| WCI COMMUNITIES INC ITEM 1A RISK FACTORS Investors are cautioned that certain statements contained in this document, including those in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, are “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995 |
| Statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “hopes”, and similar expressions constitute forward-looking statements |
| In addition, any statements concerning future financial performance (including future revenues, earnings, cash flows or growth rates), ongoing business strategies or prospects, and possible future Company actions, which may be provided by management, are also forward-looking statements |
| Forward-looking statements are based on current expectations and beliefs concerning future events and are subject to risks and uncertainties about the Company, economic and market factors and the homebuilding industry, among other things |
| These statements are not guaranties of future performance |
| If one or more of the assumptions underlying our forward-looking statements proves incorrect, then our 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 |
| The following cautionary discussion of risks and uncertainties relevant to our business includes factors we believe could cause our actual results to differ materially from expected and historical results |
| Other factors beyond those listed below, including factors unknown to us and factors known to us which we have not determined to be material, could also adversely affect us |
| Significant Capital Requirements—If we are not able to raise sufficient capital to enhance and maintain the operations of our properties and to expand and develop our real estate holdings, our revenues, financial condition and results of operations could be negatively impacted |
| We operate in a capital intensive industry and require significant capital expenditures to maintain our competitive position |
| Failure to secure needed additional financing, if and when needed, may limit our ability to grow our business which could reduce our revenues and results of operations |
| We expect to make significant capital expenditures in the future to enhance and maintain the operations of our properties and to expand and develop our real estate holdings |
| In the event that our plans or assumptions change or prove to be inaccurate, or if our cash flow proves to be insufficient, due to unanticipated expenses or otherwise, we may seek to minimize cash expenditures and/or obtain additional financing in order to support our plan of operations |
| Additional funding, whether obtained through public or private debt or equity financing, or from strategic alliances, may not be available when needed or may not be available on terms acceptable to us, if at all |
| Increases in interest rates can make it more difficult and/or expensive for us to obtain the funds we need to operate our business |
| Increases in interest rates generally and/or any downgrading in the ratings that national rating agencies assign to our outstanding debt securities could increase the interest rates we must pay on any subsequent issuances of debt securities, and any such ratings downgrade could also make it more difficult for us to sell such debt securities |
| Inability to Successfully Develop Communities—If we are not able to develop our communities successfully, our revenues, financial condition and results of operations could be diminished |
| Before a community generates any revenues, material expenditures are required to acquire land, to obtain development approvals and to construct significant portions of project infrastructure, amenities, model homes and sales facilities |
| It generally takes several years for a community development to achieve cumulative positive cash flow |
| Our inability to develop and market our communities successfully and to generate positive cash flows from these operations in a timely manner would have a material adverse effect our financial condition and results of operations |
| 9 ______________________________________________________________________ [33]Table of Contents Risks Associated with Construction—Problems in the construction of our communities could result in substantial increases in cost and could disrupt our business which would reduce our profitability |
| We must contend with the risks associated with construction activities, including the inability to obtain insurance or obtaining insurance at significantly increased rates, cost overruns, shortages of lumber, steel, concrete or other materials, shortages of labor, labor disputes, unforeseen environmental or engineering problems, work stoppages and natural disasters, any of which could delay construction and result in a substantial increase in costs which would reduce our profitability |
| Claims may be asserted against us for construction defects, personal injury or property damage caused by the subcontractors, and these claims may give rise to liability |
| Where we hire general contractors, if there are unforeseen events like the bankruptcy of, or an uninsured or under-insured loss claimed against, our general contractors, we may become responsible for the losses or other obligations of the general contractors, which may materially and adversely affect our financial condition and results of operations |
| Should losses in excess of insured limits occur, the losses could adversely affect our financial condition and results of operations |
| In addition, our results of operations could be negatively impacted in the event that a general contractor experiences significant cost overruns or delays and is not able to absorb such impacts |
| Risk of Increased Consumer Interest Rates—Because many of our customers finance their home purchases, increased interest rates could lead to fewer home sales which would reduce our revenues |
| Many purchasers of our homes obtain mortgage loans to finance a substantial portion of the purchase price of their homes |
| In general, housing demand is adversely affected by increases in interest rates, housing costs and unemployment and by decreases in the availability of mortgage financing |
| In addition, there have been discussions of possible changes in the federal income tax laws which would remove or limit the deduction for home mortgage interest |
| If mortgage interest rates increase and the ability or willingness of prospective buyers to finance home purchases is adversely affected, our sales, revenues, financial condition and results of operations may be negatively affected |
| Availability of Land—Because our business depends on the acquisition of new land, the unavailability of land could reduce our revenues and/or negatively affect our results of operations |
| Our operations and revenues are highly dependent on our ability to expand our portfolio of land parcels |
| We may compete for available land with entities that possess significantly greater financial, marketing and other resources |
| Competition generally may reduce the amount of land available as well as increase the cost of such land |
| An inability to effectively carry out any of our sales activities and development resulting from the unavailability of land may adversely affect our business, financial condition and results of operations |
| National and Regional Economic Conditions—A deterioration in national and regional economic conditions could adversely impact our business |
| Our real estate sales, revenues, financial condition and results of operations could decline due to a deterioration of regional or national economies |
| Our sales and revenues would be disproportionately affected by worsening economic conditions in the Midwestern, Northeastern and Mid-Atlantic United States because we generate a disproportionate amount of our sales from customers in those regions |
| In addition, a significant percentage of our residential units are second home purchases which are particularly sensitive to the state of the economy |
| Risks Associated with Our Geographic Concentration in Florida—Because of our geographic concentration in Florida, an economic downturn in Florida could reduce our sales, revenues and/or negatively affect our financial condition and results of operations |
| Consequently, any economic downturn or reduction in demand for new homes in Florida could reduce our sales, revenues and/or 10 ______________________________________________________________________ [34]Table of Contents negatively affect our financial condition and results of operations |
| In addition, the appeal of becoming an owner of one of our residential units may decrease if potential purchasers do not continue to view the locations of our communities as attractive primary, second home or retirement destinations |
| Insurance—Increased insurance risk and adverse changes in economic conditions as a result of recent events could negatively affect our business |
| We believe that insurance and surety companies are re-examining many aspects of their business, and may take actions including increasing premiums, requiring higher self-insured retentions and deductibles, requiring additional collateral on surety bonds, reducing limits, restricting coverages, imposing exclusions, such as mold damage, sabotage and terrorism, and refusing to underwrite certain risks and classes of business |
| Any increased premiums, mandated exclusions, change in limits, coverages, terms and conditions or reductions in the amounts of bonding capacity available may adversely affect our ability to obtain appropriate insurance coverages at reasonable costs, which could have a material adverse effect on our financial condition and results of operations |
| Community Relations—Poor relations with the residents of our communities could negatively impact sales, which could cause our revenues and/or results of operations to decline |
| As a community developer, we may be expected by community residents from time to time to resolve any real or perceived issues or disputes that may arise in connection with the operation or development of our communities |
| Any efforts made by us in resolving these issues or disputes could be deemed unsatisfactory by the affected residents and any subsequent action by these residents could negatively impact sales, which could cause our revenues and/or results of operations to decline |
| In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or modify our community development plans |
| Risks and Costs of Growth—We may not be successful in our efforts to identify, complete or integrate acquisitions which could adversely affect our financial condition and results of operations |
| A principal component of our strategy is to continue to grow profitably in a controlled manner in both existing and new markets by acquiring and developing land or by acquiring other property developers or homebuilders |
| However, we may not be successful in implementing our acquisition strategy and growth may not continue at historical levels or at all |
| Variability in Our Results—We experience variability in our results of operations in each quarter and accordingly, quarter-to-quarter comparisons should not be relied upon as an indicator of our future performance |
| In addition, as a result of such fluctuations, the price of our securities may experience volatility |
| We have historically experienced, and in the future expect to continue to experience, variability in our revenues, profits and cash flows |
| Our historical financial performance is not necessarily a meaningful indicator of future results and we expect financial results to vary from project to project and from quarter to quarter |
| In particular, our revenue recognition policy for tower residences can cause significant fluctuation in our total revenue from quarter to quarter |
| We believe that quarter-to-quarter comparisons of our results should not be relied upon as an indicator of future performance |
| As a result of such fluctuations, the price of our securities may experience volatility |
| Risks of Seasonality—We may be negatively impacted by seasonal factors, which could limit our ability to generate revenue and cash flow |
| Because many of our Florida customers prefer to close on their home purchases before the winter, and due to the typical timing of tower construction commencement and completion, the fourth quarter of each year often produces a disproportionately large portion of our total year’s revenues, profits and cash flows |
| Therefore, delays or significant negative economic events that occur in the fourth quarter may have a disproportionate effect on revenues, profits and cash flows for the year |
| 11 ______________________________________________________________________ [35]Table of Contents Risk of default on Tower Residence Sales—If we do not receive cash corresponding to previously recognized revenues, our future cash flows could be lower than expected |
| In accordance with generally accepted accounting principles, we recognize revenues and profits from sales of tower residences during the course of construction |
| Revenue recognition commences and continues to be recorded when construction is beyond a preliminary stage, the buyer is committed to the extent of being unable to require a full refund of its deposit except for nondelivery of the residence, a substantial percentage of residences in a tower are under non-cancelable contracts, collection of the sales price is reasonably assured and costs can be reasonably estimated |
| Due to various contingencies, like delayed construction and buyer defaults, we may receive less cash than the amount of revenue already recognized or the cash may be received at a later date than we expected which could affect our financial condition and results of operations |
| Risks of Expansion—Expansion into new geographic areas poses risks |
| If we are unable to successfully expand into new geographic areas, our financial condition and results of operations may be adversely affected |
| We plan to continue to expand our business to new geographic areas outside of Florida |
| We will incur additional risks to the extent we develop communities in climates or geographic areas in which we do not have experience or develop a different size or style of community, including: • acquiring the necessary construction materials and labor in sufficient amounts and on acceptable terms; • adapting our construction methods to different geographies and climates; • reaching acceptable sales levels at such communities; and • integrating and managing geographically diverse operations |
| Risks Associated with Natural Disasters—Our sales, revenues, financial condition and results of operations may be adversely affected by natural disasters |
| The Florida climate presents risks of natural disasters |
| To the extent that hurricanes, severe storms, floods or other natural disasters or similar events occur, our business may be adversely affected |
| Our Northeast and Mid-Atlantic regions may also become subject to severe winter conditions that may adversely affect our business |
| Although we insure for losses resulting from natural disasters, such insurance may not be adequate to cover business interruption or losses resulting therefrom, which may have a material adverse effect on our financial condition and results of operations |
| Risks Associated with Our Industry—Laws and regulations related to property development may subject us to additional costs and delays which could reduce our revenues and/or results of operations |
| We are subject to a variety of statutes, ordinances, rules and regulations governing certain developmental matters, building and site design which may impose additional costs and delays on us |
| In particular, we may be required to obtain the approval of numerous governmental authorities regulating such matters as permitted land uses, levels of density and the installation of utility services such as gas, electric, water and waste disposal |
| In addition, certain fees, some of which may be substantial, may be imposed to defray the cost of providing certain governmental services and improvements |
| We also may be subject to additional costs or delays or may be precluded from building a project entirely because of “no growth” or “slow growth” initiatives, building permit allocation ordinances, building moratoriums, restrictions on the availability of utility services or similar governmental regulations that could be imposed in the future |
| These ordinances, moratoriums or restrictions, if imposed, could cause our costs to increase and delay our planned or existing projects, which could in turn reduce our revenues and/or results of operations |
| In addition, some of our land we have acquired and some of the land that we may acquire has not yet received all of the planning approvals or entitlements necessary for planned development or future development |
| Failure to obtain entitlement of this land on a timely basis may adversely affect our future results |
| 12 ______________________________________________________________________ [36]Table of Contents Environmental Regulation—Compliance with applicable environmental laws may substantially increase our costs of doing business which could negatively impact our financial condition and results of operations |
| We are subject to various environmental laws and regulations relating to the operation of our properties, which are administered by numerous federal, state and local governmental agencies |
| Our growth and development opportunities may be limited and more costly as a result of legislative, regulatory or municipal requirements |
| The inability to grow our business or pay these costs could reduce our profits |
| In addition, our operating costs may also be affected by our compliance with, or our being subject to, environmental laws, ordinances and regulations relating to hazardous or toxic substances of, under, or in such property |
| These costs could be significant and could result in decreased profits or the inability to develop our land as originally intended |