WCI COMMUNITIES INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2004


[ ]		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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes þ No o

The number of shares outstanding of the issuer’s common stock, as of July 26, 2004, was 44,554,011.

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,
	2004			2003
	(Unaudited)
Assets
Cash and cash equivalents	$	69,591		$	95,005
Restricted cash		45,452			21,696
Contracts receivable		400,861			546,696
Mortgage notes and accounts receivable		76,076			102,953
Real estate inventories		1,496,997			1,105,866
Property and equipment		170,215			168,920
Other assets		133,285			105,972
Goodwill		45,616			28,940
Other intangible assets		7,430			7,625

Total assets	$	2,445,523		$	2,183,673

Liabilities and Shareholders’ Equity
Accounts payable and other liabilities	$	324,444		$	373,953
Customer deposits		153,750			154,183
Community development district obligations		44,423			46,013
Senior unsecured credit facility		87,000			—
Senior subordinated notes		678,590			678,859
Mortgages and notes payable		206,117			46,918
Contingent convertible senior subordinated notes		125,000			125,000

		1,619,324			1,424,926

Minority interests		20,691			—
Commitments and contingencies
Shareholders’ equity:
Common stock, $.01 par value; 100,000 shares authorized, 45,225 and 44,776 shares issued, respectively		452			447
Additional paid-in capital		287,358			279,173
Retained earnings		525,779			493,115
Treasury stock, at cost, 693 and 1,132 shares, respectively		(8,081	)		(13,795	)
Accumulated other comprehensive loss		—			(193	)

Total shareholders’ equity		805,508			758,747

Total liabilities and shareholders’ equity	$	2,445,523		$	2,183,673

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

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,
	2004			2003			2004			2003
Revenues
Homebuilding	$	276,295		$	245,220		$	493,394		$	432,808
Real estate services		43,066			29,934			73,201			55,354
Other		12,658			35,487			30,737			58,414

Total revenues		332,019			310,641			597,332			546,576

Cost of Sales
Homebuilding		204,646			183,726			365,521			317,059
Real estate services		35,275			24,515			61,329			46,102
Other		14,200			30,523			28,328			46,231

Total costs of sales		254,121			238,764			455,178			409,392

Gross margin		77,898			71,877			142,154			137,184

Other Income and Expenses
Equity in losses (earnings) from joint ventures		220			(118	)		(726	)		(1,662	)
Other income		(8,608	)		(1,583	)		(16,626	)		(2,611	)
Selling, general and administrative		39,129			32,861			75,961			67,561
Interest expense, net		10,144			7,405			18,534			16,210
Real estate taxes, net		3,091			2,754			5,594			5,238
Depreciation		3,159			2,540			6,261			4,971
Amortization of intangible assets		121			116			240			231

Income before income taxes and minority interests		30,642			27,902			52,916			47,246
Minority interests		(839	)		—			(839	)		—

Income before income taxes		31,481			27,902			53,755			47,246
Income tax expense		12,365			10,881			21,091			18,388

Net income	$	19,116		$	17,021		$	32,664		$	28,858

Earnings per share:
Basic	$	.43		$	.39		$	.74		$	.65
Diluted	$	.42		$	.38		$	.72		$	.64
Weighted average number of shares:
Basic		44,071			43,866			43,893			44,148
Diluted		45,736			45,317			45,607			45,213

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

WCI COMMUNITIES, INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity
(In thousands)
(unaudited)


									Accumulated
	Common Stock				Additional Paid-in		Retained		Other Comprehensive			Treasury
	Shares		Amount		Capital		Earnings		Loss			Stock			Total
Balance at December 31, 2003		43,644	$	447	$	279,173	$	493,115	$	(193	)	$	(13,795	)	$	758,747
Reissuance of common stock in connection with acquisition		439		—		4,288		—		—			5,712			10,000
Exercise of stock options		424		4		3,212		—		—			—			3,216
Stock-based compensation		25		1		685		—		—			2			688
Comprehensive income:
Net income		—		—		—		32,664		—			—			32,664
Change in fair value of derivatives, net of tax		—		—		—		—		193			—			193

Total comprehensive income		—		—		—		—		—			—			32,857

Balance at June 30, 2004		44,532	$	452	$	287,358	$	525,779	$	—		$	(8,081	)	$	805,508


											Accumulated
	Common Stock					Additional Paid-in			Retained		Other 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
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

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

WCI COMMUNITIES, INC.

Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)


	For the six months ended
	June 30,
	2004			2003
Cash flows from operating activities:
Net income	$	32,664		$	28,858
Adjustments to reconcile net income to net cash used in operating activities:
Deferred income taxes		5,051			(9,368	)
Depreciation and amortization		7,917			6,355
Earnings from investments in joint ventures		(726	)		(1,662	)
Minority interests		(839	)		—
Stock-based compensation		688			523
Changes in assets and liabilities:
Restricted cash		(16,997	)		(4,026	)
Contracts receivable		145,835			83,887
Mortgages held for sale and accounts receivable		23,986			1,567
Real estate inventories		(227,583	)		(151,628	)
Other assets		(21,764	)		4,131
Accounts payable and other liabilities		(68,503	)		(21,967	)
Customer deposits		(5,862	)		(22,309	)

Net cash used in operating activities		(126,133	)		(85,639	)

Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired		(53,517	)		—
Additions to mortgage notes receivable		(1,943	)		(20,860	)
Proceeds from repayment of mortgage notes receivable		6,492			4,382
Additions to property and equipment, net		(24,865	)		(28,952	)
Contributions to investments in joint ventures, net		(580	)		(5,111	)

Net cash used in investing activities		(74,413	)		(50,541	)

Cash flows from financing activities:
Net borrowings on senior unsecured credit facility		87,000			127,040
Proceeds from borrowings on mortgages and notes payable		286,055			109,017
Repayment of mortgages and notes payable		(195,052	)		(117,688	)
Debt issue costs		(2,959	)		—
Advances on community development district obligations		1,430			19,865
Payments on community development district obligations		(1,508	)		—
Distributions to minority interests		(3,050	)		—
Proceeds from exercise of stock options		3,216			566
Purchase of treasury stock		—			(13,734	)

Net cash provided by financing activities		175,132			125,066

Net decrease in cash and cash equivalents		(25,414	)		(11,114	)
Cash and cash equivalents at beginning of year		95,005			49,789

Cash and cash equivalents at end of period	$	69,591		$	38,675

Non-cash activity:
Property and equipment transferred to real estate inventories	$	17,602		$	20,194
Community development district obligations assumed by end user		1,310			1,681
Change in estimated community development district obligations		—			6,596
Issuance of common stock in connection with acquisition		10,000			—

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

WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
(In thousands, except per share data)

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of WCI Communities, Inc. (the Company), its wholly owned subsidiaries and certain joint ventures in which the Company has the ability to exercise control. The equity method of accounting is applied in the accompanying condensed consolidated financial statements with respect to those investments in joint ventures in which the Company has less than a controlling interest. All material intercompany balances and transactions are eliminated in consolidation.

The condensed consolidated financial statements and notes of the Company as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 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, 2003 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. In the three and six months ended June 30, 2003, amortization of previously capitalized interest and real estate taxes has been reclassified from interest expense and real estate tax expense to homebuilding, real estate services and other cost of sales. Equity in earnings from joint ventures and other income have been reclassified from real estate services and other revenues to other income and expenses. Interest income and expense related to mortgage banking has been reclassified from other income and interest expense, respectively, to real estate services net revenue, which is included in real estate services. These reclassifications have no impact on net income.

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, 2004 are not necessarily indicative of the results to be expected for the full year.

2. Stock-Based Compensation

The Company has elected to use APB 25 and related interpretations in accounting for its stock option plans. No compensation costs are recorded upon issuance or exercise of stock options as the options were issued at the current market price of the stock on the date of grant. Had the Company elected to recognize compensation expense under the fair value method under Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock Based Compensation, pro forma net income would be as follows:

WCI COMMUNITIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
(In thousands, except per share data)


	For the three months ended						For the six months ended
	June 30,						June 30,
	2004			2003			2004			2003
Net income:
As reported	$	19,116		$	17,021		$	32,664		$	28,858
Less: Total stock-based compensation expense, net of tax		(610	)		(305	)		(1,221	)		(609	)

Pro forma	$	18,506		$	16,716		$	31,443		$	28,249

Earnings per share:
As reported
Basic	$	.43		$	.39		$	.74		$	.65
Diluted	$	.42		$	.38		$	.72		$	.64
Pro forma
Basic	$	.42		$	.38		$	.72		$	.64
Diluted	$	.41		$	.37		$	.70		$	.63

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.

3. Segment Information

The Company operates in four principal business segments: Tower Homebuilding; Traditional 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 have been disclosed for purposes of additional analysis. The amount of previously capitalized interest included in cost of sales of each segment, thereby reducing segment gross margin, is also presented for purposes of additional analysis. Asset information by business segment is not presented, since the Company does not prepare such information.

WCI COMMUNITIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
(In thousands, except per share data)

Three months ended June 30, 2004


	Tower		Traditional					Amenity Membership			Real Estate				Segment
	Homes		Homes		Lots			and Operations			Services		Land Sales		Totals
Revenues	$	145,211	$	130,992	$	92		$	11,973		$	43,066	$	685	$	332,019
Gross margin		46,572		25,089		(12	)		(1,565	)		7,791		23		77,898
Previously capitalized interest included in costs of sales		3,307		1,659		53			4			—		65		5,088

Three months ended June 30, 2003


	Tower		Traditional				Amenity Membership		Real Estate				Segment
	Homes		Homes		Lots		and Operations		Services		Land Sales		Totals
Revenues	$	133,751	$	110,733	$	736	$	16,142	$	29,934	$	19,345	$	310,641
Gross margin		38,076		23,326		92		2,316		5,419		2,648		71,877
Previously capitalized interest included in costs of sales		3,164		1,899		50		228		—		1,122		6,463

Six months ended June 30, 2004


	Tower		Traditional				Amenity Membership		Real Estate				Segment
	Homes		Homes		Lots		and Operations		Services		Land Sales		Totals
Revenues	$	283,876	$	207,379	$	2,139	$	27,050	$	73,201	$	3,687	$	597,332


		Page No.
Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets June 30, 2004 (Unaudited) and December 31, 2003		3
	Condensed Consolidated Statements of Income (Unaudited) For the Three and Six Months Ended June 30, 2004 and 2003		4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) For the Six Months Ended June 30, 2004 and 2003		5
	Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2004 and 2003		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29
Item 4.	Controls and Procedures		30
Part II.	Other Information
Item 1.	Legal Proceedings		31
Item 4.	Submission of Matters to a Vote of Shareholders		31
Item 6.	Exhibits and Reports on Form 8-K		31
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

1.		Basis of Presentation

		The condensed consolidated financial statements include the accounts of WCI Communities, Inc. (the Company), its wholly owned subsidiaries and certain joint ventures in which the Company has the ability to exercise control. The equity method of accounting is applied in the accompanying condensed consolidated financial statements with respect to those investments in joint ventures in which the Company has less than a controlling interest. All material intercompany balances and transactions are eliminated in consolidation.

		The condensed consolidated financial statements and notes of the Company as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 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, 2003 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. In the three and six months ended June 30, 2003, amortization of previously capitalized interest and real estate taxes has been reclassified from interest expense and real estate tax expense to homebuilding, real estate services and other cost of sales. Equity in earnings from joint ventures and other income have been reclassified from real estate services and other revenues to other income and expenses. Interest income and expense related to mortgage banking has been reclassified from other income and interest expense, respectively, to real estate services net revenue, which is included in real estate services. These reclassifications have no impact on net income.

		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, 2004 are not necessarily indicative of the results to be expected for the full year.

2.		Stock-Based Compensation

		The Company has elected to use APB 25 and related interpretations in accounting for its stock option plans. No compensation costs are recorded upon issuance or exercise of stock options as the options were issued at the current market price of the stock on the date of grant. Had the Company elected to recognize compensation expense under the fair value method under Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock Based Compensation, pro forma net income would be as follows:

		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.

3.		Segment Information

		The Company operates in four principal business segments: Tower Homebuilding; Traditional 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 have been disclosed for purposes of additional analysis. The amount of previously capitalized interest included in cost of sales of each segment, thereby reducing segment gross margin, is also presented for purposes of additional analysis. Asset information by business segment is not presented, since the Company does not prepare such information.