WCI COMMUNITIES INC - 10-K Annual Report

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

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

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

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 þ NO o

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. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES þ NO o

As of June 30, 2003, 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 $736,476,232.

As of February 23, 2004, there were 43,816,199 shares of Common Stock outstanding.

Portions of the registrant’s definitive Proxy Statement for its 2004 annual meeting of stockholders scheduled to be held on May 20, 2004 are incorporated herein by reference in Part III, Items 10, 11, 12, 13 and 14. Such Proxy Statement will be filed with the SEC no later than 120 days after the registrant’s fiscal year end December 31, 2003.

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 residents 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 our 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, Tampa and Pensacola and on the East Coast in or near Miami, Ft. Lauderdale, Palm Beach and Palm Coast.

As of December 31, 2003, we have over 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 over 500 holes of golf, 1,100 marina slips and various country clubs, tennis and recreational facilities and other amenities. In total, we control over 13,700 acres of land, where we have approval under the state and local planning laws to develop up to approximately 28,000 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 (traditional) homebuilding, mid- and high-rise (tower) 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, 2003, 2002 and 2001.

We design, sell and build traditional 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 over $100,000 to over $5.0 million, with an average selling price per new order for the year ended December 31, 2003 of $428,000. We build most of these

homes within our master-planned communities, where we create attractive amenities, often through affiliations with hotel operators and golf course designers, such as 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 residential towers targeted to affluent, leisure-oriented home purchasers. Residences available for sale in our towers range in size from approximately 1,100 square feet to 11,700 square feet in living space and are priced from over $200,000 to over $10.0 million. The average selling price per new order for a tower unit in 2003 was approximately $1.4 million. Our towers range in size from 6 to 30 stories and include 35 to 309 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.

Design. We employ an award-winning in-house design group comprised of experienced architects and computer-assisted design technicians. Our product design experience, along with our land planning expertise, has enhanced our ability to charge premiums for homes located on waterfront, conservation and golf course sites within our communities.

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 our 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 100 to 365 calendar days for our single-family homes and up to 240 calendar days for our multi-family homes.

Design. We commence the design and planning of towers by conducting extensive research relating to the market, customer base, product requirements, pricing and absorption. Our research effort is directed by dedicated project managers specializing in the development of towers. Based on the results of this research, we organize an experienced team of architects, engineers and specialty consultants under the leadership of the project manager to create the design of the tower. We also contract for the services of an experienced third party general contractor during the early stages of design to assist in design, engineering and the estimation of construction costs.

Sales. Once the design for a 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, 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 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 15 year history of building towers, approximately 1% to 2% 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 construction. 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. 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 revolving construction loan structure with banks to finance multiple tower projects in a single construction loan facility.

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.

In June 1999, we entered into a six-year franchise agreement with Prudential Real Estates Affiliates, Inc. This agreement, as subsequently amended, allows us to provide exclusive residential brokerage services as Prudential Florida WCI Realty in six geographic areas across eight counties in Florida and commercial brokerage services in Naples. The exclusive franchise

areas are in Lee, Collier, Palm Beach and portions of Broward, Charlotte, Hillsborough, Manatee, and Dade Counties. To 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, 2003, our realty brokerage operations had 30 offices and approximately 1,300 sales agents.

We provide title insurance and closing services through a subsidiary which underwrites its policies on behalf of large national title insurers and derives its revenues from commissions on title insurance premiums and closing services provided to our customers, third party residential closings and commercial closings.

We provide residential mortgage banking services to our buyers, as well as third party purchasers through our subsidiary, Financial Resources Group, Inc. (FRG). FRG originates home mortgages which are subsequently sold to mortgage investors. Generally these mortgages are sold at prices established in commitments obtained from mortgage investors prior to the time the mortgages are originated. The mortgages are primarily funded through a bank warehouse facility.

We provide management services to our master-planned community developments and oversee the business affairs of condominium, homeowners’ associations and community master associations encompassing over 14,000 residences throughout Florida. The services provided by our management companies include accounting, security, common area maintenance and insurance policy administration.

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.

Our development services business derives fee-based income from the supervision, including serving as the general contractor, of major commercial and residential projects. For a nominal increase in overhead, this business allows us to leverage the expertise we have gained directing large-scale real estate projects.

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.

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.

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, 2003, we participate in seven real estate joint ventures. For further information on the accounting for investments in joint ventures see Note 2 “New Accounting Pronouncements” in the audited consolidated financial statements, appearing elsewhere in this report. We may be required to make additional cash contributions to the partnerships pursuant to agreements. As of December 31, 2003, none of our partnerships had debt balances.

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

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 home closed in March 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 owned by Pelican Landing Golf Resort Ventures Limited Partnership. The first phase of the project is currently nearing completion.

Bighorn Development Limited Partnership. We have a 50% 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.

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 website, purchaser-specific information is entered into our database creating a personalized customer record, which is used to record every interaction we have with this prospective 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 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.

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, 2003, our communities are located in eleven 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; Escambia County on the west coast near Pensacola; Dade County, Broward County, Martin 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.

At December 31, 2003, we had approximately 2,900 employees. We have no unionized employees and believe that our relationship with our employees is good.

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.

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.

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.

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.

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 (SEC). These filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The Company has adopted and will post in the Investor Relations section of its website the Company’s Corporate Governance Guidelines and charters for each of the Board’s standing committees prior to its Annual Shareholders Meeting.

As of December 31, 2003, we own and use approximately 316,000 square feet of office and amenity space throughout Florida. In addition, we lease approximately 121,000 square feet of office space in Bonita Springs, which serves as our corporate headquarters, and approximately 305,000 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.

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. However, it is possible 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 proceeding, or due to the ultimate resolution of the litigation.

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2003.

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 for the periods indicated as reported on the New York Stock Exchange.

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 indentures governing the Company’s outstanding 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 notes require the maintenance of minimum consolidated stockholders’ equity, which restricts the amount of dividends the Company may pay.

As of February 23, 2004, there were approximately 98 record holders of the Company’s common stock.

Please refer to Item 12 of this report and Note 16 to the Company’s consolidated financial statements for a discussion of the shares of WCI common stock that may be issued under existing equity compensation plans, all of which have been approved by shareholders, and a description of the Company’s equity incentive plans and the types of grants, in addition to options, that may be made under the plans.

The following table sets forth our selected historical consolidated financial data for each of the five years in the period ended December 31, 2003. Balance sheet data as of December 31, 2003 and 2002 and statements of operations data for the years ended December 31, 2003, 2002 and 2001 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.

(1)

Debt excludes accounts payable and other liabilities (other than land repurchase liabilities) customer deposits, income taxes payable and community development district obligations.

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

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 — Traditional Homebuilding. We recognize homebuilding revenues when homes close and title to and possession of the property is formally transferred to the buyer. The majority 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 — Tower Homebuilding. 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 full refund except for non-delivery of the residence, (3) a substantial percentage of residences are under firm contracts, (4) sales prices are collectible 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 building construction 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% to 2% of the contracts for which refundable contract deposits were collected by us defaulted on the obligation to close the purchase of the tower unit. 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 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, estimate to be incurred and expect to be paid 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 for traditional and tower residences by charging cost of sales and crediting a warranty liability. 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. We provide our single- and multi-family home buyers with a one to three year limited warranty for all material and labor and a ten year warranty for certain structural defects. We provide our tower home buyers a one year warranty for the unit and three year warranty for common elements of the tower. 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.

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, land sales and amenities conveyed through equity membership sales, capitalized interest and real estate taxes are apportioned on relative sales value and amortized to cost of sales, respectively, with each home closing, land sale or membership sold. For tower buildings, capitalized interest and real estate taxes are amortized to cost of sales 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 cost of sales.

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 revised on a prospective basis.

Impairment of long-lived assets and long-lived assets to be disposed of. Real estate inventories considered held for sale including land intended for sale and completed tower residences and homes are carried at the lower of cost or fair value less costs to sell. 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 property and equipment and real estate inventories considered held and used, including land and land improvements, investments in amenities and tower residences and homes under development 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.

(a) Our gross margin includes overhead expenses directly associated with each line of business. See the consolidated statements of income for a reconciliation of gross margin to consolidated income before income taxes for each period.

Our principal business lines include single- and multi-family (traditional) homebuilding, mid- and high-rise (tower) homebuilding, amenity membership and operations and real estate services, each of which contributes to our revenue and profitability. In 2003, 85.6% and 90.2% of revenue and gross margin, respectively, were derived from our combined homebuilding operations.

For 2003, total revenues and net income increased 19.8% and .7%, respectively. The increases were driven primarily by our traditional and tower homebuilding and real estate services divisions. Although net income increased only slightly over 2002, gross margins increased 8.1% due primarily to increased contributions from the traditional homebuilding and real estate services divisions. Gross margins from tower homebuilding, amenities and land sales declined as compared to 2002. Overall, net income increased slightly due to the increase in gross margin offset by 19.2% increase in selling, general and administrative costs. During the fourth quarter of 2003, we settled an Internal Revenue Service examination of our tax returns for the years 1999-2001. As a result, we reduced our income tax expense by approximately $1.9 million.

In 2003, we increased revenue despite a challenging economic environment. The primary/move-up home buyer market was strong during 2003 in the traditional homebuilding division. The second home/luxury and affordable retirement markets continued to exhibit some weakness, which we believe was a result of an unpredictable stock market, geopolitical risks and an uncertain economic outlook. As we enter 2004, we expect increased revenues from all lines of business as demand for our products is expected to grow. Assuming the current economic environment continues, including increased consumer confidence, a stronger stock market and stable interest rates, we expect 2004 to produce moderately increased levels of earnings. If economic conditions deteriorate, interest rates increase significantly, the ability to obtain permits and approvals for land development is delayed or adverse legislation or regulations occurs, then it may be difficult to achieve earnings growth.

For 2002, total revenues and net income increased 10.4% 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 our traditional homebuilding operations. As of January 2002, we adopted SFAS 142 and accordingly, no longer amortize goodwill. For the year ended December 31, 2001, amortization of goodwill was approximately $3.2 million.

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.

For 2002 and 2001, we recognized $3.3 million and $3.2 million, respectively, in expenses related to the write-off of unamortized debt issue costs associated with the early repayment of debt.

Revenues increased 35.3% due to a 17.9% increase in the number of homes delivered and a 15.0% increase in average selling price. We recorded initial deliveries of 250 homes in three of our communities located in the East Central and Southwest regions, offset by a decrease in deliveries from two communities closed-out in 2002 and four communities that were approaching close-out in 2003. The average selling price per home closed increased as a result of closing a larger proportion of homes in our higher-priced communities. Lot revenues increased 50.8% primarily due to the introduction of a new community and subdivision located in the East Central and Southeast regions, respectively.

The number of homes closed in our primary/move up market increased 63.4% from 2002, while the number of homes closed in our affordable retirement and luxury/second home markets declined 8.9% and 36.5%, respectively, from 2002. The increase in the primary move-up market is attributed to the low interest rate environment and the increase in available product offerings. The decline in the affordable retirement and luxury/second home markets is primarily related to an unpredictable stock market, geopolitical risks and an uncertain economic outlook.

Gross margin percentage increased 120 basis points due primarily to an increase in the average selling price per home closed, which reflects the sale of larger homes with more features and, consequently, higher margins. We also began the initial delivery of high-margin units in a community located in the East Central region.

Contract values of new orders increased 34.8% due primarily to an increase in the average sales price. The 33.8% increase in the average sales price per new order was primarily due to sales in three recently introduced higher-priced communities and demand for higher-priced homes at certain existing communities. The 28.3% increase in backlog contract values primarily reflects a 26.7% increase in the average sales price of homes under contract to $494,000 in 2003 compared to $390,000 in 2002.

In 2004, we expect four new communities will begin initial deliveries and two communities will close-out. We do not anticipate that lot revenues will reach the same level achieved in 2003. Gross margins for this segment are expected to decline slightly primarily due to increasing costs associated with shifting from closed out communities to start-up communities and a decrease in high-margin lot sales. We anticipate the average selling price per home closed will increase as we begin to deliver homes from our backlog.

Our ability to sell homes and raise home prices in the future may be adversely impacted by any significant declines in economic and stock market conditions or softening in the demand for new home offerings.

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 was 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, East Central and Southwest regions. Lot revenues decreased slightly for the year ended December 31, 2002 as compared to 2001.

Gross margin percentage increased 270 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.

The 2.0% increase in the contract values of new orders was primarily attributable to the addition of three new communities in the East Central, Southwest and West Central 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 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 East Central, Southwest and West Central regions.

We serve a broad range of customer segments that are performing well, including the affordable retirement and primary move-up markets. The affordable retirement and primary move-up markets new order units increased approximately 8.0% and 21.0%, respectively, as compared to 2001. The luxury/second home market 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.

Revenues increased 10.8% due primarily to a $76.3 million increase in the delivery of previously completed unsold tower units offset by a $18.4 million decrease in revenues from towers recognizing percentage-of-completion revenues in the periods. The tower division expects to increase revenue in 2004 with a focus on delivering completed unsold tower units and the initial percentage-of-completion revenues from new towers. Our ability to sell tower units in the future may be adversely impacted by market conditions that have slowed absorption of higher priced units.

Gross margin percentage declined to 28.9% from 33.4% in 2002. In addition to the net $3.0 million increase to our allowance for uncollectability of contracts receivable, the decline in the gross margin percentage was primarily due to an anticipated change in the mix of units sold toward lower-priced, lower-margin units, and a $4.2 million increase in warranty and completion costs recorded in 2003 related to three recently completed towers. Gross margins in 2003 were positively impacted by the initial percentage-of-completion recognition of one higher-priced, higher-margin tower located in the Southwest region. Gross margins are expected to decline slightly in 2004 due primarily to additional incentives to sell completed unsold tower units and a shift to lower-priced, lower-margin towers.

Contract values of new orders increased 65.6% in 2003 due primarily to the conversion to firm contracts of 315 units in five newly introduced towers with a sales value of $500,811 or $1.6 million average selling price compared to 305 units in seven towers with a sales value of $235,856 or $773,000 average selling price in 2002.

In addition to the items noted above, favorable period over period comparisons of revenues and contract values of new orders were impacted by the Company’s business decision to grant rescission on 48 tower units and the default by customers on closing of 5 tower units in the quarter ended September 30, 2002 as previously reported. The resulting impact reduced 2002 revenue and gross margin by $35.4 million and $12.3 million, respectively.

The increase in backlog contract values was due primarily to the increase in cumulative contract values as a result of the One Bal Harbour and Veracruz tower contract conversions in 2003 offset by the increase in cumulative revenues recognized as a result of the increase in the extent of completion of towers under construction in both periods and the completion and delivery of units in nine completed towers during 2003. The increase in cumulative contract values reflects an 11.2% increase in the average sales price of units in backlog.

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 gross margin previously recognized on these five units, net of forfeited deposits, which had an approximate $3.9 million impact on 2002 gross margin.

Additionally, earlier in 2002 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. The Company subsequently elected to cancel these contracts based on our business decision to improve customer satisfaction in the community. Based upon the foregoing, we reversed the revenue and resulting gross margin previously recognized on these units during the third quarter, resulting in a reduction of revenue and gross margin in the amounts of $25.3 million and $8.4 million, respectively.

Gross margin percentage decreased to 33.4% from 41.2% 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 in 2001. While it was expected that the average selling price for tower units being sold during 2002 would be lower than the same period in 2001 due to a planned shift of mix of buildings being initially marketed this year, the average selling price was also lower because market conditions accelerated absorption of lower priced units and slowed absorption of higher priced units. We believe the slowed absorption reflected our customers’ concerns with the national economy and prolonged stock market uncertainty.

The decrease in backlog contract values was due to the increased amount of cumulative revenues recognized in the towers under construction, which reflected 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 reflected a 24.1% increase in the number of tower units under contract offset by a 17.8% decrease in the average sales price per unit to $1.11 million from $1.35 million.

Equity membership and marina slip revenues decreased 32.8% due to a $7.5 million decline in marina slip revenues primarily due to the sell-out of marina slips at our Gulf Harbour community that occurred in 2002 and a $2.6 million decline in luxury equity membership sales at our existing amenity clubs. The decline in equity membership sales was partially mitigated by revenues of $5.2 million recognized on the sale of all remaining memberships at the Deering Bay Club that occurred in the second quarter of 2003. The sale of luxury equity memberships continues to be affected by reduced demand for associated luxury/second home residences. Marina slip revenues in 2004 will be impacted by the 2003 sell-out of our Jupiter marina project.

Membership dues and amenity service revenues decreased 11.4% primarily due to a $8.6 million decrease related to the turnover of two clubs located in the Southwest region to its members, offset by a $4.0 million increase in revenues from several new and existing club facilities. In 2004, we anticipate revenues will increase with the introduction of several new facilities.

The decline in total amenity gross margins was primarily due to the declines in sales of luxury equity memberships and marina slips, and increased start-up deficits associated with new amenity operations. Future amenity gross margin may be adversely impacted by the reduced availability of marina slips, slowing demand for equity memberships due to general market conditions and increased start-up deficits associated with new amenity operations.

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 gross 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.

Real estate services revenues, including real estate brokerage, mortgage banking, title and property management operations increased 26.2% primarily due to an increase in the volume of transactions and an increase in the average sales price per transaction associated with our Prudential Florida WCI Realty brokerage operations. Prudential Florida WCI Realty brokerage transaction volume increased 16.7% to 9,710 closings from 8,321 and the average brokerage transaction price increased 15.5% compared to the same period in 2002. The increase in gross margin was primarily due to increased efficiency in the real estate brokerage and mortgage banking businesses and prudent cost management in general. In 2004, we anticipate revenue growth in real estate services primarily due to increased transaction volume and higher average sales prices within the Prudential Florida WCI Realty brokerage business and increased capture rates in the mortgage banking and title operations achieved through synergies with our homebuilding and realty brokerage division.

Land sales are incidental to our overall operations and are expected to continue in the future, but may significantly fluctuate. The slight increase in revenues was primarily attributable to the sale of non-strategic parcels located in our various regions. Land sales gross margins were $15.1 million before adjustments of $5.3 million for community development district obligations and estimated costs to complete development activities in two closed-out non-homebuilding communities. Gross margins from land sales may increase from 2003 if we meet our anticipated sales goals.

The increase in revenues was primarily attributed to a $17.3 million and $3.2 million increase in brokerage and title revenues, respectively, which was related to an increase in the volume of transactions from third-party, non-WCI homebuilding customers and an increase in the average sales price per transaction. Real estate services gross margin increased 230 basis points primarily due to the growth in volume of transactions and controlling overhead costs in the brokerage operations.

The increase in revenues was primarily attributable to the planned sale of non-strategic parcels located in our Southwest, Southeast and East Central regions. Land sales gross 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.

Equity in earnings from joint ventures and other income increased slightly from 2002. Selling, general and administrative expenses, including real estate taxes, (SG&A) increased 21.2% to $151.8 million primarily due to a 20.6% and 16.6%

increase in general and administrative (G&A) costs and marketing expenditures, respectively. G&A increased due to an increase in salary, wages and benefits, professional and legal fees and insurance, respectively. The increase in G&A was expected with the planned growth in our business. Marketing expenditures increased primarily due to increased advertising in new and existing communities. As a percentage of total revenues, SG&A was 10.5% compared to 10.3% in 2002.

Interest expense, net of capitalization, increased 11.8% primarily due to a 7.0% increase in interest incurred. Interest incurred increased primarily as a result of the increase in the weighted average outstanding debt balance for 2003 as compared to 2002.

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

Selling, general and administrative expenses, including real estate taxes, increased 14.4% in 2002 as compared to 2001. The increase 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 10.3% in 2002 as compared to 10.0% in 2001.

Interest expense, net of capitalization, decreased in 2002 as compared to 2001. Interest incurred increased 4.3% primarily due to a marginal increase in our level of debt offset by a decrease in our effective borrowing rate. Interest capitalized increased 14.9% in 2002 as compared to 2001. The increase in 2002 is primarily due to a greater book value of new and existing properties undergoing active development.

For 2002, we recognized $3.3 million in expenses related to the write-off of unamortized debt issue costs associated with the early repayment of debt.

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, 2003, we had cash and cash equivalents of $95.0 million and $405.0 million undrawn under our existing senior unsecured credit facility and $27.7 million committed pursuant to letters of credit. Excluding letters of credit, we had approximately $377.3 million available to draw under our senior unsecured credit facility at December 31, 2003.

For 2003, operating activities provided net cash of $4.3 million, a $114.2 million improvement from the $109.9 million used in operations in 2002. We receive net cash proceeds from the sale of homes, tower units, amenity memberships and marina slips and mortgage loans originated by our mortgage banking operations. In addition, we receive cash proceeds from providing realty brokerage, title, property management and construction management services to our customers. We used cash in 2003 to acquire net inventory additions related to single- and multi-family home inventories that are under contract for delivery during the next six to twelve months, land acquisitions of approximately $66.0 million, land improvements, amenity development activities, and additions to 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.

Cash flows from operating activities were reduced by the $31.7 million net increase in contracts receivable 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 six months as four 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% to 2% of firm contacts have resulted in cancellation or default. Future defaults may limit our ability to deliver units from backlog and collect contract receivables upon the completion of towers under construction.

For 2003, $73.8 million in cash was used in investing activities compared to $61.8 million used in 2002. Investing activities in 2003 primarily included $52.9 million of net additions to property and equipment, $13.4 million of net additions to mortgage notes receivable and $6.9 million of net contributions to joint ventures. The net additions to property and equipment related to the development of a retail office building in the Palm Beach region and development of two golf courses and club facilities in our Southwest region. The net additions to mortgage notes receivable were related to our financing of several land sales offset by cash collections of $11.8 million. We expect to collect the mortgage notes in 2004 and 2005. Contributions to joint ventures were primarily related to our timeshare venture which completed the first phase of development in 2003 and is in the sales and marketing phase. 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.

For 2003, financing activities provided net cash of $114.7 million. The net cash inflows were primarily related to the $113.7 million of net proceeds from debt issuance, $12.7 million of net advances on community development district obligations offset by $13.7 million of cash used to repurchase shares of common stock.

During 2003, we issued $125.0 million in senior subordinated debt and $125.0 million of contingent convertible senior subordinated debt in order to increase our liquidity and fix our long term interest rate exposure. The net proceeds were used primarily to repay the outstanding balance of the senior unsecured credit facility. Under the $125.0 million senior subordinated indenture agreement, we are required to maintain certain financial and operational covenants that may limit the Company’s and its subsidiaries ability to incur additional debt, pay dividends, repurchase capital stock and make investment acquisitions. As defined in our senior subordinated bond indentures, in order to incur additional debt, we are required to maintain a minimum coverage ratio of 2.0 to 1.0 and maximum debt to tangible net worth ratio of 3.0 to 1.0. Additionally, under the indentures, if our consolidated tangible net worth declines below $125.0 million for two consecutive quarters we would be required to offer to purchase 10% of the aggregate principal of the notes originally issued.

In April 2003, at the direction of the Board of Directors, the Company completed the repurchase of 1.0 million shares of common stock in a private transaction for an aggregate purchase price of $13.0 million.

Our senior unsecured credit facility provides for a $350.0 million revolving loan, which may increase to $425.0 million if certain conditions are met. In June 2003, the commitment amount was increased to $405.0 million. Under the senior unsecured credit facility we are required to maintain an adequate borrowing base. At December 31, 2003, the borrowing base calculation was in excess of the commitment amount of $405.0 million. The principal financial covenants include the following, as defined in the senior unsecured credit facility: (1) Minimum Adjusted Tangible Net Worth may not be less than $575.0 million plus 50% of positive net income after July 1, 2002 plus 75% of the aggregate proceeds of equity offerings after the effective date, (2) Total Debt to Adjusted Tangible Net Worth cannot exceed 2.25 to 1.0, and (3) EBITDA to Fixed Charges cannot be less than 2.0 to 1.

Our wholly owned finance subsidiary, Financial Resources Group, Inc., increased the borrowing capacity on its bank warehouse facility to $30.0 million in 2002, which was reduced to $23.0 million in April 2003. The warehouse facility requires the maintenance of an adequate collateral borrowing base and the maintenance of certain financial covenants including a maximum leverage ratio, as defined, of 15.0 to 1. As of December 31, 2003, $23.0 million was available for borrowing under the warehouse facility.

As of December 31, 2003, we had construction loans in place for 6 towers with $45.3 million outstanding and $290.7 million of remaining undrawn commitments which expire from 2004 to 2005. To the extent we meet certain loan requirements, these commitments will be drawn to fund tower construction costs in the future. We released seven towers for reservation during 2003. Through December 31, 2003, we commenced construction of five towers.

At December 31, 2003, we were in compliance with all of the covenants, limitations and restrictions in regards to our senior subordinated notes, senior unsecured credit facility, tower construction loans and warehouse credit facility. See the footnotes to the consolidated financial statements for additional disclosures related to our debt.

The following table summarizes our payments under debt, operating lease and purchase obligations as of December 31, 2003:

		(1) Land purchase obligations represent the land option contracts accrued under FIN 46. See footnote 2 to the consolidated financial statements.

		(2) 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, 2003, excluding land under option which was recorded in accordance with FIN 46, we had option contracts aggregating $65.1 million, net of deposits, to acquire approximately 509 acres of land. Our contractual obligation with respect to the option contracts is limited to the forfeiture of the related non-refundable deposits and/or letters of credit.

		(3) Other purchase obligations principally consist of contractual obligations with third-party vendors to provide goods and services to our homebuilding segment

Our cash requirements for 2004 are projected to increase as we continue to develop new communities and fund our growth. We anticipate moderate usage of our existing senior unsecured credit facility to fund land acquisitions, land development, homebuilding and amenity development. 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. 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, 2003, 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.

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 and land purchase obligations. At December 31, 2003, we had approximately $27.7 million in letters of credit outstanding which expire during 2004. 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 $66.5 million at December 31, 2003, are typically outstanding over a period of approximately one to five years.

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.

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.

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.

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; the Company’s ability to obtain necessary permits and approvals for the development of its lands; the Company’s ability to raise debt and equity capital and grow its operations on a profitable basis; the Company’s ability to pay principal and interest on its current and future debts; the 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 or unexpected outcomes to pending 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.

We are subject to interest rate risk on the variable rate portion of our debt. We hedged a portion of our exposure to changes in interest rates by entering into an interest rate swap agreement to lock in a fixed interest rate. The swap agreement effectively fixes the variable rate cash flows on approximately $50.0 million of our variable rate debt and expires February 2004. The swap agreement has been designated as a cash flow hedge and is reflected at fair value in the consolidated balance sheet.

The following table sets forth, as of December 31, 2003, 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 amount and weighted average interest rate of our interest rate swap.

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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 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.

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

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

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

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

WCI Communities, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)

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

WCI Communities, Inc.
Consolidated Statements of Cash Flows (Continued)
(In thousands)

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