WCI Communities is violating the covenants on two of its loans, and company executives are not sure its creditors will grant yet another waiver. If negotiations fail, the company's solvency will be in question.

The seriousness of the Bonita Springs, Fla.-based company's credit situation is outlined at the bottom of its third-quarter earnings report released Thursday Nov. 8 in advance of its quarterly conference call.

At the end of September, the company was in violation of its covenants on its revolving credit agreement as well as its term-loan agreement. Lenders granted it a waiver on Nov. 7, good until Dec 7.

"At this time, it is not certain that we will reach agreement or obtain approval of the anticipated longer-term amendment," the company said in its earnings release. "The amendment will be expensive, and there can be no assurance that we will be able to comply with the amended covenants and other requirements."

If no agreement is reached, the lenders would be able to foreclose on collateral and demand payment of the loans in full. That could unleash a cascade of similar moves by the company's other lenders, leaving the company looking for other sources of cash that may not appear, "which could impair our ability to maintain sufficient working capital," the release warned. "Either situation could have a material adverse affect on the solvency of the company."

The company has little cash on hand to keep it going if its loans are pulled. At the end of September, it had $7.1 million on hand, compared to $41.9 million at the end of September 2006.

There hasn't been much new cash coming in. While its traditional single-family revenue is down 25.9% from last year, its tower business crashed in the third quarter as more buyers defaulted, failing to show up at the closing table. Orders for the third quarter were negative as 89 defaults were recorded, dramatically outnumbering the eight gross new orders.

The defaults forced WCI to increase its default reserve for towers under construction by $23.7 million. In total, the company recorded $36.6 million in unfavorable adjustments, anticipating higher construction costs because of design revisions, additional interest costs because the construction cycles are longer, increased building insurance costs, and discounts and incentives that it expects to have to provide to sell the units.

In total, the company reported a net loss of $69.7 million last quarter, translating to a loss of $1.66 a share. Pre-tax impairments and write offs totaled $35.9 million. Revenues were $166 million, down 61% from last year. Gross new orders were $139.1 million, down 22.5%. Backlog was $517 million.