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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2003

OR

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

For the transition period from _______ to _______

Commission file number 1-9186

WCI COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

     
     Delaware   59-2857021
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

24301 Walden Center Drive
Bonita Springs, Florida 34134
(Address of principal executive offices) (Zip Code)
(239) 947-2600
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

           Yes[X]  No[  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

           Yes[X]  No[  ]

The number of shares outstanding of the issuer’s common stock, as of July 25, 2003 was 43,509,105.

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Shareholders
Item 6. Exhibits and Reports on Form 8-K
EX-3.2: AMENDED AND RESTATED BY-LAWS
EX-31.1 CERTIFICATION OF EXECUTIVE OFFICER
EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

Table of Contents

WCI COMMUNITIES, INC.

Form 10-Q

For the Quarter Ended June 30, 2003

INDEX

         
        Page No.
Part I.   Financial Information    
Item 1.   Financial Statements    
    Condensed Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002 		  3
    Condensed Consolidated Statements of Income (Unaudited)
For the Three and Six Months Ended June 30, 2003 and 2002 		  4
    Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
For the Six Months Ended June 30, 2003 and 2002 		  5
    Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2003 and 2002 		  6
    Notes to Condensed Consolidated Financial Statements (Unaudited)
   7
Item 2.   Management’s Discussion and Analysis of
Financial Condition and Results of Operations 		  18
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   25
Item 4.   Controls and Procedures   25
Part II.   Other Information    
Item 1.   Legal Proceedings   26
Item 4.   Submission of Matters to a Vote of Shareholders   26
Item 6.   Exhibits and Reports on Form 8-K   26
SIGNATURE    
Certifications    

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

                     
        June 30,   December 31,
        2003   2002
       
 
        (Unaudited)        
Assets
                
Cash and cash equivalents
   $ 38,675     $ 49,789  
Restricted cash
     24,603       20,577  
Contracts receivable
     431,134       515,021  
Mortgage notes and accounts receivable
     99,509       84,598  
Real estate inventories
     1,154,417       977,524  
Property and equipment
     151,155       127,152  
Other assets
     93,798       92,779  
Goodwill
     28,411       28,388  
Other intangible assets
     7,833       8,064  
 
    
     
 
   
Total assets
   $ 2,029,535     $ 1,903,892  
 
    
     
 
Liabilities and Shareholders’ Equity
                
Accounts payable and other liabilities
   $ 285,359     $ 297,224  
Customer deposits
     161,231       183,540  
Community development district obligations
     54,464       29,684  
Senior unsecured credit facility
     171,975       44,935  
Mortgages and notes payable
     121,953       130,624  
Senior subordinated notes
     554,128       554,397  
 
    
     
 
 
     1,349,110       1,240,404  
 
    
     
 
Commitments and contingencies
               
Shareholders’ equity:
                
 
Common stock, $.01 par value; 100,000 shares authorized, 44,641 and 44,548 shares issued, respectively
     446       445  
 
Additional paid-in capital
     278,266       277,912  
 
Retained earnings
     416,413       387,555  
 
Treasury stock, at cost, 1,132 and 132 shares, respectively
     (13,795 )     (795 )
 
Accumulated other comprehensive loss
     (905 )     (1,629 )
 
    
     
 
   
Total shareholders’ equity
     680,425       663,488  
 
    
     
 
   
Total liabilities and shareholders’ equity
   $ 2,029,535     $ 1,903,892  
 
    
     
 

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

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

                                     
        For the three months ended   For the six months ended
        June 30,   June 30,
       
 
        2003   2002   2003   2002
       
 
 
 
Revenues
                                
Homebuilding
   $ 245,220     $ 253,920     $ 432,808     $ 442,041  
Amenity membership and operations
     16,142       15,202       32,103       35,298  
Real estate services, land sales and other
     51,159       28,631       86,266       51,857  
 
    
     
     
     
 
   
Total revenues
     312,521       297,753       551,177       529,196  
 
    
     
     
     
 
Cost of Sales
                                
Homebuilding
     178,127       165,316       307,160       287,064  
Amenity membership and operations
     13,598       12,741       27,138       27,552  
Real estate services, land sales and other
     39,992       23,560       63,723       40,342  
 
    
     
     
     
 
   
Total costs of sales
     231,717       201,617       398,021       354,958  
 
    
     
     
     
 
   
Contribution margin
     80,804       96,136       153,156       174,238  
 
    
     
     
     
 
Other Expenses
                                
Selling, general, administrative and other
     32,861       27,445       67,561       59,325  
Interest expense, net
     14,047       10,325       26,928       21,186  
Real estate taxes, net
     3,338       2,050       6,219       4,446  
Depreciation
     2,540       1,998       4,971       3,911  
Expenses related to early repayment of debt
     —       3,282       —       3,282  
Amortization of intangible assets
     116       120       231       237  
 
    
     
     
     
 
   
Total other expenses
     52,902       45,220       105,910       92,387  
 
    
     
     
     
 
Income before income taxes
     27,902       50,916       47,246       81,851  
Income tax expense
     (10,881 )     (19,816 )     (18,388 )     (31,891 )
 
    
     
     
     
 
Net income
   $ 17,021     $ 31,100     $ 28,858     $ 49,960  
 
    
     
     
     
 
Earnings per share:
                                
 
Basic
   $ .39     $ .70     $ .65     $ 1.21  
 
Diluted
   $ .38     $ .67     $ .64     $ 1.16  
Weighted average number of shares
                               
 
Basic
     43,866       44,317       44,148       41,248  
 
Diluted
     45,317       46,289       45,213       42,965  

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

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WCI COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(unaudited)

                                                           
                                      Accumulated                
      Common Stock   Additional           Other                
     
  Paid-in   Retained   Comprehensive   Treasury        
      Shares   Amount   Capital   Earnings   Loss   Stock   Total
     
 
 
 
 
 
 
Balance at December 31, 2002
     44,416     $ 445     $ 277,912     $ 387,555     $ (1,629 )   $ (795 )   $ 663,488  
Exercise of stock options
     93       1       565       —       —       —       566  
Settlement and amortization of stock-based compensation
     47       —       (211 )     —       —       734       523  
Purchase of treasury stock
     (1,047 )     —       —       —       —       (13,734 )     (13,734 )
Comprehensive income:
                                                        
 
Net income
     —       —       —       28,858       —       —       28,858  
 
Change in fair value of derivatives, net of tax
     —       —       —       —       724       —       724  
 
                                                    
 
Total comprehensive income
                                                     29,582  
 
    
     
     
     
     
     
     
 
Balance at June 30, 2003
     43,509     $ 446     $ 278,266     $ 416,413     $ (905 )   $ (13,795 )   $ 680,425  
 
    
     
     
     
     
     
     
 
                                                           
                                      Accumulated                
      Common Stock   Additional           Other                
     
  Paid-in   Retained   Comprehensive   Treasury        
      Shares   Amount   Capital   Earnings   Loss   Stock   Total
     
 
 
 
 
 
 
Balance at December 31, 2001
     36,382     $ 365     $ 139,193     $ 282,739     $ (2,457 )   $ (795 )   $ 419,045  
Issuance of common stock, net
     7,935       79       138,122       —       —       —       138,201  
Comprehensive income:
                                                        
 
Net income
     —       —       —       49,960       —       —       49,960  
 
Change in fair value of derivatives, net of tax
     —       —       —       —       321               321  
 
                                                    
 
Total comprehensive income
                                                     50,281  
 
    
     
     
     
     
     
     
 
Balance at June 30, 2002
     44,317     $ 444     $ 277,315     $ 332,699     $ (2,136 )   $ (795 )   $ 607,527  
 
    
     
     
     
     
     
     
 

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

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

                       
          For the six months ended
          June 30,
         
          2003   2002
         
 
Cash flows from operating activities:
                
 
Net income
   $ 28,858     $ 49,960  
 
Adjustments to reconcile net income to net cash used in operating activities:
                
   
Expenses related to early repayment of debt
     —       3,282  
   
Deferred income taxes
     (9,368 )     5,891  
   
Depreciation and amortization
     6,355       5,765  
   
Earnings from investments in joint ventures
     (1,063 )     (1,376 )
 
Changes in assets and liabilities:
                
   
Restricted cash
     (4,026 )     (1,752 )
   
Contracts receivable
     83,887       (221,149 )
   
Mortgages held for sale and accounts receivable
     1,567       16,685  
   
Real estate inventories
     (156,543 )     (123,791 )
   
Other assets
     4,131       (4,799 )
   
Accounts payable and other liabilities
     (21,967 )     (931 )
   
Customer deposits
     (22,309 )     52,848  
 
 
    
     
 
     
Net cash used in operating activities
     (90,478 )     (219,367 )
 
 
    
     
 
Cash flows from investing activities:
                
 
Additions to mortgage notes receivable
     (20,860 )     (888 )
 
Proceeds from repayment of mortgage notes receivable
     4,382       2,161  
 
Additions to property and equipment, net
     (28,952 )     (15,422 )
 
Contributions to investments in joint ventures, net
     (5,710 )     (1,145 )
 
 
    
     
 
     
Net cash used in investing activities
     (51,140 )     (15,294 )
 
 
    
     
 
Cash flows from financing activities:
                
 
Repayments on senior secured credit facility term loan
     —       (250,000 )
 
Net borrowings on senior unsecured credit facility
     127,040       146,460  
 
Proceeds from borrowings on mortgages and notes payable
     109,017       53,826  
 
Repayment of mortgages and notes payable
     (117,688 )     (77,257 )
 
Proceeds from issuance of senior subordinated notes
     —       200,000  
 
Debt issue costs
     —       (6,869 )
 
Net advances (payments) on community development district obligations
     24,780       (118 )
 
Net proceeds from issuance of common stock
     —       138,201  
 
Proceeds from exercise of stock options
     566       —  
 
Purchase of treasury stock
     (13,734 )     —  
 
Settlement of stock-based compensation and other
     523       —  
 
 
    
     
 
     
Net cash provided by financing activities
     130,504       204,243  
 
 
    
     
 
Net decrease in cash and cash equivalents
     (11,114 )     (30,418 )
Cash and cash equivalents at beginning of year
     49,789       57,993  
 
 
    
     
 
Cash and cash equivalents at end of period
   $ 38,675     $ 27,575  
 
 
    
     
 
Non-cash activity:
                
 
Notes payable in connection with land acquisition
   $ —     $ 10,000  
 
Commitment liability in connection with land acquisitions
   $ 20,194     $ —  

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

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WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands, except per share data)

1.   Basis of Presentation
 
    The condensed consolidated financial statements and notes of WCI Communities, Inc. (the Company) as of June 30, 2003 and for the three and six months ended June 30, 2003 and 2002 have been prepared by management without audit, pursuant to rules and regulations of the Securities and Exchange Commission and should be read in conjunction with the December 31, 2002 audited financial statements contained in the Company’s Annual Report on Form 10-K for the year then ended. In the opinion of management, all normal, recurring adjustments necessary for the fair presentation of such financial information have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.
 
    The Company historically has experienced and expects to continue to experience variability in quarterly results. The consolidated statements of income for the three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year.
 
2.   New Accounting Pronouncements
 
    Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) 145. 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. As a result of the adoption of SFAS 145, the Company reclassified $3,282 for the three and six months ended June 30, 2002 to expenses related to early repayment of debt. A tax benefit of $1,266 was reclassified to income tax expense for the same periods.
 
    In January 2003, Financial Accounting Standards Board (FASB) issued Interpretation 46, Consolidation of Variable Interest Entities (VIEs), an interpretation of ARB 51. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. This interpretation applies currently to VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. If applicable, it applies to the Company’s interim period beginning July 1, 2003 for VIEs in which the Company holds a variable interest that it acquired before February 1, 2003.
 
    Based on the provisions of FIN 46, the Company has concluded that whenever it options land or lots from an entity and pays a non-refundable deposit, a VIE may be created. Under FIN 46, the Company has been deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur. For each VIE created, the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46. If the Company is deemed to be the primary beneficiary of the VIE, the entity would be consolidated on the Company’s balance sheet.
 
    Although the Company does not believe the full adoption of FIN 46 will have a material effect on it’s financial statements, the Company cannot make any definitive conclusion until it completes its evaluation.

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WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands, except per share data)

    In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Management does not expect the adoption of SFAS 149 to have a material effect on the Company’s financial position or results of operations.
 
    In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise will be effective for the Company’s interim period beginning July 1, 2003. Management does not expect the adoption of SFAS 150 to have a material effect on the Company’s financial position or results of operations.
 
3.   Segment Information
 
    The Company operates in four principal business segments: Mid- and High-rise Homebuilding; Single- and Multi-family Homebuilding, which includes sales of lots; Amenity Membership and Operations; and Real Estate Services, which includes real estate brokerage, mortgage banking, title and property management operations. Land sales and other has been disclosed for purposes of additional analysis. Asset information by business segment is not presented, since the Company does not prepare such information.

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WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands, except per share data)

Three months ended June 30, 2003

                                                         
    Mid- and   Single- and Multi-family   Amenity   Real   Land Sales        
    High-rise  
  Membership   Estate   and   Segment
    Homes   Homes   Lots   and Operations   Services   Other   Totals
   
 
 
 
 
 
 
Revenues
   $ 133,751     $ 110,733     $ 736     $ 16,142     $ 29,744     $ 20,026     $ 311,132  
Interest income
     —       —       —       —       —       1,389       1,389  
Contribution margin
     41,434       25,502       157       2,544       5,230       5,937       80,804  

Three months ended June 30, 2002

                                                         
    Mid- and   Single- and Multi-family   Amenity   Real   Land Sales        
    High-rise  
  Membership   Estate   and   Segment
    Homes   Homes   Lots   and Operations   Services   Other   Totals
   
 
 
 
 
 
 
Revenues
   $ 173,639     $ 78,046     $ 2,235     $ 15,202     $ 24,753     $ 3,549     $ 297,424  
Interest income
     —       —       —       —       —       329       329  
Contribution margin
     69,583       17,685       1,336       2,461       3,579       1,492       96,136  

Six months ended June 30, 2003

                                                         
    Mid- and   Single- and Multi-family   Amenity   Real   Land Sales        
    High-rise  
  Membership   Estate   and   Segment
    Homes   Homes   Lots   and Operations   Services   Other   Totals
   
 
 
 
 
 
 
Revenues
   $ 254,256     $ 177,599     $ 953     $ 32,103     $ 54,864     $ 29,308     $ 549,083  
Interest income
     —       —       —       —       —       2,094       2,094  
Contribution margin
     80,242       45,298       108       4,965       8,766       13,777       153,156  

Six months ended June 30, 2002

                                                         
    Mid- and   Single- and Multi-family   Amenity   Real   Land Sales        
    High-rise  
  Membership   Estate   and   Segment
    Homes   Homes   Lots   and Operations   Services   Other   Totals
   
 
 
 
 
 
 
Revenues
   $ 287,655     $ 148,836     $ 5,550     $ 35,298     $ 43,546     $ 7,297     $ 528,182  
Interest income
     —       —       —       —       —       1,014       1,014  
Contribution margin
     114,863       36,843       3,271       7,746       5,755       5,760       174,238  

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WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands, except per share data)

    A reconciliation of total segment contribution margin to consolidated income before income taxes for the three months and six months ended June 30, 2003 and 2002 is as follows:

                                   
      For the three months ended   For the six months ended
      June 30,   June 30,
     
 
      2003   2002   2003   2002
     
 
 
 
Segment contribution margin
   $ 80,804     $ 96,136     $ 153,156     $ 174,238  
Corporate overhead and costs
     (36,199 )     (32,777 )     (73,780 )     (67,053 )
Interest expense, net
     (14,047 )     (10,325 )     (26,928 )     (21,186 )
Depreciation and amortization
     (2,656 )     (2,118 )     (5,202 )     (4,148 )
 
    
     
     
     
 
 
Income before income taxes
   $ 27,902     $ 50,916     $ 47,246     $ 81,851  
 
    
     
     
     
 

4.   Real Estate Inventories
 
    Real estate inventories are summarized as follows:

                   
      June 30,   December 31
      2003   2002
     
 
Land and land improvements
   $ 490,718     $ 467,120  
Investments in amenities
     58,301       42,968  
Work in progress:
                
 
Towers
     192,072       155,315  
 
Homes
     239,422       179,203  
Completed inventories:
                
 
Towers
     118,147       86,217  
 
Homes
     55,757       46,701  
 
    
     
 
 
   $ 1,154,417     $ 977,524  
 
    
     
 

5.   Capitalized Interest
 
    The following table is a summary of capitalized and amortized interest:

                                 
    For the three months ended   For the six months ended
    June 30,   June 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Total interest incurred
   $ 17,570     $ 16,474     $ 34,455     $ 31,541  
Debt issue cost amortization
     711       878       1,422       1,886  
Interest amortized
     6,463       3,573       10,390       6,902  
Interest capitalized
     (10,697 )     (10,600 )     (19,339 )     (19,143 )
 
    
     
     
     
 
Interest expense, net
   $ 14,047     $ 10,325     $ 26,928     $ 21,186  
 
    
     
     
     
 

10

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WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands, except per share data)

6.   Shareholders’ Equity

    In April 2003, the Board of Directors approved the repurchase of up to 1,000 shares of the Company’s common stock. Pursuant to this authorization, 1,000 unregistered common shares were repurchased during the second quarter 2003 in a private transaction for an aggregate purchase price of $13,000.
 
    In addition to its common stock, the Company has 100,000 shares authorized of series common stock, $.01 par value per share, and 100,000 shares authorized of preferred stock, $.01 par value per share. No shares of series common stock or preferred stock are issued and outstanding.
 
    Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of stock options and grants. For the second quarter of 2003, 738 stock options were excluded from the computation of diluted earnings per share due to their antidilutive effect.
 
    Information pertaining to the calculation of earnings per share is as follows:

                                 
    For the three months ended   For the six months ended
    June 30,   June 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Basic weighted average shares
     43,866       44,317       44,148       41,248  
Dilutive stock options and grants
     1,451       1,972       1,065       1,717  
 
    
     
     
     
 
Diluted weighted average shares
     45,317       46,289       45,213       42,965  
 
    
     
     
     
 

7.   Stock-Based Compensation
 
    The Company has elected to use APB 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation costs are recorded upon issuance or exercise of stock options. Had the Company elected to recognize compensation expense under the fair value method under SFAS 123 “Accounting for Stock Based Compensation,” pro forma net income would be as follows:

                                     
        For the three months ended   For the six months ended
        June 30,   June 30,
       
 
        2003   2002   2003   2002
       
 
 
 
Net income:
                                
 
As reported
   $ 17,021     $ 31,100     $ 28,858     $ 49,960  
   
Less: Total stock-based compensation expense, net of tax
     (305 )     (220 )     (609 )     (440 )
         
     
     
     
 
 
Pro forma
   $ 16,716     $ 30,880     $ 28,249     $ 49,520  
         
     
     
     
 
Earnings per share:
                                
 
As reported
                                
   
Basic
   $ .39     $ .70     $ .65     $ 1.21  
   
Diluted
   $ .38     $ .67     $ .64     $ 1.16  
 
Pro forma
                                
   
Basic
   $ .38     $ .70     $ .64     $ 1.20  
   
Diluted
   $ .37     $ .67     $ .62     $ 1.15  

    These pro forma amounts may not be representative of the effect on pro forma net income in future years, since the estimated fair value of stock options is amortized over the vesting period and additional options may be granted in future years.

11

Table of Contents

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands, except per share data)

8.   Debt
 
    The Company’s senior unsecured credit facility provides for a $350,000 revolving loan, which may increase to $425,000 if certain conditions are met. In June 2003, the commitment amount was increased to $405,000.
 
    In June 2003, the Company amended one of its tower construction loans to substitute a new tower for a completed project, decrease the interest rate by 25 basis points and extend the maturity date to June 2005. The loan is collateralized by first mortgages on the tower properties and interest is payable monthly in arrears based on LIBOR plus 200 basis points or the prime rate.
 
9.   Comprehensive Income
 
    The following table presents the components of comprehensive income:

                                 
    For the three months ended   For the six months ended
    June 30,   June 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Net income
   $ 17,021     $ 31,100     $ 28,858     $ 49,960  
Change in fair value of derivatives, net of tax
     320       (384 )     724       321  
 
    
     
     
     
 
Comprehensive income
   $ 17,341     $ 30,716     $ 29,582     $ 50,281  
 
    
     
     
     
 

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

12

Table of Contents

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands)

CONDENSED CONSOLIDATING BALANCE SHEETS

                                   
      June 30, 2003
     
      WCI                        
      Communities,   Guarantor   Eliminating        
      Inc.   Subsidiaries   Entries   Consolidated
     
 
 
 
Assets
                                
Cash and cash equivalents
   $ 26,834     $ 11,841     $ —     $ 38,675  
Restricted cash
     402       24,201       —       24,603  
Contracts receivable
     196,787       234,347       —       431,134  
Mortgage notes and accounts receivable
     28,021       83,006       (11,518 )     99,509  
Real estate inventories
     807,357       347,060       —       1,154,417  
Property and equipment
     53,917       97,238       —       151,155  
Investment in guarantor subsidiaries
     364,730       —       (364,730 )     —  
Other assets
     222,777       77,410       (170,145 )     130,042  
 
    
     
     
     
 
 
Total assets
   $ 1,700,825     $ 875,103     $ (546,393 )   $ 2,029,535  
 
    
     
     
     
 
Liabilities and Shareholders’ Equity
                                
Accounts payable and other liabilities
   $ 221,977     $ 449,255     $ (170,178 )   $ 501,054  
Senior unsecured credit facility
     171,975       —       —       171,975  
Mortgages and notes payable
     72,320       61,118       (11,485 )     121,953  
Senior subordinated notes
     554,128       —       —       554,128  
 
    
     
     
     
 
 
     1,020,400       510,373       (181,663 )     1,349,110  
Shareholders’ equity
     680,425       364,730       (364,730 )     680,425  
 
    
     
     
     
 
 
Total liabilities and shareholders’ equity
   $ 1,700,825     $ 875,103     $ (546,393 )   $ 2,029,535  
 
    
     
     
     
 
                                   
      December 31, 2002
     
      WCI                        
      Communities,   Guarantor   Eliminating        
      Inc.   Subsidiaries   Entries   Consolidated
     
 
 
 
Assets
                                
Cash and cash equivalents
   $ 40,127     $ 9,662     $ —     $ 49,789  
Restricted cash
     940       19,637       —       20,577  
Contracts receivable
     227,227       287,794       —       515,021  
Mortgage notes and accounts receivable
     15,048       71,540       (1,990 )     84,598  
Real estate inventories
     558,403       419,121       —       977,524  
Property and equipment
     47,403       79,749       —       127,152  
Investment in guarantor subsidiaries
     323,527       —       (323,527 )     —  
Other assets
     315,368       71,776       (257,913 )     129,231  
       
     
     
     
 
 
Total assets
   $ 1,528,043     $ 959,279     $ (583,430 )   $ 1,903,892  
       
     
     
     
 
Liabilities and Shareholders’ Equity
                                
Accounts payable and other liabilities
   $ 214,423     $ 554,128     $ (258,103 )   $ 510,448  
Senior unsecured credit facility
     44,935       —       —       44,935  
Mortgages and notes payable
     50,800       81,624       (1,800 )     130,624  
Senior subordinated notes
     554,397       —       —       554,397  
       
     
     
     
 
 
     864,555       635,752       (259,903 )     1,240,404  
       
     
     
     
 
Shareholders’ equity
     663,488       323,527       (323,527 )     663,488  
       
     
     
     
 
 
Total liabilities and shareholders’ equity
   $ 1,528,043     $ 959,279     $ (583,430 )   $ 1,903,892  
       
     
     
     
 

13

Table of Contents

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

                                 
    For the three months ended June 30, 2003
   
    WCI                        
    Communities,   Guarantor   Eliminating        
    Inc.   Subsidiaries   Entries   Consolidated
   
 
 
 
Total revenues
   $ 146,387     $ 166,163     $ (29 )   $ 312,521  
Total cost of sales
     131,688       100,029       —       231,717  
 
    
     
     
     
 
Contribution margin
     14,699       66,134       (29 )     80,804  
Total other expenses
     26,225       26,706       (29 )     52,902  
 
    
     
     
     
 
(Loss) income before income taxes and equity in income of guarantor subsidiaries
     (11,526 )     39,428       —       27,902  
Income tax benefit (expense)
     4,549       (15,430 )     —       (10,881 )
Equity in income of guarantor subsidiaries, net of tax
     23,998       —       (23,998 )     —  
 
    
     
     
     
 
Net income
   $ 17,021     $ 23,998     $ (23,998 )   $ 17,021  
 
    
     
     
     
 
                                 
    For the three months ended June 30, 2002
   
    WCI                        
    Communities,   Guarantor   Eliminating        
    Inc.   Subsidiaries   Entries   Consolidated
   
 
 
 
Total revenues
   $ 131,652     $ 166,141     $ (40 )   $ 297,753  
Total cost of sales
     90,898       110,719       —       201,617  
 
    
     
     
     
 
Contribution margin
     40,754       55,422       (40 )     96,136  
Total other expenses
     37,397       7,863       (40 )     45,220  
 
    
     
     
     
 
Income before income taxes and equity in income of guarantor subsidiaries
     3,357       47,559       —       50,916  
Income tax expense
     (900 )     (18,916 )     —       (19,816 )
Equity in income of guarantor subsidiaries, net of tax
     28,643       —       (28,643 )     —  
 
    
     
     
     
 
Net income
   $ 31,100     $ 28,643     $ (28,643 )   $ 31,100  
 
    
     
     
     
 

14

Table of Contents

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

                                 
    For the six months ended June 30, 2003
   
    WCI                        
    Communities,   Guarantor   Eliminating        
    Inc.   Subsidiaries   Entries   Consolidated
   
 
 
 
Total revenues
   $ 247,575     $ 303,651     $ (49 )   $ 551,177  
Total cost of sales
     203,791       194,230       —       398,021  
 
    
     
     
     
 
Contribution margin
     43,784       109,421       (49 )     153,156  
Total other expenses
     68,938       37,021       (49 )     105,910  
 
    
     
     
     
 
(Loss) income before income taxes and equity in income of guarantor subsidiaries
     (25,154 )     72,400       —       47,246  
Income tax benefit (expense)
     9,828       (28,216 )     —       (18,388 )
Equity in income of guarantor subsidiaries, net of tax
     44,184       —       (44,184 )     —  
 
    
     
     
     
 
Net income
   $ 28,858     $ 44,184     $ (44,184 )   $ 28,858  
 
    
     
     
     
 
                                 
    For the six months ended June 30, 2002
   
    WCI                        
    Communities,   Guarantor   Eliminating        
    Inc.   Subsidiaries   Entries   Consolidated
   
 
 
 
Total revenues
   $ 270,281     $ 258,955     $ (40 )   $ 529,196  
Total cost of sales
     178,013       176,945       —       354,958  
 
    
     
     
     
 
Contribution margin
     92,268       82,010       (40 )     174,238  
Total other expenses
     78,513       13,914       (40 )     92,387  
 
    
     
     
     
 
Income before income taxes and equity in income of guarantor subsidiaries
     13,755       68,096       —       81,851  
Income tax expense
     (5,246 )     (26,645 )     —       (31,891 )
Equity in income of guarantor subsidiaries, net of tax
     41,451       —       (41,451 )     —  
 
    
     
     
     
 
Net income
   $ 49,960     $ 41,451     $ (41,451 )   $ 49,960  
 
    
     
     
     
 

15

Table of Contents

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

                                       
          For the six months ended June 30, 2003
         
          WCI                        
          Communities,   Guarantor   Eliminating        
          Inc.   Subsidiaries   Entries   Consolidated
         
 
 
 
Cash flows from operating activities:
                                
 
Net income
   $ 28,858     $ 44,184     $ (44,184 )   $ 28,858  
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                                
   
Deferred income taxes
     (9,230 )     (14 )     (124 )     (9,368 )
   
Depreciation and amortization
     3,484       2,871       —       6,355  
   
Earnings from investments in joint ventures
     696       (1,759 )     —       (1,063 )
   
Equity in earnings of guarantor subsidiaries
     (44,184 )     —       44,184       —  
   
Distributions from parent (contributions to guarantor subsidiaries), net
     2,981       (2,981 )     —       —  
 
Changes in assets and liabilities:
                                
   
Contracts and accounts receivable
     25,871       50,055       9,528       85,454  
   
Real estate inventories
     (228,604 )     72,061       —       (156,543 )
   
Other assets
     89,115       (1,242 )     (87,768 )     105  
   
Accounts payable and other liabilities
     (9,077 )     (123,248 )     88,049       (44,276 )
 
 
    
     
     
     
 
     
Net cash (used in) provided by operating activities
     (140,090 )     39,927       9,685       (90,478 )
 
 
    
     
     
     
 
Cash flows from investing activities:
                                
 
Proceeds from mortgages and notes receivable, net
     (8,404 )     (8,074 )     —       (16,478 )
 
Additions to property and equipment, net
     (8,823 )     (20,129 )     —       (28,952 )
 
Distributions from (contributions to) investments in joint ventures, net
     1,718       (7,428 )     —       (5,710 )
 
 
    
     
     
     
 
     
Net cash used in investing activities
     (15,509 )     (35,631 )     —       (51,140 )
 
 
    
     
     
     
 
Cash flows from financing activities:
                                
 
Net borrowings on senior unsecured credit facility
     127,040       —       —       127,040  
 
Net borrowings (repayments) on mortgages and notes payable
     21,520       (20,506 )     (9,685 )     (8,671 )
 
Other
     (6,254 )     18,389       —       12,135  
 
 
    
     
     
     
 
     
Net cash provided by (used in) financing activities
     142,306       (2,117 )     (9,685 )     130,504  
 
 
    
     
     
     
 
Net (decrease) increase in cash and cash equivalents
     (13,293 )     2,179       —       (11,114 )
Cash and cash equivalents at beginning of year
     40,127       9,662       —       49,789  
 
 
    
     
     
     
 
Cash and cash equivalents at end of period
   $ 26,834     $ 11,841     $ —     $ 38,675  
 
 
    
     
     
     
 

16

Table of Contents

WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
(In thousands)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

                                       
          For the six months ended June 30, 2002
         
          WCI                        
          Communities,   Guarantor   Eliminating        
          Inc.   Subsidiaries   Entries   Consolidated
         
 
 
 
Cash flows from operating activities:
                                
 
Net income
   $ 49,960     $ 41,451     $ (41,451 )   $ 49,960  
 
Adjustments to reconcile net income to net cash used in operating activities:
                                
   
Expenses related to early repayment of debt
     2,483       799       —       3,282  
   
Deferred income taxes
     2,274       (7 )     3,624       5,891  
   
Depreciation and amortization
     3,379       2,386       —       5,765  
   
Earnings from investments in joint ventures
     704       (2,080 )     —       (1,376 )
   
Equity in earnings of guarantor subsidiaries
     (41,451 )     —       41,451       —  
   
(Contributions to guarantor subsidiaries) distributions from parent, net
     (2,054 )     2,054       —       —  
 
Changes in assets and liabilities:
                                
   
Contracts and accounts receivable
     (129,964 )     (74,790 )     290       (204,464 )
   
Real estate inventories
     (98,312 )     (25,479 )     —       (123,791 )
   
Other assets
     (66,155 )     (4,527 )     64,131       (6,551 )
   
Accounts payable and other liabilities
     24,205       95,507       (67,795 )     51,917  
 
 
    
     
     
     
 
     
Net cash (used in) provided by operating activities
     (254,931 )     35,314       250       (219,367 )
 
 
    
     
     
     
 
Cash flows from investing activities:
                                
 
Proceeds from repayment of mortgages and notes receivable, net
     673       600       —       1,273  
 
Additions to property and equipment, net
     (1,380 )     (14,042 )     —       (15,422 )
 
Contributions to investment in joint ventures, net
     (101 )     (1,044 )     —       (1,145 )
 
 
    
     
     
     
 
     
Net cash used in investing activities
     (808 )     (14,486 )     —       (15,294 )
 
 
    
     
     
     
 
Cash flows from financing activities:
                                
 
Repayments on senior secured credit facilities
     (250,000 )     —       —       (250,000 )
 
Net borrowings on senior unsecured credit facility
     146,460       —       —       146,460  
 
Net repayments on mortgages and notes payable
     6,526       (29,707 )     (250 )     (23,431 )
 
Proceeds from issuance of senior subordinated notes
     200,000       —       —       200,000  
 
Net proceeds from issuance of common stock
     138,201       —       —       138,201  
 
Other
     (7,143 )     156       —       (6,987 )
 
 
    
     
     
     
 
     
Net cash provided by (used in) financing activities
     234,044       (29,551 )     (250 )     204,243  
 
 
    
     
     
     
 
Net decrease in cash and cash equivalents
     (21,695 )     (8,723 )     —       (30,418 )
Cash and cash equivalents at beginning of year
     45,382       12,611       —       57,993  
 
 
    
     
     
     
 
Cash and cash equivalents at end of period
   $ 23,687     $ 3,888     $ —     $ 27,575  
 
 
    
     
     
     
 

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

Three and six months ended June 30, 2003 compared to three and six months ended June 30, 2002

Overview

                                 
    For the three months ended   For the six months ended
    June 30,   June 30,
   
 
(Dollars in thousands)   2003   2002   2003   2002
   
 
 
 
Total revenues
   $ 312,521     $ 297,753     $ 551,177     $ 529,196  
Total contribution margin
   $ 80,804     $ 96,136     $ 153,156     $ 174,238  
Net income
   $ 17,021     $ 31,100     $ 28,858     $ 49,960  

For the three and six months ended, we achieved a 5.0% and 4.2% increase in revenues, respectively, driven primarily by an increase in the delivery of homebuilding units with a greater average selling price, an increase in the volume of transactions in the real estate services division and increased land sales offset by a decline in tower revenues. Total contribution margin for the respective periods declined primarily due to an anticipated change in the mix of tower units sold toward a greater proportion of lower-priced, lower-margin tower units, offset by an increase in contribution margins from single- and multi-family homebuilding, real estate services and land sales. Net income declined in each period, primarily as a result of the decrease in total contribution margin and the increase in selling, general, administrative and other expenses including interest.

Homebuilding

Single- and multi-family

                                 
    For the three months ended   For the six months ended
    June 30,   June 30,
   
 
(Dollars in thousands)   2003   2002   2003   2002
   
 
 
 
Revenues
   $ 110,733     $ 78,046     $ 177,599     $ 148,836  
Contribution margin
   $ 25,502     $ 17,685     $ 45,298     $ 36,843  
Contribution margin percentage
     23.0 %     22.7 %     25.5 %     24.7 %
Homes closed (units)
     336       247       529       472  
Average selling price per home closed
   $ 330     $ 316     $ 336     $ 315  
Lot revenues
   $ 736     $ 2,235     $ 953     $ 5,550  
Net new orders for homes (units)
     423       519       819       1,016  
Contract values of new orders
   $ 175,344     $ 172,518     $ 355,545     $ 329,183  
Average selling price per new order
   $ 415     $ 332     $ 434     $ 324  
                 
    As of June 30,
   
    2003   2002
   
 
Backlog (units)
     1,159       1,160  
Backlog contract values
   $ 518,394     $ 445,748  
Average sales price of units in backlog
   $ 447     $ 384  
Active selling communities
     13       16  

Revenues increased 41.9% and 19.3% for the three and six months ended, respectively, primarily due to increases in both the number of homes delivered and the average selling price. The increase in deliveries was the result of the initial deliveries occurring in three of our communities located in the Palm Beach, Central and Southwest regions and increased deliveries in our other communities, offset by reduced inventory available in close-out communities. The average selling price per home closed in the respective periods increased as a result of closing a larger proportion of homes in our higher-priced communities. Lot revenues decreased 67.1% and 82.8% for the three and six months, respectively. The decrease for the respective periods was primarily due to the close-out of one community located in our Palm Beach region. For the

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

remainder of 2003, we expect two new communities will begin delivering homes and three communities are expected to close-out.

Contribution margin percentage increased 30 and 80 basis points for the three and six months, respectively, due primarily to a favorable change in the mix of homes delivered, resulting in a higher average price, 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 any significant declines in economic and stock market conditions and softening in the demand for certain new home offerings.

Contract values of new orders increased 1.6% and 8.0% for the three and six months, respectively, due primarily to an increase in the average sales price. The 25.0% and 34.0% increase in the average sales price per new order for the respective periods was primarily due to sales in two recently introduced higher-priced communities and demand for higher-priced homes at certain same store communities. The 16.3% increase in backlog contract values reflects a 16.4% increase in the average sales price of homes under contract to $447,000 in 2003 compared to $384,000 in 2002.

Mid- and high-rise

                                 
    For the three months ended   For the six months ended
    June 30,   June 30,
   
 
(Dollars in thousands)   2003   2002   2003   2002
   
 
 
 
Revenues
   $ 133,751     $ 173,639     $ 254,256     $ 287,655  
Contribution margin
   $ 41,434     $ 69,583     $ 80,242     $ 114,863  
Contribution margin percentage
     31.0 %     40.1 %     31.6 %     39.9 %
Net new orders (units)
     160       68       213       160  
Contract values of new orders
   $ 270,368     $ 95,181     $ 329,702     $ 189,174  
Average selling price per new order
   $ 1,690     $ 1,400     $ 1,548     $ 1,182  
Towers under construction recognizing revenue
     13       14       15       15  
                 
    As of June 30,
   
    2003   2002
   
 
Cumulative contracts (units)
     728       711  
Cumulative contract values
   $ 887,203     $ 995,269  
Less: Cumulative revenues recognized
     (434,380 )     (620,906 )
 
    
     
 
Backlog contract values
   $ 452,823     $ 374,363  
 
    
     
 
Average sales price of units in backlog
   $ 1,219     $ 1,400  

Revenues decreased 23.0% and 11.6% for the three and six months ended, respectively, due primarily to the decline in the amount of percentage completion revenue recognized in towers that reported revenues in both periods and differences between years in the timing of initial revenue recognition on towers commencing construction. The decline in the amount of percentage completion revenues will continue to be impacted by six towers that completed and closed in the first or second quarter of 2003 and recognized revenues during the six months ended June 30, 2002. In 2002, one luxury tower containing a total of 144 sold units reported approximately $64.5 million of initial revenues in the second quarter compared to $38.7 million that the same tower reported during the second quarter of 2003.

Contribution margin percentage for the three and six months ended declined to 31.0% and 31.6% from 40.1% and 39.9% for the same periods in 2002, respectively. In addition to the net $1.8 million increase to our reserve for contract defaults for the six months ended 2003, the decline in the contribution margin percentage was primarily due to an anticipated change in the mix of units sold and in backlog toward lower-priced, lower-margin units and the use of selective incentives to increase sales.

Contract values of new orders for the three and six months ended increased 184.1% and 74.3%, respectively, due primarily to the conversion to firm contract of 104 tower units with an average selling price of $2.0

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

million in the Veracruz tower located on the Southwest coast of Florida. Our ability to sell tower units in the future may be adversely impacted by market conditions that have slowed absorption of higher priced units.

The increase in backlog contract values was due primarily to the Veracruz tower contract conversion offset by reductions in both cumulative contract values and cumulative revenues recognized in the towers under construction, which reflects the recent completion and delivery of units in six towers. The decrease in cumulative contract values reflects a 12.9% decrease in the average sales price of units in backlog.

Amenity membership and operations

                                 
    For the three months ended   For the six months ended
    June 30,   June 30,
   
 
(Dollars in thousands)   2003   2002   2003   2002
   
 
 
 
Equity membership and marina slip revenues
   $ 7,465     $ 5,698     $ 13,137     $ 13,133  
Membership dues and amenity service revenues
   $ 8,677     $ 9,504     $ 18,966     $ 22,165  
Total amenity contribution margin
   $ 2,544     $ 2,461     $ 4,965     $ 7,746  
Amenity contribution margin percentage
     15.8 %     16.2 %     15.5 %     21.9 %

Equity membership and marina slip revenues increased 31.0% for the three months ended. The increase was primarily due to the bulk sale of all remaining equity memberships at the Deering Bay Club located in the Southeast region in 2003 and the decrease in available marina slips due to the sell-out of slips at our Gulf Harbour community in 2002. Membership dues and amenity operations revenues decreased 8.7% and 14.4% for the three and six months ended, respectively. The decrease in the respective periods was primarily due to the turnover of two clubs located in the Southwest region to their members offset by increased revenues from several new club facilities located in the Southwest and Central regions.

The decrease in amenity contribution margin to 15.5% for the six months ended was primarily due to the 2002 sell-out of high-margin marina slips sales at our Gulf Harbour community offset by the increase in sales of marina slips at our Jupiter Yacht Club community and bulk sale of high-margin equity memberships at our Deering Bay club.

Future amenity contribution margins may be adversely impacted by the reduced availability of marina slips, recent slowing absorption of equity memberships, increased start-up deficits associated with new amenity operations and general market conditions.

Real estate services, land sales and other

                                   
      For the three months ended   For the six months ended
      June 30,   June 30,
     
 
(Dollars in thousands)   2003   2002   2003   2002
   
 
 
 
Real Estate Services:
                                
 
Revenues
   $ 29,744     $ 24,753     $ 54,864     $ 43,546  
 
Contribution margin
   $ 5,230     $ 3,579     $ 8,766     $ 5,755  
 
Contribution margin percentage
     17.6 %     14.5 %     16.0 %     13.2 %
Land Sales:
                                
 
Revenues
   $ 19,345     $ 2,952     $ 26,311     $ 3,777  
 
Contribution margin
   $ 3,869     $ 580     $ 8,690     $ 1,244  
 
Contribution margin percentage
     20.0 %     19.6 %     33.0 %     32.9 %
Other revenues
   $ 2,070     $ 926     $ 5,091     $ 4,534  

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

Real Estate Services

Real estate services revenues, including real estate brokerage, mortgage banking, title and property management operations increased 20.2% and 26.0% for the three and six months ended, respectively. The increase in the respective periods was primarily due 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. Prudential Florida WCI Realty brokerage transaction volume increased 14.7% to 2,672 from 2,329 in the second quarter of 2002, and 17.7% to 4,781 from 4,063 for the six months ended 2002. The average Prudential Florida WCI Realty brokerage transaction price increased 5.5% to $289,000 from $274,000 in the second quarter of 2002, and 12.2% to $294,000 from $262,000 for the six months ended 2002. The increase in contribution margin for the respective periods was primarily due to the growth in volume of higher-margin transactions in the mortgage banking and title businesses and prudent cost management.

Land Sales

The increase in revenues for the three and six months ended was primarily attributable to the sale of non-strategic parcels located in our Southeast and Palm Beach regions. Land sales contribution margins for the three and six months ended June 30, 2003 were $9.1 million and $14.0 million respectively, before adjustments of $5.3 million impacting both periods for community development district obligations and estimated costs to complete development activities in two closed out non-homebuilding communities.

Other Revenues

The increase in other revenues was primarily related to the increase in interest earned from deposits and other investments offset by the decline in equity in earnings of joint ventures and fees earned from providing development management services to our joint ventures and other third party entities.

Interest expense, net of capitalization

Interest expense, net of capitalization, increased 36.0% and 27.1% for the three and six months ended, respectively. The increase in the respective periods was primarily due to the increase in interest incurred and amortization of previously capitalized interest. Interest incurred increased primarily as a result of the increase in the average outstanding balance of debt in the respective periods. Amortization of previously capitalized interest increased 80.9% and 50.5% for the three and six months ended, respectively. The increased amortization of previously capitalized interest was primarily due to the change in percentage of completion for towers recognizing revenue between periods, increased home closings and the mix of land sales in the respective periods.

Selling, general and administrative expenses, including real estate taxes

Selling, general and administrative expenses, including real estate taxes, (SG&A) increased 22.7% and 15.7% for the three and six months ended, respectively. As a percentage of total revenues, SG&A for the three and six months ended increased to 11.6% and 13.4% compared to 9.9% and 12.1% for the same periods in 2002. The increase in the respective periods was primarily due to increased marketing, real estate taxes, wages, benefits, and insurance premiums associated with the growth in our business.

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

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

June 30, 2003, we had cash and cash equivalents of $38.7 million, $233.0 million undrawn under our existing senior credit facility and $21.1 million committed pursuant to letters of credit.

Net cash used in operations declined $128.9 million for the six months ended June 30, 2003, as compared to the same period in 2002. Land acquisitions were approximately $34.0 million for the six months ended June 30, 2003 compared to $52.0 million in 2002. Net real estate 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, unsold tower and traditional homes, land and construction development activities, and land acquisitions. We expect real estate inventories will continue to increase as we are currently developing several master planned communities and towers and negotiating and searching for additional opportunities to obtain control of land for future communities. 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 June 30, 2003, we had non-refundable deposits and/or letters of credits on contracts or options aggregating $94.8 million to acquire approximately 760 acres of land that are expected to yield approximately 3,000 residential units. Of this amount, approximately $20 million of land under option is now under development and has been recorded in inventory and other liabilities.

Contracts receivable decreased 16.3% during the six-month period reflecting the collection of approximately $250.0 million in receivables from delivery of units in six towers completed through June 30, 2003 offset by $166.1 million net increase in receivables related to the increase in the value of tower units under contract that are now being constructed and have met the requirements for percentage of completion revenue recognition. We expect to collect additional receivables during the next three-to-nine months as four towers are planned to be completed, allowing delivery of units to residents. Historically, approximately 1% of firm contacts have resulted in cancellation or default. However, the recent slow down in the luxury tower market may indicate an increase in potential contract defaults for 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 the six months ended June 30, 2003, included $29.0 million of net additions to property and equipment and $16.5 million of net additions to mortgage notes receivable compared to net additions of $15.4 million and net receipts of $1.3 million in the same period in 2002, respectively. We anticipate cash used in investing activities will continue to increase with development of current and future amenity operations.

Financing activities provided cash of $130.5 million for the six months ended June 30, 2003, compared to cash provided of $204.2 million in the same period in 2002. The net cash inflow for the six months ended June 30,2003 was related to net borrowings of $118.4 million and a $24.8 million increase in community development district obligations.

In March 2003, we amended one of our tower construction loans to increase the amount available for borrowing to $101.6 million and extended the maturity date to March 2005. The loan is collateralized by first mortgages on the tower properties and interest is payable monthly in arrears based on LIBOR plus a spread of 185 to 200 basis points or the prime rate.

In June 2003, we amended one of our tower construction loans to substitute a new tower for a completed project, decrease the interest rate by 25 basis points and extend the maturity date to June 2005. The loan is collateralized by first mortgages on the tower properties and interest is payable monthly in arrears based on LIBOR plus 200 basis points or the prime rate.

Our senior 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. The

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

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 June 30, 2003, $5.3 million was available for borrowing under the $23.0 million warehouse facility maintained by our wholly owned finance subsidiary, Financial Resources Group, Inc.

The amount of community development district and improvement district bond obligations issued and outstanding with respect to our communities totaled $157.5 million at June 30, 2003. We have accrued $54.5 million as of June 30, 2003, as our estimate of the amount of bond obligations that we may be required to fund. We guarantee 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 may, subject to limitations under our various debt agreements, use district financing to a greater extent in the future.

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 June 30, 2003, we had construction loans in place for nine towers with $95.0 million outstanding and $406.1 million of remaining undrawn commitments. We released four towers for reservation during the six months ended June 30, 2003 and plan to release two to four additional towers for the remainder of 2003. We expect to begin construction on four towers for the remainder of 2003 and complete and begin the delivery of units to residents in three towers.

CRITICAL ACCOUNTING POLICIES

The Company’s critical accounting policies are those related to (1) revenue recognition related to single- and multi-family and mid- and high-rise homebuilding; (2) contracts receivable; (3) real estate inventories and cost of sales; (4) warranty costs; (5) capitalized interest and real estate taxes; (6) community development district obligations; (7) impairment of long-lived assets; (8) goodwill; and (9) litigation. These policies are more fully described in the notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

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.

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

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

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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to interest rate risk on the variable rate portion of our debt. We 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.

Our Annual Report on Form 10-K for the year ended December 31, 2002 contains information about market risks under “Item 7A. Quantitative and Qualitative Disclosure about Market Risk.”

The following table sets forth, as of June 30, 2003, the Company’s debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market values. In addition, the table sets forth the notional amounts and weighted average interest rate of the Company’s interest rate swap.

                                                                   
                                                              FMV at
      2003   2004   2005   2006   2007   Thereafter   Total   6/30/03
     
 
 
 
 
 
 
 
Debt:
                                                                
 
Fixed rate
   $ —     $ 9,341     $ —     $ —     $ —     $ 550,000     $ 559,341     $ 607,716  
 
Average interest rate
     —       10.08 %     —       —       —       9.96 %     10.03 %        
 
Variable rate
   $ 17,659     $ 41,299     $ 225,629     $ —     $ —     $ —     $ 284,587     $ 284,587  
 
Average interest rate
     3.63 %     3.68 %     3.65 %     —       —       —       3.66 %        
Interest Rate Swaps:
                                                                
 
Variable to fixed
   $ —     $ 50,000     $ —     $ —     $ —     $ —     $ 50,000     $ (1,473 )
 
Average pay rate
     —       5.68 %     —       —       —       —       5.68 %        
 
Average receive rate
     *       *       *       *       *       *       *          

* 90-Day LIBOR

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer evaluated, together with other members of senior management, the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under the Act) as of the end of the quarter ended June 30, 2003. Based on this review, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act, as amended, is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Shareholders

    At the 2003 Annual Meeting of Shareholders of the Company held May 23, 2003, Messrs. Don E. Ackerman and Lawrence L. Landry were re-elected as Class I directors for three-year terms expiring in 2006. The results of voting were as follows:

                         
                    Authority
Nominee   For   Against   Withheld
 
 
 
Don E. Ackerman
     38,204,699       0       24,729  
Lawrence L. Landry
     38,132,930       0       96,498  

    Hilliard M. Eure, III, F. Philip Handy, Alfred Hoffman, Jr., Jerry L. Starkey, Jay Sugarman and Stewart Turley continue as directors.

Item 6. Exhibits and Reports on Form 8-K

     
(a) Exhibits  
     
  3.1 Certificate of Incorporation of WCI Communities, Inc. (1)
     
  3.2 Amended and Restated By-laws of WCI Communities, Inc.
     
  31.1 Rule 13a-14(a) certification by Alfred Hoffman, Jr., Chief Executive Officer.
     
  31.2 Rule 13a-14(a) certification by James P. Dietz, Chief Financial Officer.
     
  32.1* Section 1350 certification by Alfred Hoffman, Jr., Chief Executive Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
  32.2* Section 1350 certification by James P. Dietz, Chief Financial Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

*   Pursuant to Commission Release No. 33-8212, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
 
(1)   Incorporated by reference to the exhibits in the Registration Statement on Form S-4 previously filed by WCI Communities, Inc. (Registration No. 333-87250)
 
(b)   Reports on Form 8-K
 
On May 12, 2003, we filed a current report on Form 8-K, announcing that our Board of Directors has authorized the purchase of up to one million shares of our common stock.
 
On July 10, 2003, we filed a current report on Form 8-K, which included a press release dated July 10, 2003, announcing second quarter new home orders for the quarter ended June 30, 2003.
 
On July 30, 2003, we filed a current report on Form 8-K, which included a press release dated July 30, 2003, announcing our earnings for the second quarter ended June 30, 2003.

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Table of Contents

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
    WCI COMMUNITIES, INC.
     
Date:   July 30, 2003      /s/ James P. Dietz
 
    James P. Dietz
    Senior Vice President and
    Chief Financial Officer
    (Principal Financial and
    Accounting Officer)

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