1/8% 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 December 31, 2002, we had $305.1 million undrawn under the senior credit facility and $10.8 million committed pursuant to letters of credit.

In 2002, our wholly owned finance subsidiary, Financial Resources Group, Inc. increased the borrowing capacity on its bank warehouse facility to $30.0 million, which will reduce to $23.0 million in April 2003. The warehouse facility is payable on demand and is secured primarily by mortgage loans held for sale. As of December 31, 2002, $2.0 million was available for borrowing under the warehouse facility.

In connection with the development of certain of the Company’s communities, community development or improvement districts may utilize bond financing to fund construction or acquisition of certain on-site and off-site infrastructure improvements, near or at these communities. The obligation to pay principal and interest on the bonds issued by the districts is assigned to each parcel within the district. If the owner of the parcel does not pay this obligation, a lien will be placed on the property to secure the unpaid obligation. The bonds, including interest and redemption premiums, if any, and the associated lien on the property are typically payable, secured and satisfied by revenues, fees, or assessments levied on the property benefited. The original amount of bond obligations issued by districts with respect to the parcels the Company owns in certain communities totaled $210.8 million at December 31, 2002. Bond obligations at December 31, 2002 mature from 2004 to 2034.

The districts raise the money to make the principal and interest payments on the bonds by imposing assessments and user fees on the properties benefited by the improvements from the bond offerings. The Company pays a portion of the revenues, fees, and assessments levied by the districts on the properties the Company owns that are benefited by the improvements. In addition, the Company guarantees district shortfalls under some of the bond debt service agreements when the revenues, fees and assessments which are designed to cover principal and interest and other operating costs of the bonds, are not paid.

We 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 December 31, 2002, we had construction loans in place for nine towers with $92.6 million outstanding and $427.4 million of remaining undrawn commitments which expire from 2003 to 2005. We are also planning to close on a $103.2 million loan commitment for three other towers in 2003. To the extent we meet certain loan requirements, these commitments will be drawn to fund tower construction costs in the future. We expect to begin construction on five to seven towers in 2003.

The following table summarizes our payments under debt, operating lease and land purchase obligations as of December 31, 2002:

Standby letters of credit and performance bonds, issued by third party entities, are used to guarantee our performance under various contracts, principally in connection with the development of our projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related project. If the obligations related to the project are ongoing, annual extensions are granted on a year-to-year basis. Performance bonds do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $152.7 million at December 31, 2002, are typically outstanding over a period of approximately one to five years.

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 December 31, 2002, we had contracts or options aggregating

19

Table of Contents

$68.8 million to acquire approximately 670 acres of land that are expected to yield approximately 1,500 residential units. Payments of approximately $32.6 million are expected to be made during 2003 with the balance paid in future years. We will incur land development costs for improving overall community infrastructure such as water, sewer, streets and landscaping and for developing the amenity packages such as golf courses, marinas and club facilities. A significant portion of these costs are incurred in the initial phases of a project.

Our real estate development is dependent upon the availability of funds to finance current and future development. We plan to continue growing and expect to fund this growth through the generation of cash flow from operations, from the availability of funds under our credit facilities, from new construction loans and from future debt and equity offerings. We believe we have adequate resources and sufficient credit facilities to satisfy our current and reasonably anticipated future requirements to acquire capital assets and land, to develop land improvements and construction activities and to meet any other needs of our business, both on a short- and long-term basis. If we do not have sufficient capital resources to fund our development and expansion, projects may be delayed, resulting in possible adverse effects on our results of operations. No assurance can be given as to the terms, availability or cost of any future financing we may need. If we are at any time unable to service our debt, refinancing or obtaining additional financing may be required and may not be available or available on terms acceptable to us. Furthermore, considerable economic and political uncertainties could have adverse effects on consumer buying behavior, construction costs, availability of labor and materials and other factors affecting us and the homebuilding industry generally.

We selectively enter into business relationships through the form of partnerships and joint ventures with unrelated parties. These partnerships and joint ventures are utilized to acquire, develop, market and operate homebuilding, amenities and real estate services projects. We do not consolidate partnerships and joint ventures where unanimous consent by both partners is required for making major decisions, and where we do not have control directly or indirectly, over major decisions. In connection with the operation of these partnerships and joint ventures, the partners may agree to make additional cash contributions to the partnerships pursuant to the partnership agreements. We believe that future contributions, if required, will not have a significant impact to our liquidity or financial position. If we fail to make required contributions, we may lose some or all of our interest in such partnerships or joint ventures. At December 31, 2002, none of our partnerships or joint ventures had outstanding debt. However, the partners may agree to incur debt to fund partnership and joint venture operations in the future.

INFLATION

Our costs of operations may be impacted by inflation to the extent that a strengthening economic environment places upward pressure on the cost of labor and materials. In addition, certain raw materials used by us in our homebuilding operations are susceptible to commodity price increases. Unless these cost increases are passed on to customers through increased home and service prices, our operating margins may be reduced. In addition, in times of inflation, the reduced availability of attractive mortgage financing for purchasers of our homes may have an adverse effect on sales. If interest rates increase, construction and financing costs, as well as the cost of borrowings, also would increase, which can result in lower operating margins. Increases in interest rates also may affect adversely the volume of mortgage loan originations.

The volatility of interest rates could have an adverse effect on our future operations and liquidity. Among other things, these conditions may affect adversely the demand for housing and the availability of mortgage financing and may reduce the credit facilities offered to us by banks, investment bankers and mortgage bankers.

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, cash flow 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

20

Table of Contents

results to differ materially from the forward-looking statements include but are not limited to, statements about the Company’s anticipated operating results, financial resources, ability to acquire land, ability to sell homes and properties, ability to deliver homes from backlog, ability to secure materials and subcontractors. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in other Company reports, filings, statements and presentations. These risks and uncertainties include the Company’s ability to compete in the Florida real estate market; the availability and cost of land in desirable areas in Florida and elsewhere and the ability to expand successfully into those areas; Company’s ability to obtain necessary permits and approvals for the development of its lands; Company’s ability to raise debt and equity capital and grow its operations on a profitable basis; Company’s ability to pay principal and interest on its current and future debts; Company’s ability to sustain or increase historical revenues and profit margins; material increases in labor and material costs; increases in interest rates; the level of consumer confidence; adverse legislation or regulations; unanticipated litigation or legal proceedings; natural disasters; and the continuation and improvement of general economic conditions and business trends. If one or more of the assumptions underlying our forward-looking statements proves incorrect, then the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by the forward-looking statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking statements.

All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to update any forward-looking statements in this Report or elsewhere.

ITEM 7A. 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.

The following table sets forth, as of December 31, 2002, WCI 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 WCI interest rate swaps.

21

Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of WCI Communities, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of WCI Communities, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 2 and 8, WCI Communities, Inc. adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002.

PricewaterhouseCoopers LLP
Fort Lauderdale, Florida

February 4, 2003

22

Table of Contents

WCI Communities, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)

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

23

Table of Contents

WCI Communities, Inc.
Consolidated Statements of Income
(In thousands, except per share data)