UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from                     to                    

Commission file number 1-9186

WCI COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

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.

WCI COMMUNITIES, INC.

Form 10-Q

For the Quarter Ended June 30, 2004

INDEX

     SIGNATURE

     Certifications

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WCI COMMUNITIES, INC.

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

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WCI COMMUNITIES, INC.

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

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WCI COMMUNITIES, INC.

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

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WCI COMMUNITIES, INC.

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

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WCI COMMUNITIES, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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:

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

		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.

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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

Three months ended June 30, 2003

Six months ended June 30, 2004

Six months ended June 30, 2003

See the condensed consolidated statements of income for a reconciliation of total gross margin to income before income taxes and minority interests for the three and six months ended June 30, 2004 and 2003.

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

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

		Work in progress includes tower units and homes that are finished, under contract and ready for delivery and tower units and homes in various stages of construction. Completed inventories consist of model homes used to facilitate sales and tower units and homes that were not subject to a sales contract. Excluding model homes, we had approximately 53 and 112 completed single- and multi-family homes at June 30, 2004 and December 31, 2003, respectively. We had 110 and 139 completed tower residences at June 30, 2004 and December 31, 2003, respectively.
5.		Warranty
		The Company provides its single- and multi-family home buyers with a one to three year limited warranty for all material and labor and a ten year warranty for certain structural defects. The Company provides its tower home buyers a one year warranty for the unit and three year warranty for common elements of the tower.
		Since the Company subcontracts its traditional and tower homebuilding work to subcontractors who provide it with an indemnity, claims relating to workmanship and materials are generally the primary responsibility of the subcontractors. Warranty reserves have been established by charging cost of sales and crediting a warranty liability. Warranty reserves are included in accounts payable and other liabilities in the condensed consolidated balance sheets. The amounts charged are estimated by management to be adequate to cover expected warranty-related costs under all unexpired warranty obligation periods. The Company’s warranty cost accruals are based upon historical warranty cost experience and are adjusted as appropriate to reflect qualitative risks associated with the types of towers and homes built.

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

The following table presents the activity in the Company’s warranty liability for the six months ended June 30, 2004:

6.		Interest Expense, net
		The following table is a summary of interest expense, net:

7.

Variable Interest Entities

		In December 2003, the Financial Accounting Standards Board issued Interpretation 46-R (FIN 46-R), Consolidation of Variable Interest Entities (VIEs), an interpretation of ARB 51. A VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. The Interpretation requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.
		Effective January 1, 2004, the Company adopted FIN 46-R. Under the non-special-purpose entities provisions of FIN 46-R, the Company has concluded that whenever it options land or lots from an entity and pays a non-refundable deposit or enters into a partnership arrangement, a VIE may be created. If the Company is deemed the primary beneficiary of these arrangements, it would be required to consolidate the VIE.
		For the quarter ended June 30, 2004, the Company evaluated all option contracts for land and determined it was the primary beneficiary of certain of these option contracts. Although the Company does not have legal title to the optioned land, under FIN 46, it is required to consolidate the land under option at fair value.

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

At June 30, 2004, the Company has consolidated land with a purchase price of approximately $37,000 and recorded a land purchase obligation of approximately $29,000. The land purchase obligation, which is recorded in other liabilities, represents the difference between the exercise price of the optioned land and the non-refundable deposits paid of approximately $8,000 at June 30, 2004.

In 2003, the Company entered into two contractual arrangements for approximately $30,200 to acquire land located in Northeast and Southeast Florida from two entities. After making unsuccessful exhaustive efforts to obtain the necessary financial information from the sellers, the Company has elected to apply the disclosure requirements under FIN 46-R to the contractual arrangements for which the deposits became non-refundable during the quarter ended March 31, 2004. The Company’s maximum exposure to losses from its involvement with these entities is equal to its approximate $8,300 of non-refundable deposits and other pre-acquisition costs.

8.

Investments in Joint Ventures

In 1996, the Company sold its Bighorn property located in Palm Desert, California to Bighorn Development Limited Partnership (the Partnership or Bighorn). In conjunction with the sale, the Company received cash consideration and a Class B limited partnership interest in the Partnership for which no value was assigned. This interest entitled the Company to receive an allocation of the buyer’s future net profits after allocation of preferred returns to other partners as defined in the limited partnership agreement. No profit allocations were recorded under this interest and no cash had been received through December 31, 2003. In February 2004, the Company sold its Class B limited partnership interest in the Partnership to Bighorn and affiliates for $20,000. The Company received $5,000 and a commitment from the buyer to pay the remaining $15,000 from the future sale of Bighorn home-sites over a three year period to expire February 2007. The $15,000 commitment is an unsecured obligation and does not bear interest. The Company will receive 50% of the net proceeds, as defined in the agreement, from each home-site sale completed by Bighorn. The buyer is required to remit to the Company any unpaid amounts remaining when the commitment expires in February 2007. A gain of $5,000 was recorded in other income upon the execution of the agreement. The Company will record revenue as the underlying home-sites are sold. As of June 30, 2004, the Company has recognized approximately $9,700 upon the closing of home-sites related to the remaining unpaid commitment which was included in other income.

9.

Acquisitions

On May 24, 2004, the Company acquired Spectrum Communities (Spectrum), a developer and homebuilder that currently operates in New York, New Jersey and Connecticut. Cash invested in Spectrum included consideration paid to the seller of $25,000, plus the repayment of approximately $36,300 in indebtedness on the day of closing, plus acquisition costs and net of acquired cash of approximately $9,500. The Company also issued approximately 439 shares of the Company’s common stock to the seller as consideration and assumed approximately $68,000 of project debt with maximum interest rates of prime plus 1% and maturity dates from 2004 to 2007. In connection with this acquisition, the Company recorded an initial amount of goodwill of approximately $16,200, which was assigned to our Traditional Homebuilding operating segment. In addition, a contingent payment tied to the earnings of the acquired business unit may be paid in 2005 and would be recorded as goodwill.

The acquisition was accounted for under the purchase method of accounting in accordance with SFAS 141. The purchase price of the acquisition was allocated to the net assets acquired based upon their estimated fair

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

values as of the date of acquisition. The results of operations of Spectrum are included in the accompanying consolidated financial statements beginning on the date of acquisition.

10.

Shareholder’ Equity

In addition to its common stock, the Company has 100,000 shares authorized of series common stock, $.01 par value per share, and 100,000 shares authorized of preferred stock, $.01 par value per share. No shares of series common stock or preferred stock are issued and outstanding.

Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding including the dilutive effect of stock options and grants. For the three months ended June 30, 2004 and 2003, 0 and 738 stock options were excluded from the computation of diluted earnings per share due to their anti-dilutive effect. Since the requirements to allow conversion of contingent convertible senior subordinated notes to common stock were not met during the quarter ended June 30, 2004, the diluted weighted average shares did not include any contingent convertible shares.

Information pertaining to the calculation of earnings per share is as follows:

11.

Comprehensive Income

The following table presents the components of comprehensive income:

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

12.

Commitments and Contingencies

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 June 30, 2004, the Company had approximately $27,600 in letters of credit outstanding which expire through 2005. Performance bonds do not have stated expiration dates; rather, the Company is released from the bonds as the contractual performance is completed. These bonds, which approximated $85,200 at June 30, 2004, are typically outstanding over a period of approximately one to five years.

13.

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. The principal non-guarantor subsidiaries are consolidated joint ventures. Supplemental condensed consolidating financial information of the Company’s guarantors is presented below.

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

Condensed Consolidating Balance Sheets

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

Condensed Consolidating Balance Sheets
(continued)

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

Condensed Consolidating Statements of Operations

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

Condensed Consolidating Statements of Operations
(continued)