UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
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 001-31255
WCI COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE | 59-2857021 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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 þ No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes þ No ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares outstanding of the issuer’s common stock, as of October 28, 2005, was 44,359,674.
EXPLANATORY NOTE
This amendment No. 1 on Form 10-Q/A to WCI Communities, Inc.’s (the “Company”) quarterly report on Form 10-Q for the three and nine months ended September 30, 2005, initially filed with the Securities and Exchange Commission (“SEC”) on November 1, 2005 (“Original Filing”), is being filed to correct a typographical error in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the section titled “Land Sales”. The land sales gross margin for the nine months ended September 30, 2005 should be revised to $77,221 from $163,293. Other than the correction of the typographical error, the information contained in this Form 10-Q/A is unchanged from the Company’s Original Filing with the SEC.
WCI COMMUNITIES, INC.
Form 10-Q/A
For the Quarter Ended September 30, 2005
| Page No. | ||||
| Part I. | Financial Information | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
| Part II. | Other Information | |||
| Item 6. | Exhibits | 31 | ||
| SIGNATURE | ||||
| Certifications | ||||
i
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Three and nine months ended September 30, 2005 compared to three and nine months ended September 30, 2004
Overview
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
| (Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||
Total revenues | $ | 621,887 | $ | 472,229 | $ | 1,758,406 | $ | 1,069,561 | ||||
Total gross margin (a) | $ | 132,448 | $ | 109,855 | $ | 414,094 | $ | 252,009 | ||||
Net income | $ | 39,710 | $ | 28,670 | $ | 131,590 | $ | 61,334 | ||||
| a) | Our gross margin includes overhead expenses directly associated with each line of business. See the condensed consolidated statements of income for the details of other components that are part of 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 and real estate services. For the three and nine months ended September 30, 2005, 90.9% and 83.4% of revenue and 95.5% and 76.9% of gross margin, respectively, were derived from our combined homebuilding operations.
For the three and nine months, total revenues increased 31.7% and 64.4% and gross margin increased 20.6% and 64.3%, respectively. The increase in revenues for the respective periods was driven primarily by the expansion of our traditional and tower homebuilding divisions and to a lesser extent, growth in real estate services and amenity operations. The traditional homebuilding division benefited from the continued contributions from the Northeast U.S. and Mid-Atlantic U.S. markets and delivery of homes from our increased backlog. The increase in tower revenues for the respective periods was primarily a result of an increase in the number of towers recognizing percentage-of-completion revenues compared to last year. The real estate services division continues to deliver revenue growth from increased transaction volume and higher average sales price per transaction.
Net income for the three months increased 38.5% primarily as the result of gross margin growth contributed by our traditional homebuilding and real estate services divisions, and was partially offset by our revised capitalized interest calculations, by an increase in selling, general and administrative expenses (SG&A) and expenses related to early repayment of debt.
Revenues, gross margin and net income for the nine months were positively impacted by the sale of approximately 500 acres of undeveloped land in Jupiter, Florida for $100.0 million in May 2005. This transaction produced approximately $77.0 million of gross margin.
Effective April 1, 2005, we revised our calculations of capitalized interest with respect to our traditional homebuilding and tower inventories, as prescribed by Statement of Financial Accounting Standards No. 34,Capitalization of Interest Cost. We now include the underlying developed land costs in our calculation of capitalized interest for tower residences under construction, and include the underlying developed land costs and in-process homebuilding costs in our calculation of capitalized interest for traditional homes under construction. Capitalization ceases upon substantial completion of each home or tower. The effect of the revision had an immaterial impact on net income for the nine months ended September 30, 2005.
On October 24, 2005, Hurricane Wilma disrupted business in a portion of the our Florida market, including Miami, Fort Lauderdale, West Palm Beach/Boca Ration, Marco Island, Naples and Fort Myers/Cape Coral areas. Wesustained damage to landscaping at our amenities facilities, properties under development, traditional homes under construction and certain towers. We also experienced incremental costs resulting from storm preparation, cleanup and business interruption. Although we have insurance in place that covers damage to our properties and related losses including certain losses caused by the interruption of business, we believe the effects of the storm could have a significant impact on our earnings for the fourth quarter and full year results. We are in process of documenting all estimated losses and preparing claims for submission to our insurance carrier.
The timing of our new traditional homebuilding and tower product releases is expected to affect order growth comparisons over the next two quarters. Obtaining permits in certain locations continues to take longer than it has historically. New WCI communities in Florida and the Northeast, originally scheduled to open in the latter half of 2005, are now expected to commence selling in the first half of 2006. This timing change, along with the continued limiting of releases in certain existing communities are expected to cause orders in the fourth and first quarters of 2006 to potentially fall below year-ago levels. However, as new communities and towers open for sale in 2006, orders are expected to grow substantially, with order growth for all of 2006 expected to range from 20% to 40% on both a unit and dollar basis.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Homebuilding
Traditional homebuilding
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| (Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Revenues | $ | 300,439 | $ | 166,116 | $ | 740,726 | $ | 373,495 | ||||||||
Gross margin | $ | 59,449 | $ | 26,681 | $ | 128,954 | $ | 67,430 | ||||||||
Gross margin percentage | 19.8 | % | 16.1 | % | 17.4 | % | 18.1 | % | ||||||||
Homes closed (units) | 582 | 367 | 1,487 | 872 | ||||||||||||
Average selling price per home closed | $ | 516 | $ | 453 | $ | 498 | $ | 428 | ||||||||
Lot revenues | $ | 10,763 | $ | 10,615 | $ | 29,695 | $ | 12,754 | ||||||||
Net new orders for homes (units) | 423 | 585 | 1,583 | 1,947 | ||||||||||||
Contract values of new orders | $ | 279,374 | $ | 261,226 | $ | 1,030,915 | $ | 815,027 | ||||||||
Average selling price per new order | $ | 660 | $ | 447 | $ | 651 | $ | 419 | ||||||||
| As of September 30, | ||||||
| 2005 | 2004 | |||||
Backlog (units) | 2,344 | 2,189 | ||||
Backlog contract values | $ | 1,451,746 | $ | 1,046,213 | ||
Average sales price in backlog | $ | 619 | $ | 478 | ||
Active selling communities at end of the period | 29 | 20 | ||||
Traditional homebuilding revenues increased 80.9% and 98.3% for the three and nine months, respectively. Home deliveries increased 58.6% and 70.5% for the three and nine months, respectively. The increase in revenues and home deliveries for the respective periods was primarily due to the Florida market results. The Florida market contributed $94.9 million and $248.6 million to the increase in revenues and delivered an incremental 165 units and 454 units for the three and nine months, respectively. The increase in Florida revenues and home deliveries for the nine months was primarily due to construction delays caused by the hurricanes and permitting delays in late 2004 that pushed approximately 260 homes into the first nine months of 2005 and other increases in the delivery of homes from our increased backlog. The Northeast U.S. and Mid-Atlantic U.S. markets contributed $39.4 million and $118.7 million to the increase in revenues and an incremental 50 units and 161 units to home deliveries for the three and nine months, respectively.
Revenues were also favorably impacted in both periods due to the 13.9% and 16.4% increase in the average selling price per home closed, resulting from closing a larger portion of homes in our higher priced communities. In addition to a 16.9% and 14.8% increase contributed by the Florida market for the three and nine months, respectively, the increase for both periods was positively impacted by the $1.1 million average selling price per home closed achieved in the Mid-Atlantic U.S. market. The Northeast U.S. market experienced a 17.5% and 16.4% decrease in the average selling per home closed for both periods primarily due to the change in mix of products sold.
Lot revenues increased $148.0 thousand and $16.9 million for the three and nine months, respectively. The increase in lot revenues for the nine months was primarily due to the initial sales from one of our communities located in the West Coast Florida region and an increase in lot sales from existing communities located in the Florida market. From time to time, we sell certain lots for custom homes directly to prospective residents or custom homebuilders as part of our strategy to serve a broad range of customers.
The increase in the gross margin percentage for the three months ended was primarily due to the deceased amortization of the inventory step-up from our Northeast U.S. market, offset by increased interest included in cost of sales. The amortization of the inventory step-up decreased gross margin by approximately 140 and 300 basis points for the three months ended September 30, 2005 and 2004, respectively.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Gross margin percentage in the Florida market increased to 21.6% from 20.9% for the three months ended primarily due to the change in product mix delivered and improved operational efficiency. Gross margin percentage in the Florida market decreased to 18.3% from 21.2% for the nine months ended primarily due to higher raw material and labor costs where home deliveries were delayed. Due to construction commencement delays experienced in 2004 due to hurricanes and longer than expected permitting processes, the timeframe from initial customer contract to home delivery increased by up to as much as 12 to 18 months. Consequently home sales prices were under contract a year or longer before delivery and our actual costs were higher than estimated at the time of home sale. These effects and the purchase price accounting treatment of our Northeast U.S. and Mid-Atlantic U.S. homebuilding acquisitions, suppressed gross margins in the first nine months of 2005. Traditional homebuilding gross margins for the full year are expected to be in the 18% - 19.0% range.
Contract values of new orders increased 26.5% for the nine months due in part to the 70 units and $116.6 million of new orders contributed by the Northeast U.S. and Mid-Atlantic U.S. markets and a 55.4% increase in the average sales price. Contract values of new orders in the Florida market increased 10.5% and 13.3% for the three and nine months, respectively. Net new order units for the three and nine months decreased 162 units and 364 units, respectively, primarily due to reduced sales in our Florida communities offset by initial sales from the Mid-Atlantic U.S. market. The decrease in new order units in the Florida market for the three and nine months was primarily due to the Company’s decision to temporarily reduce product offerings in certain communities where strong demand coupled with lot supply constraints caused by permitting have extended backlog into 2006. The new orders for the nine months ended was also impacted by the sell-out of three communities offset by the addition of one new community in the Florida market.
The 38.8% increase in backlog contract values reflects a 7.1% increase in backlog units combined with a 29.5% increase in the average sales price of homes under contract to $619 thousand in 2005 compared to $478 thousand in 2004. The increase in backlog contract values and units can be attributed to increased homebuilding sales and price increases for the nine months ended combined with closing delays in the Florida market and, to a lesser extent, the contributions from the Northeast U.S. and Mid-Atlantic U.S. markets, which had a combined 356 units and $299.2 million in backlog at September 30, 2005.
We employ a wide range of sales incentives to market our homes to prospective buyers. These incentives are an important aspect of our sales and marketing of homes, and we may rely on them more heavily in promoting communities experiencing weaker demand or to promote the sale of completed unsold homes. Without the use of these marketing incentives, our ability to sell homes could be adversely impacted.
21
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Tower homebuilding
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| (Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Revenues | $ | 254,023 | $ | 241,101 | $ | 696,436 | $ | 524,977 | ||||||||
Gross margin | $ | 63,839 | $ | 75,505 | $ | 181,257 | $ | 161,651 | ||||||||
Gross margin percentage | 25.1 | % | 31.3 | % | 26.0 | % | 30.8 | % | ||||||||
Net new orders (units) | 333 | 421 | 844 | 770 | ||||||||||||
Contract values of new orders | $ | 387,625 | $ | 428,496 | $ | 897,756 | $ | 841,055 | ||||||||
Average selling price per new order | $ | 1,164 | $ | 1,018 | $ | 1,064 | $ | 1,092 | ||||||||
Towers under construction recognizing revenue | 18 | 11 | 20 | 16 | ||||||||||||
| As of September 30, | ||||||||
| 2005 | 2004 | |||||||
Cumulative contracts (units) | 1,915 | 1,172 | ||||||
Cumulative contract values | $ | 2,153,769 | $ | 1,374,398 | ||||
Less: Cumulative revenues recognized | (1,097,385 | ) | (546,187 | ) | ||||
Backlog contract values | $ | 1,056,384 | $ | 828,211 | ||||
Average sales price in backlog | $ | 1,125 | 1,173 | |||||
Tower revenues increased 5.4% and 32.7% for the three and nine months ended, respectively. The increase for the respective periods was primarily due to the increase in the number of towers recognizing percentage-of-completion revenues, offset by a decrease in revenue from the sale of completed tower units. The three months ended September 30, 2004 benefited from the initial revenue recognition of one tower which contributed approximately $104.2 million compared to $37.6 million for same period in 2005.
The increase percentage-of-completion revenues in the respective periods was primarily related to the increase in the number of buildings under construction recognizing revenue and the progression of completion in towers that were under construction in the comparable periods. The Tower division began construction on 12 towers during 2004 while only six towers were completed in 2004. During the quarter ended September 30, 2005, two new towers began recognizing percentage-of-completion revenues and two towers were completed. Revenue from the sale of completed tower units decreased for the three and nine months primarily due to the reduction in the number of completed tower units in inventory available for sale. At the beginning of January 2004 and 2005, we had 139 and 84 completed tower units in inventory available for sale, respectively.
The decrease in gross margin percentage for the three and nine months was primarily due to: (1) a shift in the mix of towers under percentage-of-completion toward a greater proportion of moderately-priced, lower margin towers, (2) the reduced margin from the closings of completed tower units which averaged approximately 25.1% and 29.8% margin in 2005 compared to 32.9% and 35.3% for the respective periods in 2004, (3) revisions to our interest capitalization calculations for our tower inventories and (4) a $2.0 million net charge to cost of sales in the three months ended due to reductions in estimated gross margin associated with towers under construction and/or closed out during the quarter. The comparable periods in 2004 benefited from the realization of $3.9 million and $11.5 million in construction and sales incentive cost savings on certain completed buildings. Tower homebuilding gross margins for the full year are expected to be in the 25% - 27% range.
The contract values of new orders decreased 9.5% and increased 6.7% for the three and nine months, respectively. The decrease in contract values of new orders for the three months was primarily due to the decrease in finished inventory available for sale and a decline in the number of towers converting to contract. During the three months ended September 30, 2005, we converted two towers containing 212 units compared to
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
five towers containing 626 units in the comparable prior year period. The increase in contract values of new orders for the nine months was primarily due to the conversion to firm contract of 514 units in nine towers with a sales value of $540.6 million compared to 537 units with a sales value of $490.8 million converted to contract in the first 9 months of 2004. The average selling price per new order increased 14.3% for the three months primarily due to the conversion of firm contracts in higher priced, premium located towers, during the three months ended.
The 27.6% increase in backlog contract values was due to the 56.7% increase in cumulative contract values offset by a 100.9% increase in cumulative revenues recognized. The increase in cumulative contract values for the period September 30, 2004 to September 30, 2005 was primarily due to the $1.0 billion increase in net new contract orders offset by the delivery of $251.7 million in contracts associated with completed towers. The $551.2 million increase in cumulative revenues recognized relates to the progression of percentage-of-completion in new and existing towers offset by the reduction in cumulative contracts associated with the towers that were completed and delivered to customers during the period September 30, 2004 to September 30, 2005.
Real estate services
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| (Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Revenues | $ | 40,905 | $ | 33,325 | $ | 128,513 | $ | 103,597 | ||||||||
Gross margin | $ | 6,648 | $ | 4,716 | $ | 22,180 | $ | 16,644 | ||||||||
Gross margin percentage | 16.3 | % | 14.2 | % | 17.3 | % | 16.1 | % | ||||||||
Real estate services revenues, including real estate brokerage, mortgage banking, and title operations for the three and nine months increased 22.7% and 24.1%, respectively, 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 4.5% to 2,848 closings from 2,726 in the third quarter of 2004, and 11.5% to 9,306 from 8,344 for the nine months ended September 30, 2004. The increase in the number of transactions is due to the opening of new offices, the relocation of existing offices to larger locations, sales office acquisitions, and general growth in the real estate market. Compared to the three and nine months in 2004, the average brokerage transaction price increased 21.7% and 16.7%, respectively, due to favorable real estate market conditions. The increase in gross margin percentage for the respective periods was primarily due to increased efficiency in the real estate brokerage and mortgage banking operations.
We anticipate revenue growth in real estate services to continue through 2005 due to the increased transaction volume and higher average sales prices within the Prudential Florida WCI Realty brokerage business.
Amenity membership and operations
| For three months ended September 30, | For nine months ended September 30, | |||||||||||||||
| (Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Revenues | $ | 13,038 | $ | 10,245 | $ | 56,814 | $ | 37,295 | ||||||||
Gross margin | $ | (1,544 | ) | $ | (2,604 | ) | $ | (3,821 | ) | $ | (1,879 | ) | ||||
Gross margin percentage | (11.8 | %) | (25.4 | %) | (6.7 | %) | (5.0 | %) | ||||||||
Total amenity membership and operations revenues increased 27.3% and 52.3% for the three and nine months, respectively.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
Equity membership revenues for the three and nine months increased $1.1 million and $13.5 million, respectively. The increase for the three months ended was primarily due to the sale of luxury equity memberships from two of our clubs located in the East Coast Florida region. The increase for the nine months ended is primarily due to the conversion from the deposit method to the cost recovery method at two equity membership clubs located in the East Coast Florida region and the final sale of equity memberships at an existing club located in the West Coast Florida region. In general, the sale of luxury equity memberships continue to be affected by reduced demand in the West Coast Florida region.
Membership dues and amenity service revenues increased $1.5 million and $5.8 million for the three and nine months, respectively, due to the initial operations of new amenity facilities located throughout the Florida market and increasing annual membership fees.
The improvement in gross margin percentage for the three months was primarily due to improved operational efficiency in new and existing amenity facilities. The decline in the gross margin percentage for the nine months was primarily due to the increased overhead costs associated with operating new and existing amenity facilities.
Amenity gross margins continue to be adversely impacted by the slow demand for luxury equity memberships and increased start-up deficits associated with new amenity operations.
Land sales
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| (Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Revenues | $ | 899 | $ | 9,230 | $ | 100,899 | $ | 12,916 | ||||||||
Gross margin | $ | 635 | $ | 2,422 | $ | 77,221 | $ | 4,105 | ||||||||
Gross margin percentage | 70.6 | % | 26.2 | % | 76.5 | % | 31.8 | % | ||||||||
In May 2005, we closed on the sale of a 506 acre parcel in Jupiter, Florida for $100.0 million in revenue and $76.6 million in gross margin resulting in an increase in land sales revenues and gross margin for the nine months ended. Land sales are expected to continue in the future but will vary significantly in amount and timing.
Other income and expense
| For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
| (Dollars in thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Equity in losses from joint ventures | $ | 1,923 | $ | 1,339 | $ | 827 | $ | 613 | ||||||||
Other income | (964 | ) | (4,534 | ) | (4,917 | ) | (21,161 | ) | ||||||||
Hurricane (recoveries), losses net | (503 | ) | 5,580 | (2,364 | ) | 5,580 | ||||||||||
Selling, general and administrative expense, including real estate taxes | 48,636 | 46,730 | 163,293 | 128,285 | ||||||||||||
Interest expense, net | 9,255 | 11,670 | 25,016 | 30,205 | ||||||||||||
Other income for the three and nine months ended decreased $3.6 million and $16.2 million, respectively, primarily due to the completion of collections from the sale of our Bighorn investment. We collected and recognized $18.2 million in the first nine months of 2004 from the sale of Bighorn. The remaining unpaid commitment of $1.8 million was collected in January 2005.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
During the nine months ended September 30, 2005, we recorded an additional $3.6 million in insurance recoveries primarily related to damages caused by Hurricane Ivan to our properties near Pensacola, Florida offset by additional costs of $1.2 million related to repairs associated with damages caused by the four hurricanes in the third quarter of 2004. The insurance carrier is in the process of reviewing claims documentation. The final insurance recoveries cannot be determined until the claim review is completed.
Selling, general and administrative expenses, including real estate taxes, (SG&A) increased 4.1% to $48.6 million and 27.3% to $163.3 million for the three and nine months, respectively. General and administrative (G&A) costs increased 2.7% and 37.6% for the respective periods. The increase for the nine months ended was primarily due to the increase in salaries and benefits related to increased staffing associated with the continued expansion of our business, the addition of our Northeast and Mid-Atlantic U.S. operations, an increase in estimated incentive compensation for achievement of Company performance goals, as well as a $2.5 million retirement bonus paid to our retiring Chief Executive Officer that was approved by the Board of Directors and expensed in February 2005. Marketing expenditures increased 11.4% and 20.6% for the respective periods due to the increase in advertising in new and existing communities, an increase in costs associated with opening sales offices, incremental costs from operating existing sales offices and the addition of our Northeast and Mid-Atlantic U.S. operations. As a percentage of total revenues, SG&A for the three months ended decreased to 7.8% in 2005 from 9.9% in 2004 and for the nine months ended decreased to 9.3% from 12.0% for the same period in 2004.
For the three and nine months ended, interest expense, net of capitalization, decreased 20.7% and 17.2%, respectively, due to a greater increase in interest capitalized than in interest incurred. The 28.8% and 27.5% increase in interest incurred was primarily a result of the increase in the weighted average outstanding debt balance for the respective periods in 2005 as compared to 2004. The increase in overall debt was primarily related to increased development activities and acquisitions. The increase in interest capitalized is primarily the result of the revised calculations of capitalized interest related to our traditional homebuilding and tower inventories effective April 1, 2005.
Liquidity and capital resources
We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We finance our land acquisitions, land improvements, homebuilding, development and construction activities from internally generated funds, credit agreements with financial institutions and other debt. As of September 30, 2005, we had $72.3 million of cash and cash equivalents and approximately $601.3 million available to draw under our senior unsecured credit facility.
We use cash flows from operations to build inventory additions, land acquisitions, land improvements and amenity facilities. Including land acquisitions, net additions to real estate inventories were approximately $144.3 million for the nine months ended September 30, 2005. During the first nine months of the year, we acquired approximately $130.0 million in additional land. We expect real estate inventories to increase as we are currently searching for and negotiating to obtain control of additional land for future communities through land purchases, land purchase options or developed lot takedown option arrangements.
For the nine months, our cash flows from operations were impacted by a $333.4 million increase in contracts receivable reflecting the increase in percentage-of-completion revenue recognition in tower units under contract that are now being constructed offset by the cash proceeds received from closing two towers during the third quarter. We expect to collect a portion of the remaining contracts receivable during the next three to six months as six tower closings are planned to occur, allowing delivery of units to residents. If we do not collect these contract receivables due to various contingencies, including buyer defaults, we may receive less cash than we expect. Historically, approximately 1% of non-cancelable 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.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
For the year, approximately $136.6 million of cash was used in investing activities for the purchase of Renaissance Housing Corporation and $38.1 million to develop golf courses and club facilities and acquire corporate assets.
For 2005, financing activities provided net cash from borrowings on the senior unsecured credit facility, the revolving credit construction loan agreement, other project loans, the issuance of $200.0 million in senior subordinated notes in March 2005 and $100.0 million of junior subordinated notes in September 2005. The proceeds from each bond issuance were used to repay the outstanding balance of the senior unsecured credit facility. During the nine months ended September 30, 2005, we used $48.4 million and $30.9 million in cash to repurchase a portion of our outstanding 10 5/8% senior subordinated notes and one million shares of our common stock, respectively. We recognized expenses related to the debt redemption of approximately $4.3 million, which primarily represented the purchase premium above par value, which we paid. In October 2005, the Company’s Board of Directors authorized the repurchase of up to five million shares of our common stock from time to time based upon certain parameters.
We utilize a revolving credit construction loan to fund tower development activities. In September 2005, we entered into an amended and restated revolving credit construction loan agreement that replaces the previous $290.0 million revolving tower construction loan. The loan agreement provides for a $390.0 million revolving tower construction loan, which may increase to $440.0 million if certain conditions are met. The loan matures December 31, 2008, subject to extensions at the Company’s request, not to exceed four years from the existing maturity date, and allows for prepayments and additional borrowings to the maximum amount, provided an adequate borrowing base is maintained. At September 30, 2005 approximately $115.6 million was outstanding on this facility. In addition, the Company has a construction loan for another tower which was repaid as of September 30, 2005 and extinguished in October 2005.
We utilize a senior unsecured revolving credit facility primarily to fund land acquisitions, land improvements and home construction and for general corporate purposes. In September 2005 the revolving loan commitment was increased to $875.0 million. At September 30, 2005, approximately $273.7 million was outstanding on this loan.
Our wholly owned finance subsidiary, Financial Resources Group, Inc., utilizes a $23.0 million bank warehouse facility to fund mortgage loan originations. As of September 30, 2005, approximately $19.4 million was available for borrowing under the warehouse facility.
At September 30, 2005, we were in compliance with all of the covenants, limitations and restrictions in regards to our senior subordinated notes, senior unsecured credit facility, revolving credit construction loan facility, warehouse credit facility and junior subordinated notes.
OFF-BALANCE SHEET ARRANGEMENTS
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 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 September 30, 2005, one of our unconsolidated joint ventures had obtained
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
third-party financing of $20.5 million, of which $15.7 million is outstanding. Under the terms of the agreement, we provide a guarantee for our pro-rata share of the amount outstanding. Although the majority of our unconsolidated partnership and joint ventures do not have outstanding debt, the partners may agree to incur debt to fund partnership and joint venture operations in the future.
In the normal course of business, we enter into contractual arrangements to acquire developed and undeveloped land parcels and lots. As of September 30, 2005, our evaluation of our contractual arrangements to acquire land and lots did not indicate any material variable interests with VIEs and we did not have any material lot purchase arrangements in which we were compelled to exercise the option. As of September 30, 2005, we had land and lot option contracts aggregating $279.9 million net of deposits, to acquire approximately 3,600 acres of land. Our contractual obligation with respect to the land and lot option contracts is limited to the forfeiture of the related non-refundable deposits any other payments which may be due to the landowner and other pre-development costs, which totaled $35.4 million at September 30, 2005.
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 September 30, 2005, we had approximately $39.5 million in letters of credit outstanding. 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 $115.0 million at September 30, 2005, are typically outstanding over a period of approximately one to five years.
CRITICAL ACCOUNTING POLICIES
The Company’s critical accounting policies are those related to (1) revenue recognition related to traditional and tower 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, 2004.
INFLATION
The homebuilding industry is affected by inflation as it relates to the cost to acquire land, land improvements, homebuilding raw materials and subcontractor labor. The continued growth in the homebuilding and other construction related industries and increases in the cost of petroleum has resulted in increased costs to obtain certain building materials, including lumber, drywall, steel, concrete and asphalt. We compete with other builders and real estate developers for raw materials and labor. On certain occasions we have experienced vendors limiting the supply of raw materials which slows the land, home and tower development process and requires us to obtain raw materials from other vendors, typically at higher prices. Unless these increased costs are recovered through higher sales prices, our gross margins would be impacted. Because the sales price of our homes in backlog are fixed at the time a buyer enters into a contract to acquire a home, any inflation in the costs of raw materials and labor costs greater than those anticipated may result in lower gross margins.
In general, if interest rates continue to increase, construction and financing costs could increase, which would result in lower future gross margins. Increases in home mortgage interest rates may make it more difficult for our customers to qualify for home mortgage loans, potentially decreasing home sales revenue.
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 flows 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.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) |
These risks and uncertainties include the Company’s ability to compete in real estate markets where we conduct business; the availability and cost of land in desirable areas in our geographic markets and our ability to expand successfully into those areas; the Company’s ability to obtain necessary permits and approvals for the development of its lands; the availability of capital to the Company and our ability to effect growth strategies successfully; the Company’s ability to pay principal and interest on its current and future debts; the Company’s ability to maintain or increase historical revenues and profit margins; our ability to offer sales incentives at levels consistent with our past practices; the Company’s ability to collect contracts receivable and close homes in backlog, particularly related to buyers purchasing homes as investments; availability of labor and materials and material increases in labor and material costs; increases in interest rates and availability of mortgage financing; the level of consumer confidence; adverse legislation or regulations; unanticipated litigation or legal proceedings; natural disasters; and changes in general economic, real estate and business conditions. 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 as a result of new information, future events or otherwise.
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PART II. OTHER INFORMATION
| Item 6. | Exhibits |
(a) Exhibits
| 31.1 | Rule 13a-14(a) certification by Jerry L. Starkey, Chief Executive Officer.** | |
| 31.2 | Rule 13a-14(a) certification by James P. Dietz,, Chief Financial Officer.** | |
| ** | Filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WCI COMMUNITIES, INC. | ||||
Date: November 1, 2005 | /s/ JAMES P. DIETZ | |||
| James P. Dietz | ||||
| Senior Vice President and | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||||
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