UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 March 31, 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 (State or other jurisdiction of incorporation or organization) |
59-2857021 (I.R.S. Employer Identification No.) |
24301 Walden Center Drive
Bonita Springs, Florida 34134
(Address of principal executive offices) (Zip Code)
| (Registrant’s telephone number, including area code) | (239) 947-2600 |
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
The number of shares outstanding of the issuer’s common stock, as of April 28, 2003 was 44,444,485.
WCI COMMUNITIES, INC.
Form 10-Q
For the Quarter Ended March 31, 2003
INDEX
Part I. Financial Information
| Page No. | |||||
| Item 1. | Financial Statements | ||||
| Condensed Consolidated Balance Sheets March 31, 2003 (Unaudited) and December 31, 2002 | 3 | ||||
| Condensed Consolidated Statements of Income (Unaudited) For the Three Months Ended March 31, 2003 and 2002 | 4 | ||||
| Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) For the Three Months Ended March 31, 2003 and 2002 | 5 | ||||
| Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 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 | 16 | |||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 23 | |||
| Item 4. | Controls and Procedures | 23 | |||
| Part II | Other Information | ||||
| Item 1. | Legal Proceedings | 24 | |||
| Item 6. | Exhibits and Reports on Form 8-K | 24 | |||
| SIGNATURE | |||||
| Certifications | |||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WCI COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
| March 31, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (Unaudited) | ||||||||||
Assets |
||||||||||
Cash and cash equivalents |
$ | 23,853 | $ | 49,789 | ||||||
Restricted cash |
22,161 | 20,577 | ||||||||
Contracts receivable |
569,421 | 515,021 | ||||||||
Mortgage notes and accounts receivable |
60,595 | 84,598 | ||||||||
Real estate inventories |
1,050,773 | 977,524 | ||||||||
Property and equipment |
139,627 | 127,152 | ||||||||
Other assets |
87,817 | 92,779 | ||||||||
Goodwill |
28,401 | 28,388 | ||||||||
Other intangible assets |
7,948 | 8,064 | ||||||||
Total assets |
$ | 1,990,596 | $ | 1,903,892 | ||||||
Liabilities and Shareholders’ Equity |
||||||||||
Accounts payable and other liabilities |
$ | 246,891 | $ | 297,224 | ||||||
Customer deposits |
218,241 | 183,540 | ||||||||
Community development district obligations |
49,764 | 29,684 | ||||||||
Senior unsecured credit facility |
92,750 | 44,935 | ||||||||
Mortgages and notes payable |
152,742 | 130,624 | ||||||||
Senior subordinated notes |
554,263 | 554,397 | ||||||||
| 1,314,651 | 1,240,404 | |||||||||
Commitments and contingencies |
||||||||||
Shareholders’ equity: |
||||||||||
Common stock, $.01 par value; 100,000 shares
authorized, 44,576 and 44,548 shares issued, respectively |
445 | 445 | ||||||||
Additional paid-in capital |
278,128 | 277,912 | ||||||||
Retained earnings |
399,392 | 387,555 | ||||||||
Treasury stock, at cost, 132 shares, respectively |
(795 | ) | (795 | ) | ||||||
Accumulated other comprehensive loss |
(1,225 | ) | (1,629 | ) | ||||||
Total shareholders’ equity |
675,945 | 663,488 | ||||||||
Total liabilities and shareholders’ equity |
$ | 1,990,596 | $ | 1,903,892 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
WCI COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
| For the three months ended | |||||||||||
| March 31, | |||||||||||
| 2003 | 2002 | ||||||||||
Revenues |
|||||||||||
Homebuilding |
$ | 187,588 | $ | 188,121 | |||||||
Amenity membership and operations |
15,961 | 20,096 | |||||||||
Real estate services, land sales and other |
35,107 | 23,226 | |||||||||
Total revenues |
238,656 | 231,443 | |||||||||
Cost of Sales |
|||||||||||
Homebuilding |
129,033 | 121,748 | |||||||||
Amenity membership and operations |
13,540 | 14,811 | |||||||||
Real estate services, land sales and other |
23,731 | 16,782 | |||||||||
Total costs of sales |
166,304 | 153,341 | |||||||||
Contribution margin |
72,352 | 78,102 | |||||||||
Other Expenses |
|||||||||||
Selling, general, administrative and other |
34,699 | 31,880 | |||||||||
Interest expense, net |
12,881 | 10,861 | |||||||||
Real estate taxes, net |
2,881 | 2,396 | |||||||||
Depreciation |
2,431 | 1,913 | |||||||||
Amortization of intangible assets |
116 | 117 | |||||||||
Total other expenses |
53,008 | 47,167 | |||||||||
Income before income taxes |
19,344 | 30,935 | |||||||||
Income tax expense |
(7,507 | ) | (12,075 | ) | |||||||
Net income |
$ | 11,837 | $ | 18,860 | |||||||
Earnings per share: |
|||||||||||
Basic |
$ | .27 | $ | .49 | |||||||
Diluted |
$ | .26 | $ | .48 | |||||||
Weighted average number of shares
|
|||||||||||
Basic |
44,433 | 38,145 | |||||||||
Diluted |
45,111 | 39,608 | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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 |
28 | — | 169 | — | — | — | 169 | ||||||||||||||||||||||
Stock-based compensation |
— | — | 47 | — | — | — | 47 | ||||||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||||||
Net income |
— | — | — | 11,837 | — | — | 11,837 | ||||||||||||||||||||||
Change in fair value of derivatives,
net of tax |
— | — | — | — | 404 | — | 404 | ||||||||||||||||||||||
Total comprehensive income
|
12,241 | ||||||||||||||||||||||||||||
Balance at March 31, 2003 |
44,444 | $ | 445 | $ | 278,128 | $ | 399,392 | $ | (1,225 | ) | $ | (795 | ) | $ | 675,945 | ||||||||||||||
| 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 | 138,452 | — | — | — | 138,531 | ||||||||||||||||||||||
Comprehensive income: |
|||||||||||||||||||||||||||||
Net income |
— | — | — | 18,860 | — | — | 18,860 | ||||||||||||||||||||||
Change in fair value of derivatives,
net of tax |
— | — | — | — | 705 | — | 705 | ||||||||||||||||||||||
Total comprehensive income |
19,565 | ||||||||||||||||||||||||||||
Balance at March 31, 2002 |
44,317 | $ | 444 | $ | 277,645 | $ | 301,599 | $ | (1,752 | ) | $ | (795 | ) | $ | 577,141 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
WCI COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
| For the three months ended | ||||||||||||
| March 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 11,837 | $ | 18,860 | ||||||||
Adjustments to reconcile net income to net cash
used in operating activities: |
||||||||||||
Deferred income taxes |
4,547 | (776 | ) | |||||||||
Depreciation and amortization |
3,124 | 2,903 | ||||||||||
Earnings from investments in joint ventures |
(1,544 | ) | (1,693 | ) | ||||||||
Stock-based compensation |
47 | — | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Restricted cash |
(1,584 | ) | 749 | |||||||||
Contracts receivable |
(54,400 | ) | (77,865 | ) | ||||||||
Accounts receivable |
25,842 | 4,348 | ||||||||||
Real estate inventories |
(72,929 | ) | (78,208 | ) | ||||||||
Other assets |
6,996 | (408 | ) | |||||||||
Accounts payable and other liabilities |
(54,476 | ) | (24,442 | ) | ||||||||
Customer deposits |
34,701 | 24,413 | ||||||||||
Net cash used in operating activities |
(97,839 | ) | (132,119 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||
Additions to mortgage notes receivable |
(4,204 | ) | (41 | ) | ||||||||
Proceeds from repayment of mortgage notes receivable |
2,365 | 1,594 | ||||||||||
Additions to property and equipment, net |
(15,048 | ) | (7,711 | ) | ||||||||
Contributions to investments in joint ventures, net |
(1,392 | ) | (126 | ) | ||||||||
Net cash used in investing activities |
(18,279 | ) | (6,284 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Repayments on senior secured credit facility term loan |
— | (5,000 | ) | |||||||||
Net borrowings on senior unsecured credit facility |
47,815 | — | ||||||||||
Proceeds from borrowings on mortgages and
notes payable |
54,453 | 30,673 | ||||||||||
Repayment of mortgages and notes payable |
(32,335 | ) | (51,276 | ) | ||||||||
Debt issue costs |
— | (207 | ) | |||||||||
Net advances (payments) on community development
district obligations |
20,080 | (1,288 | ) | |||||||||
Net proceeds from issuance of common stock |
— | 138,531 | ||||||||||
Proceeds from exercise of stock options |
169 | — | ||||||||||
Net cash provided by financing activities |
90,182 | 111,433 | ||||||||||
Net decrease in cash and cash equivalents |
(25,936 | ) | (26,970 | ) | ||||||||
Cash and cash equivalents at beginning of year |
49,789 | 57,993 | ||||||||||
Cash and cash equivalents at end of period |
$ | 23,853 | $ | 31,023 | ||||||||
Non-cash financing activity: |
||||||||||||
Notes payable in connection with land acquisition |
$ | — | $ | 10,000 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands, except per share data)
| 1. | Basis of Presentation | |
| The Company’s condensed consolidated financial statements and notes as of March 31, 2003 and for the three months ended March 31, 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 statement of income for the three months ended March 31, 2003 is not necessarily indicative of the results to be expected for the full year. | ||
| 2. | New Accounting Pronouncement | |
| In January 2003, Financial Accounting Standards Board issued Interpretation 46, Consolidation of Variable Interest Entities, an interpretation of ARB 51. The Interpretation addresses consolidation by business enterprises of variable interest entities. This interpretation is intended to achieve more consistent application of consolidation policies to variable interest entities and, thus, improve comparability between enterprises engaged in similar activities even if some of those activities are conducted through variable interest entities. This interpretation applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. If applicable, it applies to the Company’s interim period beginning July 1, 2003 for variable interest entities in which the Company holds a variable interest that it acquired before February 1, 2003. Management does not expect the adoption of Interpretation 46 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. |
7
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands, except per share data)
Three months ended March 31, 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 |
$ | 120,505 | $ | 66,867 | $ | 216 | $ | 15,961 | $ | 25,120 | $ | 9,282 | $ | 237,951 | ||||||||||||||
Interest income |
— | — | — | — | — | 705 | 705 | |||||||||||||||||||||
Contribution margin |
38,808 | 19,797 | (50 | ) | 2,421 | 3,536 | 7,840 | 72,352 | ||||||||||||||||||||
Three months ended March 31, 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 |
$ | 114,016 | $ | 70,790 | $ | 3,315 | $ | 20,096 | $ | 18,793 | $ | 3,748 | $ | 230,758 | ||||||||||||||
Interest income |
— | — | — | — | — | 685 | 685 | |||||||||||||||||||||
Contribution margin |
45,280 | 19,158 | 1,935 | 5,285 | 2,176 | 4,268 | 78,102 | |||||||||||||||||||||
A reconciliation of total segment contribution margin to consolidated income before income taxes for the three months ended March 31, 2003 and 2002 is as follows:
| For the three months ended | |||||||||
| March 31, | |||||||||
| 2003 | 2002 | ||||||||
Segment contribution margin |
$ | 72,352 | $ | 78,102 | |||||
Corporate overhead and costs |
(37,580 | ) | (34,276 | ) | |||||
Interest expense, net |
(12,881 | ) | (10,861 | ) | |||||
Depreciation and amortization |
(2,547 | ) | (2,030 | ) | |||||
Income before income taxes |
$ | 19,344 | $ | 30,935 | |||||
8
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands, except per share data)
| 4. | Real Estate Inventories | |
| Real estate inventories are summarized as follows: |
| March 31, | December 31 | ||||||||
| 2003 | 2002 | ||||||||
Land and land improvements |
$ | 459,195 | $ | 467,120 | |||||
Investments in amenities |
51,655 | 42,968 | |||||||
Work in progress: |
|||||||||
Towers |
170,844 | 155,315 | |||||||
Homes |
206,916 | 179,203 | |||||||
Completed inventories: |
|||||||||
Towers |
90,132 | 86,217 | |||||||
Homes |
72,031 | 46,701 | |||||||
| $ | 1,050,773 | $ | 977,524 | ||||||
| 5. | Capitalized Interest | |
| The following table is a summary of capitalized and amortized interest: |
| For the | ||||||||
| three months ended | ||||||||
| March 31, | ||||||||
| 2003 | 2002 | |||||||
Total interest incurred |
$ | 16,885 | $ | 15,067 | ||||
Debt issue cost amortization |
711 | 1,008 | ||||||
Interest amortized |
3,927 | 3,329 | ||||||
Interest capitalized |
(8,642 | ) | (8,543 | ) | ||||
Interest expense, net |
$ | 12,881 | $ | 10,861 | ||||
| 6. | Earnings Per Share | |
| 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 three months ended March 31, 2003 and 2002, 1,129 and 0 stock options were excluded from the computation of diluted earnings per share due to their anti-dilutive effect. |
9
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands, except per share data)
| Information pertaining to the calculation of earnings per share is as follows: |
| For the three months ended | ||||||||
| March 31, | ||||||||
| 2003 | 2002 | |||||||
Basic weighted average shares |
44,433 | 38,145 | ||||||
Dilutive stock options and grants |
678 | 1,463 | ||||||
Diluted weighted average shares |
45,111 | 39,608 | ||||||
| 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 March 31, |
|||||||||||
| 2003 | 2002 | ||||||||||
Net income: |
|||||||||||
As reported |
$ | 11,837 | $ | 18,860 | |||||||
Less: Total stock-based compensation
expense, net of tax |
(305 | ) | (220 | ) | |||||||
Pro forma |
$ | 11,532 | $ | 18,640 | |||||||
Earnings per share: |
|||||||||||
As reported
|
|||||||||||
Basic |
$ | .27 | $ | .49 | |||||||
Diluted |
$ | .26 | $ | .48 | |||||||
Pro forma
|
|||||||||||
Basic |
$ | .26 | $ | .49 | |||||||
Diluted |
$ | .26 | $ | .47 | |||||||
| 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. | ||
| 8. | Debt |
10
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands, except per share data)
| In March 2003, the Company amended one of its tower construction loans to increase the amount available for borrowing to $101,610 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. | ||
| 9. | 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. |
11
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands)
CONDENSED CONSOLIDATING BALANCE SHEETS
| March 31, 2003 | |||||||||||||||||||
| WCI | |||||||||||||||||||
| Communities, | Guarantor | Eliminating | |||||||||||||||||
| Inc. | Subsidiaries | Entries | Consolidated | ||||||||||||||||
Assets |
|||||||||||||||||||
Cash and cash equivalents |
$ | 19,299 | $ | 4,554 | $ | — | $ | 23,853 | |||||||||||
Restricted cash |
372 | 21,789 | — | 22,161 | |||||||||||||||
Contracts receivable |
283,167 | 286,254 | — | 569,421 | |||||||||||||||
Mortgage notes and accounts receivable |
7,431 | 53,369 | (205 | ) | 60,595 | ||||||||||||||
Real estate inventories |
706,628 | 344,145 | — | 1,050,773 | |||||||||||||||
Property and equipment |
53,765 | 85,862 | — | 139,627 | |||||||||||||||
Investment in guarantor subsidiaries |
340,740 | — | (340,740 | ) | — | ||||||||||||||
Other assets |
233,801 | 70,920 | (180,555 | ) | 124,166 | ||||||||||||||
Total assets |
$ | 1,645,203 | $ | 866,893 | $ | (521,500 | ) | $ | 1,990,596 | ||||||||||
Liabilities and Shareholders’ Equity |
|||||||||||||||||||
Accounts payable and other liabilities |
$ | 239,398 | $ | 456,258 | $ | (180,760 | ) | $ | 514,896 | ||||||||||
Senior unsecured credit facility |
92,750 | — | — | 92,750 | |||||||||||||||
Senior subordinated notes |
554,263 | — | — | 554,263 | |||||||||||||||
Mortgages and notes payable |
82,847 | 69,895 | — | 152,742 | |||||||||||||||
| 969,258 | 526,153 | (180,760 | ) | 1,314,651 | |||||||||||||||
Shareholders’ equity |
675,945 | 340,740 | (340,740 | ) | 675,945 | ||||||||||||||
Total liabilities and shareholders’ equity |
$ | 1,645,203 | $ | 866,893 | $ | (521,500 | ) | $ | 1,990,596 | ||||||||||
| 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 | |||||||||||||||
Senior subordinated notes |
554,397 | — | — | 554,397 | |||||||||||||||
Mortgages and notes payable |
50,800 | 81,624 | (1,800 | ) | 130,624 | ||||||||||||||
| 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 | ||||||||||
12
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
| For the three months ended March 31, 2003 | ||||||||||||||||
| WCI | ||||||||||||||||
| Communities, | Guarantor | Eliminating | ||||||||||||||
| Inc. | Subsidiaries | Entries | Consolidated | |||||||||||||
Total revenues |
$ | 101,188 | $ | 137,488 | $ | (20 | ) | $ | 238,656 | |||||||
Total cost of sales |
72,103 | 94,201 | — | 166,304 | ||||||||||||
Contribution margin |
29,085 | 43,287 | (20 | ) | 72,352 | |||||||||||
Total other expenses |
42,713 | 10,315 | (20 | ) | 53,008 | |||||||||||
(Loss) income before income taxes and equity in income of
guarantor subsidiaries |
(13,628 | ) | 32,972 | — | 19,344 | |||||||||||
Income tax benefit (expense) |
5,279 | (12,786 | ) | — | (7,507 | ) | ||||||||||
Equity in income of guarantor subsidiaries, net of tax |
20,186 | — | (20,186 | ) | — | |||||||||||
Net income |
$ | 11,837 | $ | 20,186 | $ | (20,186 | ) | $ | 11,837 | |||||||
| For the three months ended March 31, 2002 | ||||||||||||||||
| WCI | ||||||||||||||||
| Communities, | Guarantor | Eliminating | ||||||||||||||
| Inc. | Subsidiaries | Entries | Consolidated | |||||||||||||
Total revenues |
$ | 138,629 | $ | 92,814 | $ | — | $ | 231,443 | ||||||||
Total cost of sales |
87,115 | 66,226 | — | 153,341 | ||||||||||||
Contribution margin |
51,514 | 26,588 | — | 78,102 | ||||||||||||
Total other expenses |
41,116 | 6,051 | — | 47,167 | ||||||||||||
Income before income taxes and equity in
income of guarantor subsidiaries |
10,398 | 20,537 | — | 30,935 | ||||||||||||
Income tax expense |
(4,346 | ) | (7,729 | ) | — | (12,075 | ) | |||||||||
Equity in income of guarantor subsidiaries, net of tax |
12,808 | — | (12,808 | ) | — | |||||||||||
Net income |
$ | 18,860 | $ | 12,808 | $ | (12,808 | ) | $ | 18,860 | |||||||
13
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| For the three months ended March 31, 2003 | |||||||||||||||||||
| WCI | |||||||||||||||||||
| Communities, | Guarantor | Eliminating | |||||||||||||||||
| Inc. | Subsidiaries | Entries | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
|||||||||||||||||||
Net income |
$ | 11,837 | $ | 20,186 | $ | (20,186 | ) | $ | 11,837 | ||||||||||
Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |
|||||||||||||||||||
Deferred income taxes |
2,019 | (7 | ) | 2,535 | 4,547 | ||||||||||||||
Depreciation and amortization |
1,702 | 1,422 | — | 3,124 | |||||||||||||||
Other |
47 | — | — | 47 | |||||||||||||||
Earnings from investments in joint ventures |
(10 | ) | (1,534 | ) | — | (1,544 | ) | ||||||||||||
Equity in earnings of guarantor subsidiaries |
(20,186 | ) | — | 20,186 | — | ||||||||||||||
Distributions from parent (contributions to guarantor subsidiaries), net |
2,973 | (2,973 | ) | — | — | ||||||||||||||
Changes in assets and liabilities: |
|||||||||||||||||||
Contracts and accounts receivable |
(48,908 | ) | 22,135 | (1,785 | ) | (28,558 | ) | ||||||||||||
Real estate inventories |
(147,905 | ) | 74,976 | — | (72,929 | ) | |||||||||||||
Other assets |
79,339 | 3,431 | (77,358 | ) | 5,412 | ||||||||||||||
Accounts payable and other liabilities |
22,192 | (116,775 | ) | 74,808 | (19,775 | ) | |||||||||||||
Net cash (used in) provided by operating activities |
(96,900 | ) | 861 | (1,800 | ) | (97,839 | ) | ||||||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Proceeds from mortgages and notes receivable, net |
585 | (2,424 | ) | — | (1,839 | ) | |||||||||||||
Additions to property and equipment, net |
(7,629 | ) | (7,419 | ) | — | (15,048 | ) | ||||||||||||
Distributions from (contributions to) investments in joint ventures, net |
1,917 | (3,309 | ) | — | (1,392 | ) | |||||||||||||
Net cash used in investing activities |
(5,127 | ) | (13,152 | ) | — | (18,279 | ) | ||||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Net borrowings on senior unsecured credit facility |
47,815 | — | — | 47,815 | |||||||||||||||
Net borrowings (repayments) on mortgages and notes payable |
32,047 | (11,729 | ) | 1,800 | 22,118 | ||||||||||||||
Other |
1,337 | 18,912 | — | 20,249 | |||||||||||||||
Net cash provided by financing activities |
81,199 | 7,183 | 1,800 | 90,182 | |||||||||||||||
Net decrease in cash and cash equivalents |
(20,828 | ) | (5,108 | ) | — | (25,936 | ) | ||||||||||||
Cash and cash equivalents at beginning of year |
40,127 | 9,662 | — | 49,789 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 19,299 | $ | 4,554 | $ | — | $ | 23,853 | |||||||||||
14
WCI COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2003
(In thousands)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
| For the three months ended March 31, 2002 | |||||||||||||||||||
| WCI | |||||||||||||||||||
| Communities, | Guarantor | Eliminating | |||||||||||||||||
| Inc. | Subsidiaries | Entries | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
|||||||||||||||||||
Net income |
$ | 18,860 | $ | 12,808 | $ | (12,808 | ) | $ | 18,860 | ||||||||||
Adjustments to reconcile net income to net cash
used in operating activities: |
|||||||||||||||||||
Deferred income taxes |
(3,067 | ) | — | 2,291 | (776 | ) | |||||||||||||
Depreciation and amortization |
1,776 | 1,127 | — | 2,903 | |||||||||||||||
Earnings from investments in joint ventures |
(47 | ) | (1,646 | ) | — | (1,693 | ) | ||||||||||||
Equity in earnings of guarantor subsidiaries |
(12,808 | ) | — | 12,808 | — | ||||||||||||||
(Contributions to guarantor subsidiaries) distributions from parent, net |
(2,177 | ) | 2,177 | — | — | ||||||||||||||
Changes in assets and liabilities: |
|||||||||||||||||||
Contracts and accounts receivable |
(83,059 | ) | (5,558 | ) | 15,100 | (73,517 | ) | ||||||||||||
Real estate inventories |
(50,696 | ) | (27,512 | ) | — | (78,208 | ) | ||||||||||||
Other assets |
(16,125 | ) | 110 | 16,356 | 341 | ||||||||||||||
Accounts payable and other liabilities |
2,559 | 16,059 | (18,647 | ) | (29 | ) | |||||||||||||
Net cash used in operating activities |
(144,784 | ) | (2,435 | ) | 15,100 | (132,119 | ) | ||||||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Proceeds from repayment of mortgages and notes receivable, net |
953 | 600 | — | 1,553 | |||||||||||||||
Additions to property and equipment, net |
(3,121 | ) | (4,590 | ) | — | (7,711 | ) | ||||||||||||
Contributions to investment in joint ventures, net |
(101 | ) | (25 | ) | — | (126 | ) | ||||||||||||
Net cash used in investing activities |
(2,269 | ) | (4,015 | ) | — | (6,284 | ) | ||||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Net borrowings on senior secured credit facilities |
(5,000 | ) | — | — | (5,000 | ) | |||||||||||||
Net repayments on mortgages and notes payable |
(4,594 | ) | (909 | ) | (15,100 | ) | (20,603 | ) | |||||||||||
Net proceeds from issuance of common stock |
138,531 | — | — | 138,531 | |||||||||||||||
Other |
(642 | ) | (853 | ) | — | (1,495 | ) | ||||||||||||
Net cash provided by (used in) financing activities |
128,295 | (1,762 | ) | (15,100 | ) | 111,433 | |||||||||||||
Net decrease in cash and cash equivalents |
(18,758 | ) | (8,212 | ) | — | (26,970 | ) | ||||||||||||
Cash and cash equivalents at beginning of year |
45,382 | 12,611 | — | 57,993 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 26,624 | $ | 4,399 | $ | — | $ | 31,023 | |||||||||||
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 2003 compared to three months ended March 31, 2002
Overview
| For the three months ended | ||||||||
| (Dollars in thousands) | March 31, | |||||||
| 2003 | 2002 | |||||||
Total revenues |
$ | 238,656 | $ | 231,443 | ||||
Total contribution margin |
$ | 72,352 | $ | 78,102 | ||||
Net income |
$ | 11,837 | $ | 18,860 | ||||
During the first three months of 2003, we achieved a 3.1% increase in revenues driven primarily by a larger number and greater value of sold tower units under construction, an increase in the volume of transactions in the real estate services division and increased land sales. Total contribution margin 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 and the sell-out of high-margin marina slips in one of our communities offset by an increase in margins from single- and multi-family homebuilding, real estate services and land sales. Net income declined primarily as a result of the decrease in total contribution margin and the increase in selling, general, administrative and other expenses.
Homebuilding
Single- and multi-family
| For the three months ended | ||||||||
| (Dollars in thousands) | March 31, | |||||||
| 2003 | 2002 | |||||||
Revenues |
$ | 66,867 | $ | 70,790 | ||||
Contribution margin |
$ | 19,797 | $ | 19,158 | ||||
Contribution margin percentage |
29.6 | % | 27.1 | % | ||||
Homes closed (units) |
193 | 225 | ||||||
Average selling price per home closed |
$ | 346 | $ | 315 | ||||
Lot revenues |
$ | 216 | $ | 3,315 | ||||
Net new orders for homes (units) |
396 | 497 | ||||||
Contract values of new orders |
$ | 180,201 | $ | 156,182 | ||||
Average selling price per new order |
$ | 455 | $ | 314 | ||||
| As of March 31, | ||||||||
| 2003 | 2002 | |||||||
Backlog (units) |
1,072 | 888 | ||||||
Backlog contract values |
$ | 453,544 | $ | 351,276 | ||||
Average sales price of units in backlog |
$ | 423 | $ | 396 | ||||
Active selling communities |
15 | 14 | ||||||
16
Revenues decreased 5.5% primarily due to the decrease in the number of homes delivered during the period partially offset by a 9.8% increase in the average selling price of these homes. The decrease in deliveries is the result of the near close-out of three communities and the close-out of one community offset by the increased deliveries in a new community located in the Palm Beach region. 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 93.5% primarily due to the close-out of one community located in our Palm Beach region. For the remainder of 2003, we expect one new community will begin sales activities, four new communities will begin delivering homes and three communities are expected to close-out.
Contribution margin percentage increased 250 basis points 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, and reduced construction overhead expense. Our ability to raise home prices in the future may be adversely impacted by the current economic and stock market conditions and softening in the demand for certain new home offerings.
Contract values of new orders increased 15.4% primarily due to the addition of four new communities and increased sales at some existing communities, offset by the sell out and/or reduced available inventory in three communities. The average sales price per new order increased 44.9% primarily due to sales in three newly introduced higher priced communities and demand for higher priced homes at certain same store communities. The 29.1% increase in backlog contract values reflects a 184 unit increase and a 6.8% increase in the average sales price of homes under contract to $423,000 in 2003 compared to $396,000 in 2002.
Mid- and high-rise homebuilding
| For the three months ended | ||||||||
| (Dollars in thousands) | March 31, | |||||||
| 2003 | 2002 | |||||||
Revenues |
$ | 120,505 | $ | 114,016 | ||||
Contribution margin |
$ | 38,808 | $ | 45,280 | ||||
Contribution margin percentage |
32.2 | % | 39.7 | % | ||||
Net new orders (units) |
53 | 92 | ||||||
Contract values of new orders |
$ | 59,334 | $ | 93,993 | ||||
Average selling price per new order |
$ | 1,120 | $ | 1,022 | ||||
| As of March 31, | ||||||||
| 2003 | 2002 | |||||||
Cumulative contracts (units) |
749 | 686 | ||||||
Cumulative contract values |
$ | 888,397 | $ | 930,484 | ||||
Less: Cumulative revenues recognized |
(571,407 | ) | (477,663 | ) | ||||
Backlog contract values |
$ | 316,990 | $ | 452,821 | ||||
Average sales price of units in backlog |
$ | 1,186 | $ | 1,356 | ||||
Towers under construction recognizing revenue |
15 | 14 | ||||||
17
Revenues increased 5.7% due primarily to an increase in the number of towers under construction that qualified for recognition of revenue during the respective periods. We met the requirements for percentage of completion revenue recognition in 15 towers for 2003, compared to 14 towers in 2002.
Contribution margin percentage decreased to 32.2% from 39.7%. In addition to the net $847,000 increase to our reserve for contract defaults, the decline in the contribution margin percentage is 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.
The decrease in contract values of new orders relates to market conditions that has slowed absorption of higher priced units. We believe the slowed absorption reflects our customers’ concerns with the national economy, prolonged stock market uncertainty and war in Iraq.
The decrease in backlog contract values is due to a 4.5% decrease in the cumulative value of all units under contract with purchasers, the completion of two buildings and the increased amount of cumulative revenues recognized in the towers under construction, which reflects the advancing percentage of completion of those towers. This decrease in cumulative contract values reflects a 12.5% decrease in the average sales price of units in backlog, offset by a 9.2% increase in the number of tower units under contract.
Amenity membership and operations
| For the three months ended | ||||||||
| (Dollars in thousands) | March 31, | |||||||
| 2003 | 2002 | |||||||
Equity membership and marina slip revenues |
$ | 5,672 | $ | 7,435 | ||||
Membership dues and amenity service revenues |
$ | 10,289 | $ | 12,661 | ||||
Total amenity contribution margin |
$ | 2,421 | $ | 5,285 | ||||
Amenity contribution margin percentage |
15.2 | % | 26.3 | % | ||||
Equity membership and marina slip revenues decreased 23.7% primarily due a decrease in equity membership sales at two clubs located in the Southwest region and the sell-out of marina slips at our Gulf Harbour community offset by the increase in marina slip sales at our Jupiter Yacht Club community. The decrease in membership sales in the Southwest region is directly related to the reduction in demand for luxury golf club memberships due to the impact of general economic conditions. Membership dues and amenity operations revenues decreased 18.7% primarily due to the turnover of two clubs located in the Southwest region to its members and the temporary closing of a golf course for redesign and development, which is expected to re-open for operations in the latter part of 2003.
The decrease in amenity contribution margin percentage 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.
Future amenity contribution margins may be adversely impacted by the reduced availability of marina slips, increased start-up deficits associated with new amenity operations and general market conditions.
Real estate services, land sales and other
18
| For the three months ended | |||||||||
| (Dollars in thousands) | March 31, | ||||||||
| 2003 | 2002 | ||||||||
Real Estate Services: |
|||||||||
Revenues |
$ | 25,120 | $ | 18,793 | |||||
Contribution margin |
$ | 3,536 | $ | 2,176 | |||||
Contribution margin percentage |
14.1 | % | 11.6 | % | |||||
Land Sales: |
|||||||||
Revenues |
$ | 6,966 | $ | 825 | |||||
Contribution margin |
$ | 4,821 | $ | 664 | |||||
Contribution margin percentage |
69.2 | % | 80.5 | % | |||||
Other revenues |
$ | 3,021 | $ | 3,608 | |||||
Real Estate Services
Real estate services revenues, including real estate brokerage, mortgage banking, title operations and property management increased 33.7% 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. Real estate brokerage transaction volume increased 21.5% to 2,106 from 1,734 in the first quarter of 2002. The average real estate brokerage transaction price increased 21.5% to $299,600 from $246,600 in the first quarter of 2002. Real estate services contribution margin percentage increased 250 basis points 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 was primarily attributable to the planned sale of non-strategic parcels located in our Southeast and Palm Beach regions. Land sales contribution margin decreased primarily due to the change in mix and location of the parcels sold.
Other Revenues
The decrease in other revenues was primarily related to the decline in equity in earnings of joint ventures and fees earned from providing services to our joint ventures.
Interest expense, net of capitalization
Interest expense, net of capitalization, increased 18.6% primarily due to the 12.1% increase in interest incurred for the period. Interest incurred increased primarily as a result of the increase in the average outstanding balance of debt in the respective periods. Interest capitalized and amortization of previously capitalized interest increased 1.2% and 18.0%, respectively. The increased amortization of previously capitalized interest was primarily due to the increase in the number of towers recognizing revenue under the percentage completion method.
Selling, general and administrative expenses, including real estate taxes
19
Selling, general and administrative expenses, including real estate taxes, (SG&A) increased 9.6% primarily due to increased wages, benefits costs and increases in insurance premiums. As a percentage of total revenues, SG&A increased to 15.7% compared to 14.8% for the same period in 2002.
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 March 31, 2003, we had cash and cash equivalents of $23.9 million, $257.2 million undrawn under our existing senior credit facility and $19.9 million committed pursuant to letters of credit.
Net cash used in operations was $97.8 million for the three months ended March 31, 2003, as compared to cash used in operations of $132.1 million for the same period in 2002. Excluding net increases in real estate inventories of $72.9 million and $78.2 million and contracts receivable of $54.4 million and $77.9 million, net cash flows provided by operations were $29.5 million and $24.0 million for the three months ended March 31, 2003 and 2002, respectively. Land acquisitions were $3.8 million for the three months ended March 31, 2003 compared to $41.7 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.
Contracts receivable increased 10.6% during the three-month period reflecting the increase in the value of tower units under contract that are now being constructed and that have met the requirements for percentage of completion revenue recognition. We expect to collect a substantial portion of these receivables during the next three-to-nine months as seven 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 of those tower units with a significant proportion of purchasers who intend to use those units for second homes and/or investment properties. Future defaults may limit our ability to deliver units from backlog and collect contract receivables upon the completion of towers under construction.
Investing activities for the period ended March 31, 2003, included $15.0 million of net additions to property and equipment compared to $7.7 million in the same period in 2002. We anticipate cash used in investing activities will continue to increase with development of current and future amenity operations.
Financing activities provided cash of $90.2 million for the three months ended March 31, 2003, compared to cash provided of $111.4 million in the same period in 2002. The net cash inflow for the period ended March 31, 2003 was related to net borrowings of $69.9 million and a $20.1 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.
20
Our senior credit facility provides for a $350.0 million revolving loan, which may increase to $425.0 million if certain conditions are met. The loan matures June 30, 2005, subject to a one-year extension at our election, and allows for prepayments and additional borrowing to the maximum amount, provided an adequate borrowing base is maintained. The loan allows an allocation of the unused balance for issuance of a maximum of $75.0 million of stand-by letters of credit. The initial interest rate is the lender’s prime rate or the LIBOR base rate plus a spread of 180 basis points, payable in arrears. The LIBOR base rate can be reduced by up to 30 basis points or increased by 20 basis points if the credit rating of the facility is revised.
As of March 31, 2003, $12.7 million was available for borrowing under the $30.0 million warehouse facility maintained by our wholly owned finance subsidiary, Financial Resources Group, Inc. The availability on the warehouse credit facility reduces to $23.0 million on April 1, 2003.
The amount of community development district and improvement district bond obligations issued with respect to our communities totaled $251.4 million at March 31, 2003. We have accrued $49.8 million as of March 31, 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 intend to 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 March 31, 2003, we had construction loans in place for 11 towers with $125.7 million outstanding and $377.1 million of remaining undrawn commitments. We released two towers for reservation during the three months ended March 31, 2003 and plan to release five additional towers for the remainder of 2003. We expect to begin construction on up to five towers in 2003 and complete and begin the delivery of units to residents in seven towers for the remainder of 2003.
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 March 31, 2003, we had contracts or options aggregating $72.0 million to acquire approximately 933 acres of land that are expected to yield approximately 2,193 residential units.
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
21
statements. In addition, any statements concerning future financial performance (including future revenues, earnings, cash flow or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management are also forward-looking statements. Forward-looking statements are based on current expectations and beliefs concerning future events and are subject to risks and uncertainties about the Company, economic and market factors and the homebuilding industry, among other things. These statements are not guaranties of future performance.
Actual events and results may differ materially from those expressed or forecasted in the forward-looking statements made by the Company or Company officials due to a number of factors. The principal factors that could cause the Company’s actual results to differ materially from the forward-looking statements include but are not limited to, statements about the Company’s anticipated operating results, financial resources, ability to acquire land, ability to sell homes and properties, ability to deliver homes from backlog, ability to secure materials and subcontractors. Such forward-looking information involves important risks and uncertainties that could significantly affect actual results and cause them to differ materially from expectations expressed herein and in other Company reports, filings, statements and presentations. These risks and uncertainties include the Company’s ability to compete in the Florida real estate market; the availability and cost of land in desirable areas in Florida and elsewhere and the ability to expand successfully into those areas; Company’s ability to obtain necessary permits and approvals for the development of its lands; Company’s ability to raise debt and equity capital and grow its operations on a profitable basis; Company’s ability to pay principal and interest on its current and future debts; Company’s ability to sustain or increase historical revenues and profit margins; material increases in labor and material costs; increases in interest rates; the level of consumer confidence; adverse legislation or regulations; unanticipated litigation or legal proceedings; natural disasters; and the continuation and improvement of general economic conditions and business trends. If one or more of the assumptions underlying our forward-looking statements proves incorrect, then the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by the forward-looking statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking statements.
All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The Company undertakes no obligation to update any forward-looking statements in this Report or elsewhere.
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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 March 31, 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 rates of the Company’s interest rate swaps.
| FMV at | |||||||||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | 3/31/03 | ||||||||||||||||||||||||||
Debt: |
|||||||||||||||||||||||||||||||||
Fixed rate |
$ | — | $ | 9,744 | $ | — | $ | — | $ | — | $ | 550,000 | $ | 559,744 | $ | 558,494 | |||||||||||||||||
Average interest rate |
— | 10.08 | % | — | — | — | 9.96 | % | 10.03 | % | |||||||||||||||||||||||
Variable rate |
$ | 67,386 | $ | 54,828 | $ | 113,534 | $ | — | $ | — | $ | — | $ | 235,748 | $ | 235,748 | |||||||||||||||||
Average interest rate |
3.37 | % | 3.27 | % | 3.24 | % | — | — | — | 3.31 | % | ||||||||||||||||||||||
Interest Rate Swaps: |
|||||||||||||||||||||||||||||||||
Variable to fixed |
$ | — | $ | 50,000 | $ | — | $ | — | $ | — | $ | — | $ | 50,000 | $ | (1,995 | ) | ||||||||||||||||
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). Based on this review, which was completed within 90 days of the filing of this report, 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 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits | ||
| 99.1 | Certification by Alfred Hoffman, Jr., Chief Executive Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 99.2 | Certification by James P. Dietz, Chief Financial Officer, pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | ||
| (b) | Reports on Form 8-K | ||
| On April 11, 2003, we filed a current report on Form 8-K, which included a press release dated April 10, 2003, announcing first quarter new home orders for the three months ended March 31, 2003. | ||
| On April 30, 2003, we filed a current report on Form 8-K, which included a press release dated April 29, 2003, announcing our earnings for the first quarter ended March 31, 2003. |
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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: May 1, 2003 | /s/ JAMES P. DIETZ | |
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James P. Dietz Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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CERTIFICATION
I, Alfred Hoffman, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of WCI Communities, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| WCI COMMUNITIES, INC. | ||
| Date: May 1, 2003 | /s/ ALFRED HOFFMAN, JR. | |
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Alfred Hoffman, Jr. Chief Executive Officer and Director |
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CERTIFICATION
I, James P. Dietz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WCI Communities, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| WCI COMMUNITIES, INC. | ||
| Date: May 1, 2003 | /s/ JAMES P. DIETZ | |
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James P. Dietz Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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