SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| - Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly period ended September 30, 2004
or
|_| - Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-19292
BLUEGREEN CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 03-0300793
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4960 Conference Way North, Suite 100, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
(561) 912-8000
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of November 12, 2004, there were 29,096,963 shares of Common Stock,
$.01 par value per share, issued, 2,755,300 treasury shares and 26,341,663
shares outstanding.
BLUEGREEN CORPORATION
Index to Quarterly Report on Form 10-Q
Part I - Financial Information
Item 1. Financial Statements (Unaudited) Page
----
Condensed Consolidated Balance Sheets at December 31, 2003
and September 30, 2004 ................................... 3
Condensed Consolidated Statements of Income - Three Months
Ended September 30, 2003 and 2004 ........................ 4
Condensed Consolidated Statements of Income - Nine Months
Ended September 30, 2003 and 2004 ........................ 5
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2003 and 2004 ................. 6
Notes to Condensed Consolidated Financial Statements ........... 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ....................... 19
Item 4. Controls and Procedures ........................................ 36
Part II - Other Information
Item 1. Legal Proceedings .............................................. 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .... 37
Item 6. Exhibits ....................................................... 37
Signatures ................................................................ 37
Note: The terms "Bluegreen" "Bluegreen Communities" and "Bluegreen Vacation
Club" are trademarks registered in the U.S. Patent and Trademark office
("USPTO") by Bluegreen Corporation. The term "World Golf Village" is registered
in the USPTO by World Golf Foundation, Inc.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, September 30,
2003 2004
------------ -------------
(Note) (Unaudited)
ASSETS
Cash and cash equivalents (including restricted cash of approximately $14,156
and $19,533 at December 31, 2003 and September 30, 2004, respectively) ....... $ 53,647 $ 86,237
Contracts receivable, net ....................................................... 25,522 43,631
Notes receivable, net ........................................................... 94,194 120,598
Prepaid expenses ................................................................ 9,925 11,005
Other assets .................................................................... 19,711 21,348
Inventory, net .................................................................. 219,890 197,924
Retained interests in notes receivable sold ..................................... 60,975 67,678
Property and equipment, net ..................................................... 63,430 70,790
Intangible assets ............................................................... 3,728 4,807
--------- ---------
Total assets .......................................................... $ 551,022 $ 624,018
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable ................................................................ $ 6,983 $ 8,701
Accrued liabilities and other ................................................... 32,791 48,670
Deferred income ................................................................. 18,646 26,384
Deferred income taxes ........................................................... 43,924 62,271
Receivable-backed notes payable ................................................. 24,921 32,408
Lines-of-credit and notes payable ............................................... 87,858 74,329
10.50% senior secured notes payable ............................................. 110,000 110,000
8.25% convertible subordinated debentures ....................................... 34,371 27,590
--------- ---------
Total liabilities ............................................................ 359,494 390,353
Minority interest ............................................................... 4,648 7,340
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 1,000 shares authorized; none issued ........... -- --
Common stock, $.01 par value, 90,000 shares authorized; 27,702 and 29,079
shares issued at December 31, 2003 and September 30, 2004, respectively ...... 277 291
Additional paid-in capital ...................................................... 124,931 135,035
Treasury stock, 2,755 common shares at both December 31, 2003 and
September 30, 2004, at cost .................................................. (12,885) (12,885)
Accumulated other comprehensive income, net of income taxes ..................... 1,830 1,047
Retained earnings ............................................................... 72,727 102,837
--------- ---------
Total shareholders' equity ................................................. 186,880 226,325
--------- ---------
Total liabilities and shareholders' equity ............................ $ 551,022 $ 624,018
========= =========
Note: The condensed consolidated balance sheet at December 31, 2003 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.
See accompanying notes to condensed consolidated financial statements.
3
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
September 30, September 30,
2003 2004
------------- -------------
Revenues:
Sales of real estate ......................................... $108,941 $161,898
Other resort and communities operations revenue .............. 14,549 19,662
Interest income .............................................. 4,441 5,743
Gain on sales of notes receivable ............................ 476 3,333
-------- --------
128,407 190,636
Costs and expenses:
Cost of real estate sales .................................... 31,033 58,787
Cost of other resort and communities operations .............. 14,830 20,198
Selling, general and administrative expenses ................. 58,791 78,339
Interest expense ............................................. 3,650 3,242
Provision for loan losses .................................... 2,300 2,603
Other expense ................................................ 515 591
-------- --------
111,119 163,760
-------- --------
Income before minority interest and provision for income taxes .. 17,288 26,876
Minority interest in income of consolidated subsidiary .......... 699 360
-------- --------
Income before provision for income taxes ........................ 16,589 26,516
Provision for income taxes ...................................... 6,387 10,209
-------- --------
Net income ...................................................... $ 10,202 $ 16,307
======== ========
Income per common share:
Basic ....................................................... $ 0.41 $ 0.62
======== ========
Diluted ..................................................... $ 0.36 $ 0.54
======== ========
Weighted average number of common and common
equivalent shares:
Basic ....................................................... 24,634 26,298
======== ========
Diluted ..................................................... 29,377 30,646
======== ========
See accompanying notes to condensed consolidated financial statements.
4
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
September 30, September 30,
2003 2004
------------- -------------
Revenues:
Sales of real estate ......................................... $256,749 $376,403
Other resort and communities operations revenue .............. 42,592 52,376
Interest income .............................................. 12,308 15,484
Gain on sales of notes receivable ............................ 3,360 6,929
Other income ................................................. 608 --
-------- --------
315,617 451,192
Costs and expenses:
Cost of real estate sales .................................... 76,366 131,853
Cost of other resort and communities operations .............. 44,122 53,396
Selling, general and administrative expenses ................. 147,933 195,895
Interest expense ............................................. 9,626 11,339
Provision for loan losses .................................... 5,525 6,502
Other expense ................................................ -- 556
-------- --------
283,572 399,541
-------- --------
Income before minority interest and provision for income taxes .. 32,045 51,651
Minority interest in income of consolidated subsidiary .......... 1,875 2,692
-------- --------
Income before provision for income taxes ........................ 30,170 48,959
Provision for income taxes ...................................... 11,615 18,849
-------- --------
Net income ...................................................... $ 18,555 $ 30,110
======== ========
Income per common share:
Basic ....................................................... $ 0.75 $ 1.16
======== ========
Diluted ..................................................... $ 0.68 $ 1.02
======== ========
Weighted average number of common and common
equivalent shares:
Basic ....................................................... 24,604 25,858
======== ========
Diluted ..................................................... 29,089 30,563
======== ========
See accompanying notes to condensed consolidated financial statements.
5
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30, September 30,
2003 2004
------------- -------------
Operating activities:
Net income .............................................................. $ 18,555 $ 30,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in income of consolidated subsidiary ............. 1,875 2,692
Depreciation and amortization ...................................... 10,403 10,521
Gain on sales of notes receivable .................................. (3,360) (6,929)
(Gain) loss on sale of property and equipment ...................... (212) 384
Provision for loan losses .......................................... 5,525 6,502
Provision for deferred income taxes ................................ 11,615 18,849
Interest accretion on retained interests in notes receivable sold .. (3,564) (3,988)
Proceeds from sales of notes receivable ............................ 49,650 92,730
Proceeds from borrowings collateralized by notes receivable ........ 22,086 16,365
Payments on borrowings collateralized by notes receivable .......... (4,970) (8,840)
Change in operating assets and liabilities:
Contracts receivable ................................................. (17,722) (18,109)
Notes receivable ..................................................... (115,197) (140,407)
Inventory ............................................................ 11,232 34,177
Other assets ......................................................... (3,186) (2,780)
Accounts payable, accrued liabilities and other ...................... 22,626 24,126
--------- ---------
Net cash provided by operating activities .................................. 5,356 55,403
--------- ---------
Investing activities:
Purchases of property and equipment ..................................... (7,527) (14,676)
Sales of property and equipment ......................................... 1,080 8
Installment payments on business acquisition (see Note 2) ............... -- (575)
Cash received from retained interests in notes receivable sold .......... 5,948 11,231
--------- ---------
Net cash used by investing activities ...................................... (499) (4,012)
--------- ---------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and other
notes payable ......................................................... 32,000 57,640
Payments under line-of-credit facilities and other notes payable ........ (33,830) (75,778)
Payment of debt issuance costs .......................................... (1,642) (3,219)
Proceeds from exercise of stock options ................................. 537 2,556
--------- ---------
Net cash used by financing activities ...................................... (2,935) (18,801)
--------- ---------
Net increase in cash and cash equivalents .................................. 1,922 32,590
Cash and cash equivalents at beginning of period ........................... 34,276 53,647
--------- ---------
Cash and cash equivalents at end of period ................................. 36,198 86,237
Restricted cash and cash equivalents at end of period ...................... (16,416) (19,533)
--------- ---------
Unrestricted cash and cash equivalents at end of period .................... $ 19,782 $ 66,704
========= =========
6
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
(Unaudited)
Nine Months Ended
September 30, September 30,
2003 2004
------------- -------------
Supplemental schedule of non-cash operating, investing
and financing activities:
Inventory acquired through financing ............................ $43,488 $ 4,440
======= =======
Inventory acquired through foreclosure or deedback in lieu of
foreclosure .................................................. $ 4,967 $ 7,440
======= =======
Income tax benefit from stock options exercised ................. $ -- $ 613
======= =======
Property and equipment acquired through financing ............... $ 2,250 $ 169
======= =======
Retained interests in notes receivable sold ..................... $11,682 $19,094
======= =======
Net change in unrealized losses in retained interests in notes
receivable sold .............................................. $ 2,158 $ 1,224
======= =======
Settlement of business acquisition purchase price (see Note 2) .. $ -- $ 925
======= =======
Conversion of 8.25% convertible subordinated debentures ......... $ -- $ 6,781
======= =======
See accompanying notes to condensed consolidated financial statements.
7
BLUEGREEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
1. Organization and Significant Accounting Policies
We have prepared the accompanying unaudited condensed consolidated
financial statements in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
The financial information furnished herein reflects all adjustments
consisting of normal recurring accruals that, in our opinion, are necessary for
a fair presentation of the results for the interim periods. The results of
operations for the nine months ended September 30, 2004 are not necessarily
indicative of the results to be expected for the year ending December 31, 2004.
For further information, refer to our audited consolidated financial statements
for the year ended December 31, 2003, which are included in our Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on March 29, 2004.
We have historically experienced seasonal fluctuations in our gross
revenues and net earnings, with the majority of our gross revenues and net
earnings historically occurring in the quarters ending in June and September
each year. Other material fluctuations in operating results may occur due to the
timing of development and the requirement that we use the
percentage-of-completion method of accounting. Under this method of income
recognition, income is recognized as work progresses. Measures of progress are
based on the relationship of costs incurred to date to expected total costs.
Organization
We are a leading provider of vacation and residential lifestyle choices
through our resorts and residential communities businesses. Our resorts business
("Bluegreen(R) Resorts") acquires, develops and markets vacation ownership
interests ("VOIs") in resorts generally located in popular, high-volume,
"drive-to" vacation destinations. VOIs in any of our resorts entitle the buyer
to an annual allotment of "points" in perpetuity (supported by an underlying
deeded vacation ownership interest being held in trust for the buyer) in our
Bluegreen Vacation Club(R). Members in our Bluegreen Vacation Club may use their
points to stay in any of our participating resorts or for other vacation
options, including cruises and stays at approximately 3,700 resorts offered by a
third-party, worldwide vacation ownership exchange network. We are currently
marketing and selling VOIs in 16 resorts located in the United States and Aruba
as well as at four off-site sales offices located in the United States. Our
residential communities business ("Bluegreen Communities(R)") acquires, develops
and subdivides property and markets residential land homesites, the majority of
which are sold directly to retail customers who seek to build a home in a high
quality residential setting, in some cases on properties featuring a golf course
and other related amenities. During the nine months ended September 30, 2004,
sales generated by Bluegreen Resorts comprised approximately 63% of our total
sales of real estate while sales generated by Bluegreen Communities comprised
approximately 37% of our total sales of real estate. Our other resort and
communities operations revenues consist primarily of mini-vacation package
sales, vacation ownership tour sales, resort property management services,
resort title services, resort amenity operations, rental brokerage services,
realty operations and daily-fee golf course operations. We also generate
significant interest income by providing financing to individual purchasers of
VOIs and, to a lesser extent, homesites sold by Bluegreen Communities.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of
all of our wholly-owned subsidiaries and entities in which we hold a controlling
financial interest. The only non-wholly owned subsidiary that we consolidate is
Bluegreen/Big Cedar Vacations LLC (the "Joint Venture"), as we hold a 51% equity
interest in the Joint Venture, have an active role as the day-to-day manager of
the Joint Venture's activities and have majority voting control of the Joint
Venture's management committee. We have eliminated all significant intercompany
balances and transactions.
Use of Estimates
Accounting principles generally accepted in the United States require us
to make estimates and assumptions that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
8
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share is computed in the same manner as basic earnings per share, but
also gives effect to all dilutive stock options using the treasury stock method
and includes an adjustment, if dilutive, to both net income and shares
outstanding as if our 8.25% convertible subordinated debentures were converted
into common stock at the beginning of the periods presented. We have excluded
approximately 1.2 million anti-dilutive stock options from our computation of
earnings per common share for the three- and nine-months ended September 30,
2003. There were no anti-dilutive stock options during the three and nine months
ended September 30, 2004.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
----------------------------------------------------------
Basic earnings per share - numerator:
Net income ................................. $10,202 $16,307 $18,555 $30,110
==========================================================
Diluted earnings per share - numerator:
Net income - basic ......................... $10,202 $16,307 $18,555 $30,110
Effect of dilutive securities, net of
income taxes ............................ 441 353 1,308 1,109
----------------------------------------------------------
Net income - diluted ....................... $10,643 $16,660 $19,863 $31,219
==========================================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares ................. 24,634 26,298 24,604 25,858
Effect of dilutive securities:
Stock options ........................... 572 990 314 1,053
Convertible securities .................. 4,171 3,358 4,171 3,652
----------------------------------------------------------
Dilutive potential common shares .............. 4,743 4,348 4,485 4,705
----------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions ..................... 29,377 30,646 29,089 30,563
==========================================================
Basic earnings per common share ............... $ 0.41 $ 0.62 $ 0.75 $ 1.16
==========================================================
Diluted earnings per common share ............. $ 0.36 $ 0.54 $ 0.68 $ 1.02
==========================================================
Retained Interest in Notes Receivable Sold
When we sell our notes receivable either pursuant to our vacation
ownership receivables purchase facilities (more fully described in Note 3) or
term securitizations, we evaluate whether or not such transfers should be
accounted for as a sale pursuant to Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" and related interpretations. The evaluation
of sale treatment under SFAS No. 140 involves legal assessments of the
transactions, which include determining whether the transferred assets have been
isolated from us (i.e., put presumptively beyond our reach and our creditors,
even in bankruptcy or other receivership), determining whether each transferee
has the right to pledge or exchange the assets it received, and ensuring that we
do not maintain effective control over the transferred assets through either an
agreement that (1) both entitles and obligates us to repurchase or redeem the
assets before their maturity or (2) provides us with the ability to unilaterally
cause the holder to return the assets (other than through a cleanup call).
In connection with such transactions, we retain subordinated tranches,
rights to excess interest spread and servicing rights, all of which are retained
interests in the notes receivable sold. Gain or loss on the sale of the
receivables depends in part on the allocation of the previous carrying amount of
the financial assets involved in the transfer between the assets sold and the
retained interests based on their relative fair value at the date of transfer.
We consider our retained interests in notes receivable sold as
available-for-sale investments and, accordingly, carry them at fair value in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Accordingly, unrealized holding gains or losses on our
retained interests in notes receivable sold are included in our shareholders'
equity, net of income taxes. Declines in fair value that are determined to be
other than temporary are charged to operations.
9
We measure the fair value of the retained interests in the notes
receivable sold initially and periodically based on the present value of future
expected cash flows estimated using our best estimates of the key assumptions -
prepayment rates, loss severity rates, default rates and discount rates
commensurate with the risks involved. We revalue our retained interests in notes
receivable sold on a quarterly basis.
Interest on the retained interests in notes receivable sold is accreted
using the effective yield method.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", encourages, but does not require companies to record compensation
cost for employee stock options at fair value. We have elected to continue to
account for our employee stock options using the intrinsic value method pursuant
to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, compensation cost for our
employee stock options is measured as the excess, if any, of the quoted market
price of our stock at the date of the grant over the exercise price of the
option.
Pro forma information regarding net income and earnings per share as if we
had accounted for the grants of stock options to our employees under the fair
value method of SFAS No. 123 is presented below. There were 40,000 stock options
granted to our non-employee directors during the nine months ended September 30,
2004. The fair value of the stock options granted during the nine months ended
September 30, 2003 and 2004 was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk free investment rate of 2.80% and 2.12%; dividend yield of 0%
and 0%; a volatility factor of the expected market price of our common stock of
0.631 and 0.650; and a weighted average life of the options of 6.0 years and 3.0
years, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying SFAS No. 123 for the purpose of providing pro forma disclosures are not
likely to be representative of the effects on reported pro forma net income for
future years, due to the impact of the staggered vesting periods of our stock
option grants. Our pro forma information is as follows (in thousands, except per
share data).
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Net income, as reported .................... $ 10,202 $ 16,307 $ 18,555 $ 30,110
Pro forma stock-based employee
compensation cost, net of income taxes ... (81) (60) (320) (257)
---------- ---------- ---------- ----------
Pro forma net income ....................... $ 10,121 $ 16,247 $ 18,235 $ 29,853
========== ========== ========== ==========
Earnings per share, as reported:
Basic .................................... $ 0.41 $ 0.62 $ 0.75 $ 1.16
Diluted .................................. $ 0.36 $ 0.54 $ 0.68 $ 1.02
Pro forma earnings per share:
Basic .................................... $ 0.41 $ 0.62 $ 0.74 $ 1.15
Diluted .................................. $ 0.36 $ 0.54 $ 0.67 $ 1.01
During the nine months ended September 30, 2004, optionees under our employee
and director stock option plans exercised stock options resulting in the
issuance of an aggregate 555,000 shares of our common stock and proceeds of $2.6
million.
Other Comprehensive Income
Other comprehensive income on our condensed consolidated balance sheets is
comprised of net unrealized gains on retained interests in notes receivable
sold, which are held as available-for-sale investments. The following table
discloses the components of our comprehensive income for the periods presented
(in thousands):
10
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Net income ...................................... $ 10,202 $ 16,307 $ 18,555 $ 30,110
Net unrealized (losses) gains on retained
interests in notes receivable sold, net of
income taxes ................................. 551 (935) 1,327 (783)
-------- -------- -------- --------
Total comprehensive income ...................... $ 10,753 $ 15,372 $ 19,882 $ 29,327
======== ======== ======== ========
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (the "FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51" ("FIN 46"). FIN 46 addresses the consolidation of
variable interest entities. FIN 46 expands the criteria for consideration in
determining whether a variable interest entity should be consolidated by a
business entity, and requires existing unconsolidated variable interest entities
(which include, but are not limited to, certain special purpose entities) to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. This interpretation's consolidation
provisions applied immediately to variable interests in variable interest
entities created after January 31, 2003. Pursuant to a subsequent FASB revision
in December 2003, variable interest entities that were created before February
1, 2003 and were not reported as consolidated in accordance with FIN 46
previously were required to be reported as consolidated in the first interim or
annual period ended after March 15, 2004. The adoption of FIN 46 did not have a
material impact on our financial position or results of operations as of and for
the nine months ended September 30, 2004.
In February 2003, the FASB released for public comment an exposure draft
of an American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP"), "Accounting for Real Estate Time-Sharing Transactions" and a
proposed FASB Statement, "Accounting for Real Estate Time-Sharing
Transactions--an amendment of FASB Statements No. 66 and No. 67." The proposed
SOP and related FASB Statement, if cleared by the FASB, would have provided
accounting guidance for vacation ownership interest transactions, including: a
framework for sales and revenue recognition, the accounting for cost of sales
and inventory, credit losses and changes in estimates. In January 2004, the FASB
recommended that the proposed SOP not include any revenue recognition guidance
based on changes in revenue recognition practices that had occurred since this
project was initially started, the FASB's revenue recognition project and the
potential for requiring preparers to change their revenue recognition practices
twice in a short time frame and the rules-based nature of the revenue
recognition requirements of the proposed SOP. In August 2004, the SOP, revised
by the FASB's recommendations, received clearance from the FASB. The FASB also
approved the issuance of a final Statement that will amend FASB Statement No.
67, "Accounting for Costs and Initial Rental Operations of Real Estate
Projects," to state that the guidance for (a) incidental operations and (b)
costs incurred to sell real estate projects do not apply to real estate
timesharing transactions. The FASB also decided that the final Statement should
also amend FASB Statement No. 66, "Accounting for Sales of Real Estate," to
include a footnote that refers to the interpretive guidance in the SOP for
timesharing transactions. The FASB is expected to vote on the final Statement in
the fourth quarter of 2004, the issuance of which is expected to coincide with
the issuance of the final SOP. We have not yet completely evaluated the impact
of the SOP on our financial position or results of operations, however, we do
not believe that the SOP will have a material impact on us.
Reclassifications
We have made certain reclassifications of prior period amounts to conform
to the current period presentation. Most significantly, we previously carried
amounts held in bank accounts on behalf of the purchasers of our vacation
ownership notes receivable on our balance sheet as restricted cash with a
corresponding liability included under the caption "accrued liabilities and
other." While we retain the servicing rights on the vacation ownership notes
receivable sold, these cash accounts operate in the name of third-parties e.g.,
the facility trustees or the note purchasers. We have therefore reduced both
"restricted cash" and "accrued liabilities and other" for the aggregate carrying
amount of this cash in all periods presented, which as of December 31, 2003 was
$19.4 million.
2. Acquisition
On October 2, 2002, Great Vacation Destinations, Inc. ("GVD"), one of our
wholly-owned subsidiaries, with no prior operations, acquired substantially all
of the assets and assumed certain liabilities of TakeMeOnVacation, LLC, RVM
Promotions, LLC and RVM Vacations, LLC (collectively, "TMOV") for $2.8 million
in cash, $500,000 of which was paid on March 31, 2003. The acquisition agreement
provided for the payment of additional consideration of up to $12.5 million
through December 31, 2007 upon GVD meeting certain earnings targets (the "Earn
Out Provisions").
11
On June 1, 2004, we executed an amendment to the acquisition agreement
with the former owners of TMOV whereby in exchange for agreeing to pay $1.5
million, the former owners of TMOV agreed to release us from any obligation to
pay amounts under the Earn Out Provisions. The $1.5 million, which is payable in
quarterly installments over an 18 month period commencing on May 30, 2004, was
recorded as goodwill.
3. Sales of Notes Receivable
On October 8, 2003, Resort Finance, LLC ("RFL") acquired and assumed the
rights, obligations and commitments of ING Capital, LLC ("ING") as initial
purchaser in an existing vacation ownership receivables purchase facility (the
"Purchase Facility") originally executed between ING and us in April 2002.. In
connection with its assumption of the Purchase Facility and subsequent
amendments, RFL increased the size of the Purchase Facility to $150.0 million
and extended the term of the Purchase Facility on a revolving basis through
September 30, 2004. On September 30, 2004, we executed an extension of the
Purchase Facility to allow for sales of notes receivable for a cumulative
purchase price of up to $100.0 million on a revolving basis through September
29, 2005.
The Purchase Facility utilizes an owner's trust structure, pursuant to
which we sell receivables to Bluegreen Receivables Finance Corporation V, one of
our wholly-owned, special purpose finance subsidiaries (the "Finance
Subsidiary"), and the Finance Subsidiary sells the receivables to an owner's
trust (a qualified special purpose entity) without recourse to us or the Finance
Subsidiary except for breaches of certain representations and warranties at the
time of sale. We did not enter into any guarantees in connection with the
Purchase Facility. The Purchase Facility has detailed requirements with respect
to the eligibility of receivables for purchase, and fundings under the Purchase
Facility are subject to certain customary conditions precedent. Under the
Purchase Facility, a variable purchase price of 85.00% of the principal balance
of the receivables sold, subject to certain customary terms and conditions, is
paid at closing in cash. The balance of the purchase price is deferred until
such time as the Initial Purchaser has received a specified return and all
servicing, custodial, agent and similar fees and expenses have been paid. The
Initial Purchaser earned a return equal to the London Interbank Offered Rate
("LIBOR") plus 1.00% through April 15, 2003, LIBOR plus 1.25% through October 7,
2003, LIBOR plus an additional return ranging from 2.00% to 3.25% (based on the
amount outstanding under the Purchase Facility) from October 8, 2003 through
September 30, 2004, and will earn LIBOR plus 3.25% through September 29, 2005,
subject to the use of alternate return rates in certain circumstances. In
addition, the Initial Purchaser received or will receive a 0.25% annual facility
fee through April 15, 2003 and from October 8, 2003 through September 29, 2005.
RFL's obligation to purchase under the Purchase Facility may terminate
upon the occurrence of specified events. These specified events, some of which
are subject to materiality qualifiers and cure periods, include, without
limitation, (1) a breach by us of the representations or warranties in the
Purchase Facility agreements, (2) a failure by us to perform the covenants in
the Purchase Facility agreements, including, without limitation, a failure by us
to pay principal or interest due to RFL, (3) the commencement of a bankruptcy
proceeding or the like against us, (4) a material adverse change to us since
December 31, 2001, (5) the amount borrowed under the Purchase Facility exceeding
the borrowing base, (6) significant delinquencies or defaults on the receivables
sold, (7) a payment default by us under any other borrowing arrangement of $5
million or more (a "Significant Arrangement"), or an event of default under any
indenture, facility or agreement that results in a default under any Significant
Arrangement, (8) a default or breach under any other agreement beyond the
applicable grace period if such default or breach (a) involves the failure to
make a payment in excess of 5% of our tangible net worth or (b) causes, or
permits the holder of indebtedness to cause, an amount in excess of 5% of our
tangible net worth to become due, (9) our tangible net worth not equaling at
least $110.0 million plus 50% of net income and 100% of the proceeds from new
equity financing following the first closing under the Purchase Facility, (10)
our ratio of debt to tangible net worth exceeding 6 to 1, or (11) our failure to
perform our servicing obligations.
We act as servicer under the Purchase Facility for a fee. The Purchase
Facility agreements include various conditions to purchase, covenants, trigger
events and other provisions customary for a transaction of this type.
During the six months ended June 30, 2004, we sold $60.7 million of
aggregate principal balance of notes receivable under the Purchase Facility for
a cumulative purchase price of $51.6 million.
On July 8, 2004, BB&T Capital Markets, a division of Scott & Stringfellow,
Inc. ("BB&T"), consummated a $156.6 million private offering and sale of
vacation ownership receivable-backed securities on our behalf (the "2004 Term
Securitization"). The $172.1 million in aggregate principal of vacation
ownership receivables offered and sold in the 2004 Term Securitization included
$152.8 million in aggregate principal of qualified receivables that were
previously sold under the Purchase Facility and $19.3 million in aggregate
principal of qualified vacation ownership receivables (the "Pre-funded
Receivables") that, as permitted in the 2004 Term Securitization, were
subsequently sold without recourse (except for breaches of certain
representations and warranties at the time of sale) in two separate tranches on
August 13, 2004 and August 24, 2004 to an owners' trust (a qualified special
purpose entity) through our wholly-owned, special purpose finance
12
subsidiary, Bluegreen Receivables Finance Corporation VIII. The proceeds from
the 2004 Term Securitization were used to pay RFL all amounts outstanding under
the Purchase Facility, pay fees associated with the transaction to third-parties
and deposit initial amounts in a required cash reserve account. We received net
cash proceeds of $19.1 million, certain VOIs with a carrying value of $331,000
that were being held in the Purchase Facility in connection with previously
defaulted receivables, certain vacation ownership notes receivable with a net
realizable value of $4.2 million that were previously held in the Purchase
Facility that did not qualify for the 2004 Term Securitization and a retained
interest in the future cash flows from the 2004 Term Securitization of $33.0
million. We also recognized an aggregate gain of $2.6 million in connection with
the 2004 Term Securitization.
On September 29, 2004, we sold $25.9 million in aggregate principal of
vacation ownership receivables under the Purchase Facility for a cumulative
purchase price of $22.0 million. As a result of this sale, we recognized a gain
of $701,000 and recorded retained interests in notes receivable sold and
servicing assets of $4.4 million and $268,000, respectively. As a result of this
sale and the 2004 Term Securitization, the remaining availability under the
Purchase Facility was $78.0 million at September 30, 2004, subject to the
eligibility requirements and certain conditions precedent.
The following assumptions were used to measure the initial fair value of
the retained interests in notes receivable sold or securitized during the nine
months ended September 30, 2004: Prepayment rates ranging from 17% to 13% per
annum as the portfolios mature; loss severity rates ranging 40% to 45%; default
rates ranging from 10% to 1% per annum as the portfolios mature; and discount
rates ranging from 9% to 14%.
4. Lines of Credit and Notes Payable
On July 9, 2004, we borrowed $4.4 million from the Central Carolina Bank.
The proceeds from the borrowing were used to acquire 800 acres of land in
Chatham County, North Carolina for the purpose of developing a golf course
community to be known as Chapel Ridge. The total purchase price of the land was
$5.5 million. The borrowing, which is secured by the land, requires monthly
interest-only payments at the prime lending rate plus 0.5% per annum, principal
repayments through agreed-upon release prices as homesites are sold at Chapel
Ridge and becomes due in its entirety on July 9, 2007. As of September 30, 2004,
$3.9 million of this borrowing was outstanding.
From July through September 2004, we borrowed an aggregate $7.2 million
for construction expenditures at The Fountains(TM) resort in Orlando, Florida
pursuant to an existing $75.0 million acquisition, development and construction
revolving credit facility with Residential Funding Corporation ("RFC"), an
affiliate of GMAC (the "GMAC AD&C Facility"). The borrowing period on the GMAC
AD&C Facility expires on February 10, 2005, and outstanding borrowings mature no
later than February 10, 2009, although specific draws typically are due four
years from the borrowing date. Principal will be repaid through agreed-upon
release prices as vacation ownership interests are sold at the financed resorts,
subject to minimum required amortization. Indebtedness under the facility bears
interest at LIBOR plus 4.75%. Interest payments are due monthly. The outstanding
balance under this revolving facility was $24.6 million at September 30, 2004.
On August 26, 2004, we borrowed $9.6 million under an existing acquisition
and development loan with Wachovia Bank, N.A. (the "Wachovia Loan"). The
Wachovia Loan is collateralized by the real property homesites (and personal
property related thereto) at our Sanctuary Cove(TM) at St. Andrews Sound
residential land community in Brunswick, Georgia. Principal payments on the
Wachovia Loan are effected through agreed-upon release prices paid to Wachovia
Bank, N.A., as homesites at Sanctuary Cove at St. Andrews Sound are sold,
subject to minimum quarterly amortization commencing on November 12, 2004. The
Wachovia Loan bears interest at LIBOR plus 2.00%, subject to increase in the
event of a default, as defined in the Wachovia Loan documents. Interest payments
are due monthly. The Wachovia Loan matures on October 12, 2006, however we can
extend the maturity of the Wachovia Loan until November 12, 2008, subject to
certain customary extension terms and conditions. The outstanding balance under
the Wachovia Loan was $8.4 million at September 30, 2004.
On October 29, 2004, we borrowed $10.0 million under an existing
acquisition and development loan with Wells Fargo Foothill, Inc. (the "Foothill
Loan"). The Foothill Loan is collateralized by the real property homesites (and
personal property related thereto) at our Traditions of Braselton(TM) golf
course community in Braselton, Georgia. The Foothill Loan requires principal
payments based on agreed-upon release prices as homesites are sold and bears
interest at the prime lending rate plus 1.25%, payable monthly. Outstanding
indebtedness related to the Foothill Loan is due on March 10, 2006.
5. Senior Secured Notes Payable
On April 1, 1998, we consummated a private placement offering of $110.0
million in aggregate principal amount of 10.5% senior secured notes due April 1,
2008 (the "Notes"). None of the assets of Bluegreen Corporation secure our
obligations under the Notes, and the Notes are effectively subordinated to our
secured indebtedness to any third party to the extent of assets serving as
security therefor. The Notes are unconditionally guaranteed, jointly and
severally, by each of our
13
subsidiaries (the "Subsidiary Guarantors"), with the exception of Bluegreen/Big
Cedar Vacations, LLC, Bluegreen Properties N.V., Resort Title Agency, Inc., any
special purpose finance subsidiary, any subsidiary which is formed and continues
to operate for the limited purpose of holding a real estate license and acting
as a broker, and certain other subsidiaries which have individually less than
$50,000 of assets (collectively, "Non-Guarantor Subsidiaries"). Each of the note
guarantees cover the full amount of the Notes and each of the Subsidiary
Guarantors is 100% owned, directly or indirectly, by us. Supplemental financial
information for Bluegreen Corporation, its combined Non-Guarantor Subsidiaries
and its combined Subsidiary Guarantors follows:
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
December 31, 2003
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents .......................... $ 29,872 $ 8,716 $ 15,059 $ -- $ 53,647
Contracts receivable, net .......................... -- 1,075 24,447 -- 25,522
Intercompany receivable ............................ 100,191 -- -- (100,191) --
Notes receivable, net .............................. 847 19,232 74,115 -- 94,194
Other assets ....................................... 6,229 3,372 23,763 -- 33,364
Inventory, net ..................................... -- 22,225 197,665 -- 219,890
Retained interests in notes receivable sold ........ -- 60,975 -- -- 60,975
Investments in subsidiaries ........................ 185,162 -- 3,230 (188,392) --
Property and equipment, net ........................ 11,936 1,900 49,594 -- 63,430
--------- --------- --------- --------- ---------
Total assets ................................ $ 334,237 $ 117,495 $ 387,873 $(288,583) $ 551,022
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other .. $ 13,266 $ 9,874 $ 35,280 $ -- $ 58,420
Intercompany payable ............................. -- 1,127 99,064 (100,191) --
Deferred income taxes ............................ (19,954) 29,314 34,564 -- 43,924
Lines-of-credit and notes payable ................ 5,026 22,759 84,994 -- 112,779
10.50% senior secured notes payable .............. 110,000 -- -- -- 110,000
8.25% convertible subordinated debentures ........ 34,371 -- -- -- 34,371
--------- --------- --------- --------- ---------
Total liabilities ........................... 142,709 63,074 253,902 (100,191) 359,494
Minority interest ................................ -- -- -- 4,648 4,648
Total shareholders' equity ....................... 191,528 54,421 133,971 (193,040) 186,880
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity .. $ 334,237 $ 117,495 $ 387,873 $(288,583) $ 551,022
========= ========= ========= ========= =========
September 30, 2004
(Unaudited)
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents .......................... $ 50,908 $ 19,977 $ 15,352 $ -- $ 86,237
Contracts receivable, net .......................... -- 2,072 41,559 -- 43,631
Intercompany receivable ............................ 84,620 -- -- (84,620) --
Notes receivable, net .............................. -- 28,758 91,840 -- 120,598
Other assets ....................................... 5,909 3,819 27,432 -- 37,160
Inventory, net ..................................... -- 20,902 177,022 -- 197,924
Retained interests in notes receivable sold ........ -- 67,678 -- -- 67,678
Investments in subsidiaries ........................ 215,418 -- 3,230 (218,648) --
Property and equipment, net ........................ 14,046 2,110 54,634 -- 70,790
--------- --------- --------- --------- ---------
Total assets ................................ $ 370,901 $ 145,316 $ 411,069 $(303,268) $ 624,018
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other .. $ 14,886 $ 17,366 $ 51,503 $ -- $ 83,755
Intercompany payable ............................. -- 3,314 81,306 (84,620) --
Deferred income taxes ............................ (18,851) 35,353 45,769 -- 62,271
Lines-of-credit and notes payable ................ 3,611 22,504 80,622 -- 106,737
10.50% senior secured notes payable .............. 110,000 -- -- -- 110,000
8.25% convertible subordinated debentures ........ 27,590 -- -- -- 27,590
--------- --------- --------- --------- ---------
Total liabilities ........................... 137,236 78,537 259,200 (84,620) 390,353
Minority interest ................................ -- -- -- 7,340 7,340
Total shareholders' equity ....................... 233,665 66,779 151,869 (225,988) 226,325
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity .. $ 370,901 $ 145,316 $ 411,069 $(303,268) $ 624,018
========= ========= ========= ========= =========
14
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended September 30, 2003
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 9,857 $ 99,084 $ -- $ 108,941
Other resort and communities operations revenue .. -- 1,416 13,133 -- 14,549
Management fees .................................. 11,803 -- -- (11,803) --
Equity income from subsidiaries .................. 9,132 -- -- (9,132) --
Interest income .................................. 64 1,542 2,835 -- 4,441
Gain on sales of notes receivable ................ -- 476 -- -- 476
--------- --------- --------- --------- ---------
20,999 13,291 115,052 (20,935) 128,407
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 2,566 28,467 -- 31,033
Cost of other resort and communities operations .. -- 799 14,031 -- 14,830
Management fees .................................. -- 298 11,505 (11,803) --
Selling, general and administrative expenses ..... 7,471 5,473 45,847 -- 58,791
Interest expense ................................. 2,647 169 834 -- 3,650
Provision for loan losses ........................ -- 303 1,997 -- 2,300
Other expense .................................... 10 358 147 -- 515
--------- --------- --------- --------- ---------
10,128 9,966 102,828 (11,803) 111,119
--------- --------- --------- --------- ---------
Income before minority interest and provision
for income taxes ............................ 10,871 3,325 12,224 (9,132) 17,288
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 699 699
--------- --------- --------- --------- ---------
Income before provision for income taxes ......... 10,871 3,325 12,224 (9,831) 16,589
Provision for income taxes ....................... 669 1,011 4,707 -- 6,387
--------- --------- --------- --------- ---------
Net income ....................................... $ 10,202 $ 2,314 $ 7,517 $ (9,831) $ 10,202
========= ========= ========= ========= =========
Three Months Ended September 30, 2004
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 11,040 $ 150,858 $ -- $ 161,898
Other resort and communities operations revenue .. -- 2,359 17,303 -- 19,662
Management fees .................................. 17,508 -- -- (17,508) --
Equity income from subsidiaries .................. 14,223 -- -- (14,223) --
Interest income .................................. 70 1,777 3,896 -- 5,743
Gain on sales of notes receivable ................ -- 3,333 -- -- 3,333
--------- --------- --------- --------- ---------
31,801 18,509 172,057 (31,731) 190,636
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 3,602 55,185 -- 58,787
Cost of other resort and communities operations .. -- 1,423 18,775 -- 20,198
Management fees .................................. -- 302 17,206 (17,508) --
Selling, general and administrative expenses ..... 12,856 5,905 59,578 -- 78,339
Interest expense ................................. 1,293 376 1,573 -- 3,242
Provision for loan losses ........................ -- 410 2,193 -- 2,603
Other expense .................................... 38 38 515 -- 591
--------- --------- --------- --------- ---------
14,187 12,056 155,025 (17,508) 163,760
--------- --------- --------- --------- ---------
Income before minority interest and provision
for income taxes ............................ 17,614 6,453 17,032 (14,223) 26,876
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 360 360
--------- --------- --------- --------- ---------
Income before provision for income taxes ......... 17,614 6,453 17,032 (14,583) 26,516
Provision for income taxes ....................... 1,307 2,361 6,541 -- (10,209)
--------- --------- --------- --------- ---------
Net income ....................................... $ 16,307 $ 4,092 $ 10,491 $ (14,583) $ 16,307
========= ========= ========= ========= =========
15
Nine Months Ended September 30, 2003
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 26,227 $ 230,522 $ -- $ 256,749
Other resort and communities operations revenue .. -- 4,319 38,273 -- 42,592
Management fees .................................. 28,370 -- -- (28,370) --
Equity income from subsidiaries .................. 18,732 -- -- (18,732) --
Interest income .................................. 228 5,314 6,766 -- 12,308
Gain on sales of notes receivable ................ -- 3,360 -- -- 3,360
Other income (expense) ........................... 50 (534) 1,092 -- 608
--------- --------- --------- --------- ---------
47,380 38,686 276,653 (47,102) 315,617
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 7,011 69,355 -- 76,366
Cost of other resort and communities operations .. -- 2,271 41,851 -- 44,122
Management fees .................................. -- 814 27,556 (28,370) --
Selling, general and administrative expenses ..... 22,066 14,387 111,480 -- 147,933
Interest expense ................................. 6,870 434 2,322 -- 9,626
Provision for loan losses ........................ -- 834 4,691 -- 5,525
--------- --------- --------- --------- ---------
28,936 25,751 257,255 (28,370) 283,572
--------- --------- --------- --------- ---------
Income before minority interest and provision
(benefit) for income taxes .................. 18,444 12,935 19,398 (18,732) 32,045
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 1,875 1,875
--------- --------- --------- --------- ---------
Income before provision (benefit) for income
taxes ....................................... 18,444 12,935 19,398 (20,607) 30,170
Provision (benefit) for income taxes ............. (111) 4,258 7,468 -- 11,615
--------- --------- --------- --------- ---------
Net income ....................................... $ 18,555 $ 8,677 $ 11,930 $ (20,607) $ 18,555
========= ========= ========= ========= =========
Nine Months Ended September 30, 2004
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 32,711 $ 343,692 $ -- $ 376,403
Other resort and communities operations revenue .. -- 6,673 45,703 -- 52,376
Management fees .................................. 40,599 -- -- (40,599) --
Equity income from subsidiaries .................. 28,347 -- -- (28,347) --
Interest income .................................. 227 6,450 8,807 -- 15,484
Gain on sales of notes receivable ................ -- 6,929 -- -- 6,929
--------- --------- --------- --------- ---------
69,173 52,763 398,202 (68,946) 451,192
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 8,704 123,149 -- 131,853
Cost of other resort and communities operations .. -- 3,942 49,454 -- 53,396
Management fees .................................. -- 779 39,820 (40,599) --
Selling, general and administrative expenses ..... 31,294 17,390 147,211 -- 195,895
Interest expense ................................. 6,287 1,064 3,988 -- 11,339
Provision for loan losses ........................ -- 848 5,654 -- 6,502
Other expense (income) ........................... 378 354 (176) -- 556
--------- --------- --------- --------- ---------
37,959 33,081 369,100 (40,599) 399,541
--------- --------- --------- --------- ---------
Income before minority interest and provision
for income taxes ............................ 31,214 19,682 29,102 (28,347) 51,651
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 2,692 2,692
--------- --------- --------- --------- ---------
Income before provision for income taxes ......... 31,214 19,682 29,102 (31,039) 48,959
Provision for income taxes ....................... 1,104 6,541 11,204 -- 18,849
--------- --------- --------- --------- ---------
Net income ....................................... $ 30,110 $ 13,141 $ 17,898 $ (31,039) $ 30,110
========= ========= ========= ========= =========
16
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2003
--------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------- ---------- ------------
Operating activities:
Net cash provided (used) by operating activities .................. $ (5,857) $ (4,198) $ 15,411 $ 5,356
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment ............................. (2,104) (336) (5,087) (7,527)
Sales of property and equipment ................................. 854 -- 226 1,080
Cash received from retained interests in notes receivable sold .. -- 5,948 -- 5,948
-------- -------- -------- --------
Net cash provided (used) by investing activities .................. (1,250) 5,612 (4,861) (499)
-------- -------- -------- --------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and
notes payable ................................................ 7,000 -- 25,000 32,000
Payments under line-of-credit facilities and notes payable ...... (7,528) -- (26,302) (33,830)
Payment of debt issuance costs .................................. (273) (985) (384) (1,642)
Proceeds from exercise of stock options ......................... 537 -- -- 537
-------- -------- -------- --------
Net cash used by financing activities ............................. (264) (985) (1,686) (2,935)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. (7,371) 429 8,864 1,922
Cash and cash equivalents at beginning of period .................. 22,373 5,322 6,581 34,276
-------- -------- -------- --------
Cash and cash equivalents at end of period ........................ 15,002 5,751 15,445 36,198
Restricted cash and cash equivalents at end of period ............. (173) (1,803) (14,440) (16,416)
-------- -------- -------- --------
Unrestricted cash and cash equivalents at end of period ........... $ 14,829 $ 3,948 $ 1,005 $ 19,782
======== ======== ======== ========
Nine Months Ended September 30, 2004
--------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------- ---------- ------------
Operating activities:
Net cash provided by operating activities ......................... $ 27,003 $ 5,212 $ 23,188 $ 55,403
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment ............................. (4,365) (607) (9,704) (14,676)
Sales of property and equipment ................................. -- -- 8 8
Installment payments on business acquisition .................... -- -- (575) (575)
Cash received from retained interests in notes receivable sold .. -- 11,231 -- 11,231
-------- -------- -------- --------
Net cash provided (used) by investing activities .................. (4,365) 10,624 (10,271) (4,012)
-------- -------- -------- --------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and
notes payable ................................................ -- 3,179 54,461 57,640
Payments under line-of-credit facilities and notes payable ...... (1,480) (7,733) (66,565) (75,778)
Payment of debt issuance costs .................................. (2,678) (21) (520) (3,219)
Proceeds from exercise of stock options ......................... 2,556 -- -- 2,556
-------- -------- -------- --------
Net cash used by financing activities ............................. (1,602) (4,575) (12,624) (18,801)
-------- -------- -------- --------
Net increase in cash and cash equivalents ......................... 21,036 11,261 293 32,590
Cash and cash equivalents at beginning of period .................. 29,872 8,716 15,059 53,647
-------- -------- -------- --------
Cash and cash equivalents at end of period ........................ 50,908 19,977 15,352 86,237
Restricted cash and cash equivalents at end of period ............. (173) (5,432) (13,928) (19,533)
-------- -------- -------- --------
Unrestricted cash and cash equivalents at end of period ........... $ 50,735 $ 14,545 $ 1,424 $ 66,704
======== ======== ======== ========
6. Convertible Subordinated Debentures
During the nine months ended September 30, 2004, $6.8 million of our 8.25%
Convertible Subordinated Debentures (the "Debentures") were voluntarily
converted by the holders of the Debentures at a conversion price of $8.24 per
share. Such conversions resulted in the issuance of 822,860 shares of our common
stock.
7. Contingencies
On August 21, 2000, we received a notice of Field Audit Action (the "First
Notice") from the State of Wisconsin Department of Revenue (the "DOR") alleging
that two corporations purchased by us had failed to collect and remit sales and
use taxes totaling $1.9 million to the State of Wisconsin prior to the purchase
during the period from January 1, 1994 through September 30, 1997. On May 24,
2003, we received a second Notice of Field Audit Action (the "Second Notice")
from DOR alleging that the two subsidiaries failed to collect and remit sales
and use taxes to the State of Wisconsin during the period from April 1, 1998
through March 31, 2002 totaling $1.4 million. The majority of the assessment is
based on the subsidiaries not charging sales tax to purchasers of VOIs at our
Christmas Mountain Village(TM) resort during the period from January 1, 1994
through December 31, 1999. The statute requiring the assessment of sales tax on
sales of certain VOIs in Wisconsin was repealed in December 1999. We acquired
the subsidiaries that were the subject of the notices in connection with the
acquisition of RDI Group, Inc. ("RDI") on September 30, 1997. Under the RDI
purchase agreement, we had certain rights of off set for amounts owed the
sellers based on any breach of representations and warranties.
17
On August 31, 2004, we settled the sales tax assessments and all interest
and penalties for $2.3 million. Of this amount, $750,000 was already accrued in
connection with the indemnification by RDI's former stockholders and
approximately $210,000 will be reimbursed to us by certain property owners'
associations that serve the Christmas Mountain Village Resort. We recognized an
expense of $1.3 million from this settlement during the three months ended
September 30, 2004.
In the ordinary course of our business, we become subject to claims or
proceedings from time to time relating to the purchase, subdivision, sale or
financing of real estate. Additionally, from time to time, we become involved in
disputes with existing and former employees. We believe that these claims are
routine litigation incidental to our business.
8. Business Segments
We have two reportable business segments. Bluegreen Resorts develops,
markets and sells VOIs in our Bluegreen Vacation Club resorts, and provides
resort management services to resort property owners associations. Bluegreen
Communities acquires large tracts of real estate, which are subdivided, improved
(in some cases to include a golf course on the property) and sold, typically on
a retail basis as homesites. Disclosures for our business segments are as
follows (in thousands):
Bluegreen Bluegreen
Resorts Communities Totals
--------- ----------- --------
As of and for the three months ended September 30, 2003
Sales of real estate ...................................... $ 83,925 $ 25,016 $108,941
Other resort and communities operations revenue ........... 12,826 1,723 14,549
Depreciation expense ...................................... 959 452 1,411
Field operating profit .................................... 21,799 2,028 23,827
Inventory, net ............................................ 93,228 117,126 210,354
As of and for the three months ended September 30, 2004
Sales of real estate ...................................... $ 96,104 $ 65,794 $161,898
Other resort and communities operations revenue ........... 17,782 1,880 19,662
Depreciation expense ...................................... 1,387 426 1,813
Field operating profit .................................... 19,355 15,584 34,939
Inventory, net ............................................ 109,165 88,759 197,924
For the nine months ended September 30, 2003
Sales of real estate ...................................... $191,060 $ 65,689 $256,749
Other resort and communities operations revenue ........... 37,605 4,987 42,592
Depreciation expense ...................................... 2,628 1,249 3,877
Field operating profit .................................... 40,796 5,644 46,440
For the nine months ended September 30, 2004
Sales of real estate ...................................... $235,888 $140,515 $376,403
Other resort and communities operations revenue ........... 46,824 5,552 52,376
Depreciation expense ...................................... 3,689 1,341 5,030
Field operating profit .................................... 43,694 28,173 71,867
Reconciliations to Consolidated Amounts
Field operating profit for our reportable segments reconciled to our
consolidated income before provision for income taxes and minority interest is
as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Field operating profit for reportable
segments ................................. $ 23,827 $ 34,939 $ 46,440 $ 71,867
Interest income ............................. 4,441 5,743 12,308 15,484
Gain on sales of notes receivable ........... 476 3,333 3,360 6,929
Other income (expense) ...................... (515) (591) 608 (556)
Corporate general and administrative
expenses ................................. (4,991) (10,703) (15,520) (24,232)
Interest expense ............................ (3,650) (3,242) (9,626) (11,339)
Provision for loan losses ................... (2,300) (2,603) (5,525) (6,502)
-------- -------- -------- --------
Consolidated income before minority
interest and provision for income taxes .. $ 17,288 $ 26,876 $ 32,045 $ 51,651
======== ======== ======== ========
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Reform Act of 1995 (the "Act") and are making the following
statements pursuant to the Act to do so. Certain statements in this Quarterly
Report and our other filings with the SEC constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act. You may identify these statements by
forward-looking words such as "may," "intend," "expect," "anticipate,"
"believe," "will," "should," "project," "estimate," "plan" or other comparable
terminology or by other statements that do not relate to historical facts. All
statements, trend analyses and other information relative to the market for our
products, remaining life of project sales, our expected future sales, financial
position, operating results, liquidity and capital resources, our business
strategy, financial plan and expected capital requirements as well as trends in
our operations or results are forward-looking statements. These forward-looking
statements are subject to known and unknown risks and uncertainties, many of
which are beyond our control, including changes in economic conditions,
generally, in areas where we operate, or in the travel and tourism industry,
increases in interest rates, changes in regulations, results of claims or
litigation pending or brought against us in the future and other factors
discussed throughout our SEC filings, all of which could cause our actual
results, performance or achievements, or industry trends, to differ materially
from any future results, performance, or achievements or trends expressed or
implied herein. Given these uncertainties, investors are cautioned not to place
undue reliance on these forward-looking statements and no assurance can be given
that the plans, estimates and expectations reflected herein will be achieved.
Factors that could adversely affect our future results can also be considered
general "risk factors" with respect to our business, whether or not they relate
to a forward-looking statement. We wish to caution you that the important
factors set forth below and elsewhere in this report in some cases have
affected, and in the future could affect, our actual results and could cause our
actual consolidated results to differ materially from those expressed in any
forward-looking statements. Please also see our Annual Report on Form 10-K for
the year ended December 31, 2003 for further discussion of the factors,
including those set forth below.
o Our continued liquidity depends on our ability to sell or borrow
against our notes receivable.
o We depend on additional funding to finance our operations.
o Our success depends on our ability to market our products
efficiently.
o We would incur substantial losses if the customers we finance
default on their obligations to pay the balance of the purchase
price; and, our results of operations and financial condition could
be adversely impacted if our estimates concerning our notes
receivable are incorrect.
o We are subject to the risks of the real estate market and the risks
associated with real estate development, including risks and
uncertainties relating to the cost and availability of land and
construction materials.
o We may not successfully execute our growth strategy.
o We may face a variety of risks when, and if,we expand our
operations.
o Excessive claims for development-related defects could adversely
affect our financial condition and operating results.
o We may face additional risks as we expand into new markets.
o The limited resale market for VOIs could adversely affect our
business.
o Extensive federal, state and local laws and regulations affect the
way we conduct our business.
o Environmental liabilities, including claims with respect to mold or
hazardous or toxic substances, could have a material adverse impact
on our business.
o We could incur costs to comply with laws governing accessibility of
facilities by disabled persons.
19
o Our internal controls over financial reporting could be found not to
be effective as required under Section 404 of the Sarbanes-Oxley Act
of 2002
Executive Overview
We operate through two business segments. Bluegreen Resorts develops, markets
and sells VOIs in our Bluegreen Vacation Club resorts, and provides resort
management services to resort property owners associations. Bluegreen
Communities acquires large tracts of real estate, which are subdivided, improved
(in some cases to include a golf course on the property) and sold, typically on
a retail basis, as homesites.
We have historically experienced and expect to continue to experience seasonal
fluctuations in our gross revenues and net earnings. This seasonality may cause
significant fluctuations in our quarterly operating results, with the majority
of our gross revenues and net earnings historically occurring in the quarters
ending in June and September each year. Other material fluctuations in operating
results may occur due to the timing of development and the requirement that we
use the percentage-of-completion method of accounting. Under this method of
income recognition, income is recognized as work progresses. Measures of
progress are based on the relationship of costs incurred to date to expected
total costs. We expect that we will continue to invest in projects that will
require substantial development (with significant capital requirements), and
hence that our results of operations may fluctuate significantly between
quarterly and annual periods as a result of the required use of the
percentage-of-completion method of accounting.
We do not believe that inflation and changing prices currently have had or will
have for the foreseeable future a material impact on our revenues and results of
operations, other than to the extent that we continually review and have
historically increased the sales prices of our VOIs annually and that
construction costs have and are expected to continue to increase. There is no
assurance that we will be able to continue to increase our sales prices or that
increased construction costs will not have a material adverse impact on our
results of operations. To the extent inflationary trends affect interest rates,
a portion of our debt service costs and pricing on our receivable sales
transactions may be adversely affected.
We recognize revenue on homesite and VOI sales when a minimum of 10% of the
sales price has been received in cash, the refund or rescission period has
expired, collectibility of the receivable representing the remainder of the
sales price is reasonably assured and we have completed substantially all of our
obligations with respect to any development of the real estate sold. In cases
where we otherwise meet the revenue recognition criteria previously noted but
all development has not been completed, we recognize revenue in accordance with
the percentage-of-completion method of accounting.
Costs associated with the acquisition and development of vacation ownership
resorts and residential communities, including carrying costs such as interest
and taxes, are capitalized as inventory and are allocated to cost of real estate
sold as the respective revenues are recognized.
A portion of our revenues historically has been and is expected to continue to
be comprised of gains on sales of notes receivable. The gains are recorded on
our consolidated statements of income and the related retained interests in the
notes receivable sold are recorded on our consolidated balance sheets at the
time of sale. The amount of gains recognized and the fair value of the retained
interests recorded are based in part on management's best estimates of future
prepayment, default rates, loss severity rates, discount rates and other
considerations in light of then-current conditions. If actual prepayments with
respect to loans occur more quickly than we projected at the time such loans
were sold, as can occur when interest rates decline, interest would be less than
expected and may cause a decline in the fair value of the retained interests and
a charge to operations. If actual defaults or other factors discussed above with
respect to loans sold are greater than estimated, charge-offs would exceed
previously estimated amounts and the cash flow from the retained interests in
notes receivable sold would decrease. Also, to the extent the portfolio of
receivables sold fails to satisfy specified performance criteria (as may occur
due to, for example, an increase in default rates or loan loss severity) or
certain other events occur, the funds received from obligors must be distributed
on an accelerated basis to investors. If the accelerated payment formula were to
become applicable, the cash flow to us from the retained interests in notes
receivable sold would be reduced until the outside investors were paid or the
regular payment formula was resumed. If these situations were to occur on a
material basis, it could cause a decline in the fair value of the retained
interests and a charge to earnings currently. There is no assurance that the
carrying value of our retained interests in notes receivable sold will be fully
realized or that future loan sales will be consummated or, if consummated,
result in gains. See "Vacation Ownership Receivables Purchase Facilities - Off
Balance Sheet Arrangements," below.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported
20
amounts of assets, liabilities, revenues and expenses, and related disclosure of
commitments and contingencies. On an ongoing basis, management evaluates its
estimates, including those that relate to the recognition of revenue, including
revenue recognition under the percentage-of-completion method of accounting; our
reserve for loan losses; the valuation of retained interests in notes receivable
sold and the related gains on sales of notes receivable; the recovery of the
carrying value of real estate inventories, golf courses, intangible assets and
other assets; and the estimate of contingent liabilities related to litigation
and other claims and assessments. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
these estimates under different assumptions and conditions. If actual results
significantly differ from management's estimates, our results of operations and
financial condition could be materially adversely impacted. For a more detailed
discussion of these critical accounting policies see "Critical Accounting
Policies and Estimates" included in our Annual Report on Form 10-K for the year
ended December 31, 2003.
Results of Operations
We review financial information, allocate resources and manage our business as
two segments, Bluegreen Resorts and Bluegreen Communities. The information
reviewed is based on internal reports and excludes general and administrative
expenses attributable to corporate overhead. The information provided is based
on a management approach and is used by us for the purpose of tracking trends
and changes in results. It does not reflect the actual economic costs,
contributions or results of operations of the segments as stand alone
businesses. If a different basis of presentation or allocation were utilized,
the relative contributions of the segments might differ but the relative trends,
in our view, would likely not be materially impacted. The table below sets forth
net revenue and income from operations by segment.
21
Bluegreen Bluegreen
Resorts Communities Total
------------------------ ----------------------- -----------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
--------- ---------- --------- ---------- --------- ----------
(dollars in thousands)
Three Months Ended
September 30, 2003
Sales of real estate .............. $ 83,925 100% $ 25,016 100% $ 108,941 100%
Cost of real estate sales ......... (16,464) (20) (14,569) (58) (31,033) (29)
--------- --------- ---------
Gross profit ...................... 67,461 80 10,447 42 77,908 71
Other resort and communities
operations revenues ........... 12,826 15 1,723 7 14,549 13
Cost of other resort and
communities operations ........ (12,834) (15) (1,996) (8) (14,830) (14)
Selling and marketing
expenses ...................... (41,650) (50) (5,854) (23) (47,504) (44)
Field general and administrative
expenses (1) .................. (4,004) (5) (2,292) (9) (6,296) (6)
--------- --------- ---------
Field Operating Profit ............ $ 21,799 26% $ 2,028 8% $ 23,827 22%
========= ========= =========
Three Months Ended
September 30, 2004
Sales of real estate .............. $ 96,104 100% $ 65,794 100% $ 161,898 100%
Cost of real estate sales ......... (23,873) (25) (34,914) (53) (58,787) (36)
--------- --------- ---------
Gross profit ...................... 72,231 75 30,880 47 103,111 64
Other resort and communities
operations revenues ........... 17,782 19 1,880 3 19,662 12
Cost of other resort and
communities operations ........ (18,165) (19) (2,033) (3) (20,198) (12)
Selling and marketing
expenses ...................... (48,154) (50) (11,796) (18) (59,950) (37)
Field general and
administrative expenses (1) ..... (4,339) (5) (3,347) (5) (7,686) (5)
--------- --------- ---------
Field Operating Profit ............ $ 19,355 20% $ 15,584 24% $ 34,939 22%
========= ========= =========
Nine Months Ended
September 30, 2003
Sales of real estate .............. $ 191,060 100% $ 65,689 100% $ 256,749 100%
Cost of real estate sales ......... (39,327) (21) (37,039) (56) (76,366) (30)
--------- --------- ---------
Gross profit ...................... 151,733 79 28,650 44 180,383 70
Other resort and communities
operations revenues ........... 37,605 20 4,987 8 42,592 17
Cost of other resort and
communities operations ........ (38,655) (20) (5,467) (8) (44,122) (17)
Selling and marketing
expenses ...................... (98,514) (52) (15,232) (23) (113,746) (44)
Field general and
administrative expenses (1) ... (11,373) (6) (7,294) (11) (18,667) (7)
--------- --------- ---------
Field Operating Profit ............ $ 40,796 21% $ 5,644 9% $ 46,440 18%
========= ========= =========
22
Bluegreen Bluegreen
Resorts Communities Total
------------------------ ----------------------- -----------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
--------- ---------- --------- ---------- --------- ----------
(dollars in thousands)
Nine Months Ended
September 30, 2004
Sales of real estate .............. $ 235,888 100% $ 140,515 100% $ 376,403 100%
Cost of real estate sales ......... (55,479) (24) (76,374) (54) (131,853) (35)
--------- --------- ---------
Gross profit ...................... 180,409 76 64,141 46 244,550 65
Other resort and communities
operations revenues ........... 46,824 20 5,552 4 52,376 14
Cost of other resort and
communities operations ........ (47,928) (20) (5,468) (4) (53,396) (14)
Selling and marketing
expenses ...................... (122,722) (52) (27,341) (20) (150,063) (40)
Field general and
administrative expenses (1) ..... (12,889) (6) (8,711) (6) (21,600) (6)
--------- --------- ---------
Field Operating Profit ............ $ 43,694 19% $ 28,173 20% $ 71,867 19%
========= ========= =========
----------
(1) General and administrative expenses attributable to corporate
overhead have been excluded from the tables. Corporate general and
administrative expenses totaled $5.0 million for the three months
ended September 30, 2003 and $10.7 million for the three months
ended September 30, 2004. Corporate general and administrative
expenses totaled $15.5 million for the nine months ended September
30, 2003 and $24.2 million for the nine months ended September 30,
2004. See "Corporate General and Administrative Expenses," below,
for further discussion.
Sales and Field Operations. Consolidated sales increased 49% from $108.9 million
for the three months ended September 30, 2003 to $161.9 million for the three
months ended September 30, 2004. Consolidated sales increased 47% from $256.7
million for the nine months ended September 30, 2003 to $376.4 million for the
nine months ended September 30, 2004.
Bluegreen Resorts. During the three months ended September 30, 2003 and
September 30, 2004, sales of VOIs represented $83.9 million (77%) and $96.1
million (59%) of our total consolidated sales, respectively. During the nine
months ended September 30, 2003 and September 30, 2004, sales of VOIs
represented $191.1 million (74%) and $235.9 million (63%) of our total
consolidated sales, respectively.
The following table sets forth certain information for sales of VOIs for the
periods indicated, before giving effect to the percentage-of-completion method
of accounting.
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Number of VOI sales transactions ...... 8,476 9,735 20,270 24,258
Average sales price per transaction ... $ 9,680 $10,171 $ 9,696 $10,043
Gross margin .......................... 80% 75% 79% 76%
The $12.2 million or 15% increase in Bluegreen Resorts' sales during the three
months ended September 30, 2004, as compared to the three months ended September
30, 2003, was due primarily to the opening of three new sales sites: Grande
Villas at World Golf Village(R) (opened in November 2003), The Fountains(TM) in
Orlando, Florida (opened in December 2003) and an offsite sales office in
Destin, Florida (opened in July 2004). These new sales sites generated a
combined $7.1 million of incremental sales during the three months ended
September 30, 2004 as compared to the three months ended September 30, 2003. The
remainder of the sales increase was due to same-store sales increases. We
believe this was the result of our focus on marketing to our growing Bluegreen
Vacation Club owner base and to sales prospects referred to us by existing
Bluegreen Vacation Club owners and other prospects. Sales to owner and referral
prospects increased by 37% during the three months ended September 30, 2004 as
compared to the three months ended September 30, 2003. This, combined with a 16%
overall increase in the number of sales prospects seen by Bluegreen Resorts from
approximately 68,000 prospects during the three months ended September 30, 2003
to approximately 79,000 prospects during the three months ended September 30,
2004 and a consistent sale-to-tour conversion ratio of 12% during both of these
periods
23
significantly contributed to the overall sales increase during the three months
ended September 30, 2004 as compared to the three months ended September 30,
2003. The increase in the average sales price per transaction reflected in the
above table also contributed to the increase in sales.
The $44.8 million or 23% increase in Bluegreen Resorts' sales during the nine
months ended September 30, 2004, as compared to the nine months ended September
30, 2003, was due primarily to same-store sales increases as previously
indicated. Sales to owner and referral prospects increased by 52% during the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003. This, combined with a 20% overall increase in the number of
sales prospects seen by Bluegreen Resorts from approximately 166,000 prospects
during the nine months ended September 30, 2003 to approximately 199,000
prospects during the nine months ended September 30, 2004, partially offset by a
decrease in the sale-to-tour conversion ratio from 13% during the nine months
ended September 30, 2003 to 12% during the nine months ended September 30, 2004,
contributed to the overall sales increase during the nine months ended September
30, 2004 as compared to the nine months ended September 30, 2003. The remainder
of the sales increase was due to the opening of four new sales sites: an
off-site sales office in Harbor Springs, Michigan (opened in March 2003 on the
campus of the Boyne Highlands resort, pursuant to a marketing agreement with
Boyne USA Resorts), Grande Villas at World Golf Village(R), The Fountains(TM)
and our new offsite sales office in Destin, Florida. These new sales sites
generated a combined $16.3 million of incremental sales during the nine months
ended September 30, 2004. The increase in the average sales price per
transaction reflected in the above table also contributed to the increase in
sales.
Gross margin percentages vary between periods based on the relative costs of the
specific VOIs sold in each respective period. The gross margin percentage for
Bluegreen Resorts is trending back to historical levels from the higher gross
margins realized in 2003 and the first quarter of 2004. We were able to make
some opportunistic acquisitions of relatively lower cost VOI inventories in
2003, which contributed to our favorable gross margins in 2003 and the beginning
of 2004. As much of this lower cost VOI inventory has been sold and due to
rising construction costs we are experiencing at projects under development, we
anticipate that our gross margin will approximate our historical levels for the
foreseeable future.
Other resort operations revenues increased $5.0 million or 39% during the three
months ended September 30, 2004, as compared to the three months ended September
30, 2003. Other resort operations revenues increased $9.2 million or 25% during
the nine months ended September 30, 2004, as compared to the nine months ended
September 30, 2003. These increases are due to increases in revenues from our
mini-vacation sales and vacation ownership tour generation business, our
vacation ownership resort interior purchasing and design business and fees
earned for providing reservation services for the Bluegreen Vacation Club(R).
Cost of other resort operations increased $5.3 million or 42% during the three
months ended September 30, 2004, as compared to the three months ended September
30, 2003. Cost of other resort operations increased $9.3 million or 24% during
the nine months ended September 30, 2004, as compared to the nine months ended
September 30, 2003. These increases are due primarily to subsidies and
maintenance fees paid to the property owners' associations that maintain our
resorts. These subsidies and fees increased in the aggregate due to the increase
in the number of our resorts since September 30, 2003 and due to increased
maintenance fees incurred on our remaining VOI inventory at the La Cabana Beach
and Racquet Club(TM) resort in Aruba. In addition, costs of other resort
operations increased as we opened our owner contact center in Indianapolis,
Indiana in 2003 to handle reservations and customer service for members of the
Bluegreen Vacation Club.
Selling and marketing expenses for Bluegreen Resorts remained consistent as a
percentage of sales at approximately 50% during both the three months ended
September 30, 2003 and September 30, 2004. Selling and marketing expenses for
Bluegreen Resorts were consistent at 52% of sales during both the nine months
ended September 30, 2003 and September 30, 2004. We believe that selling and
marketing expense as a percentage of sales is an important indicator of the
performance of Bluegreen Resorts and our performance as a whole. No assurance
can be given that selling and marketing expenses will not increase as a
percentage of sales in future periods.
Field general and administrative expenses for Bluegreen Resorts increased
$335,000 or 8% during the three months ended September 30, 2004 as compared to
the three months ended September 30, 2003. Field general and administrative
expenses for Bluegreen Resorts increased $1.5 million or 13% during the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003. The majority of this increase was due to the expansion of our regional
management team in connection with the growth of Bluegreen Resorts since
September 30, 2003. The remaining increase was primarily due to the addition of
the Harbor Springs (Boyne Highlands), Grande Villas at World Golf Village(R),
The Fountains and Destin sales offices.
As of December 31, 2003, Bluegreen Resorts had no sales or Field Operating
Profit deferred under percentage-of-completion accounting. As of September 30,
2004, Bluegreen Resorts had approximately $3.9 million of sales and $1.3 million
of Field Operating Profit deferred under percentage-of-completion accounting.
24
Bluegreen Communities. During the three months ended September 30, 2003 and
September 30, 2004, Bluegreen Communities generated $25.0 million (23%) and
$65.8 million (41%) of our total consolidated sales, respectively. During the
nine months ended September 30, 2003 and September 30, 2004, Bluegreen
Communities generated $65.7 million (26%) and $140.5 million (37%) of our total
consolidated sales, respectively.
The table below sets forth the number of homesites sold by Bluegreen Communities
and the average sales price per homesite for the periods indicated, before
giving effect to the percentage-of-completion method of accounting and excluding
sales of bulk parcels.
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Number of homesites sold .......... 530 816 1,370 2,191
Average sales price per homesite .. $60,029 $72,662 $57,069 $69,212
Gross margin ...................... 42% 47% 44% 46%
Bluegreen Communities' sales increased $40.8 million or 163% during the three
months ended September 30, 2004 as compared to the three months ended September
30, 2003. In March 2003, Bluegreen Communities acquired 1,142 acres in
Braselton, Georgia for the development of a new golf course community known as
the Traditions of Braselton(TM). This project recognized approximately $13.4
million more sales during the three months ended September 30, 2004 as compared
to the three months ended September 30, 2003, due to the recognition of sales
previously deferred under the percentage-of-completion method of accounting. Our
Brickshire golf course community, which is located in New Kent, Virginia,
recognized $5.1 million more sales during the three months ended September 30,
2004 as compared to the three months ended September 30, 2003, due primarily to
increased effectiveness of sales programs and price increases. In November 2003,
we acquired and commenced sales at our approximately 500-acre golf course
community in Brunswick, Georgia known as Sanctuary Cove at St. Andrews Sound.
Sanctuary Cove recognized sales of approximately $5.8 million during the three
months ended September 30, 2004, and had an additional $10.3 million of sales
deferred under the percentage-of-completion method of accounting as of September
30, 2004. In July 2004, we acquired and commenced sales at our approximately
800-acre golf course community in Chatham County, North Carolina known as Chapel
Ridge(TM). Chapel Ridge recognized sales of approximately $4.2 million during
the three months ended September 30, 2004, and had an additional $4.4 million of
sales deferred under the percentage-of-completion method of accounting as of
September 30, 2004. The remaining sales increase was realized at several of our
other existing communities. The increase in the average sales price per homesite
reflected in the above table also contributed to the increase in sales.
Bluegreen Communities' sales increased $74.8 million or 114% during the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003. Traditions of Braselton(TM) recognized approximately $21.5 million
more sales during the nine months ended September 30, 2004 as compared to the
nine months ended September 30, 2003 as the project had only just begun sales in
April 2003. Brickshire(TM) recognized $15.4 million more sales during the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003, due primarily to increased effectiveness of sales programs and price
increases. Sanctuary Cove and Chapel Ridge(TM) recognized sales of approximately
$15.6 million and $4.2 million, respectively, during the nine months ended
September 30, 2004. The remaining sales increase was realized at several of our
other existing communities. The increase in the average sales price per homesite
reflected in the above table also contributed to the increase in sales.
Bluegreen Communities intends to primarily focus its resources on developing new
golf course communities and continuing to support its projects in Texas. During
the nine months ended September 30, 2004, our golf communities and communities
in Texas comprised approximately 50% and 47%, respectively, of Bluegreen
Communities' sales.
Bluegreen Communities' gross margin increased from 42% to 47% during the three
months ended September 30, 2003 and September 30, 2004, respectively. Bluegreen
Communities' gross margin increased from 44% to 46% during the nine months ended
September 30, 2003 and September 30, 2004, respectively. Variations in cost
structures and the market pricing of projects available for sale as well as the
opening of phases of projects which include premium homesites (e.g., water
frontage, preferred views, larger acreage homesites, etc.) will impact the gross
margin of Bluegreen Communities from period to period. These factors, as well as
the impact of percentage-of-completion accounting, will cause variations in
gross margin between periods, although the gross margin of Bluegreen Communities
has historically been between 42% and 51% of sales and is expected to
approximate these percentages for the foreseeable future.
Selling and marketing expenses for Bluegreen Communities decreased as a
percentage of sales from 23% to 18% during the three months ended September 30,
2003 and September 30, 2004, respectively. Selling and marketing expenses for
25
Bluegreen Communities decreased as a percentage of sales from 23% to 20% during
the nine months ended September 30, 2003 and September 30, 2004, respectively.
These expenditures decreased as a percentage of sales primarily due to
relatively low selling and marketing expenses at our new golf course communities
in Georgia and North Carolina as compared to our other projects.
Field general and administrative expenses for Bluegreen Communities increased
$1.1 million or 46% during the three months ended September 30, 2004 as compared
to the three months ended September 30, 2003. Field general and administrative
expenses for Bluegreen Communities increased $1.4 million or 19% during the nine
months ended September 30, 2004 as compared to the nine months ended September
30, 2003. These increases are due in part to higher performance-based bonuses
accrued for divisional and regional management in connection with the improved
operating performance of Bluegreen Communities. The remainder of the increase
was primarily incurred by projects opened for operations since September 30,
2003.
As of December 31, 2003, Bluegreen Communities had $18.9 million of sales and
$8.1 million of Field Operating Profit deferred under percentage-of-completion
accounting. As of September 30, 2004, Bluegreen Communities had $30.4 million of
sales and $12.6 million of Field Operating Profit deferred under
percentage-of-completion accounting.
Corporate General and Administrative Expenses. Our corporate general and
administrative expenses consist primarily of expenses associated with
administering the various support functions at our corporate headquarters,
including accounting, human resources, information technology, mergers and
acquisitions, inventory acquisition and development, mortgage servicing,
treasury and legal. Such expenses were $5.0 million and $10.7 million for the
three months ended September 30, 2003 and September 30, 2004, respectively. As a
percentage of sales of real estate, corporate general and administrative
expenses were approximately 5% and 7% during the three months ended September
30, 2003 and September 30, 2004, respectively. Corporate general and
administrative expenses were $15.5 million and $24.2 million for the nine months
ended September 30, 2003 and September 30, 2004, respectively. As a percentage
of sales of real estate, corporate general and administrative expenses were
approximately 6% during both the nine months ended September 30, 2003 and
September 30, 2004.
The increases in corporate general and administrative expenses during the three-
and nine-month periods ended September 30, 2004 as compared to the comparable
periods ended September 30, 2003 were due in part to an expense incurred upon
the settlement of a sales tax dispute with the State of Wisconsin (see Part II,
Item 1 "Legal Proceedings"). In addition, the increase in corporate general and
administrative expenses was due to an increased number of personnel and other
expenses incurred to help support our growth. Also, accounting and auditing fees
were higher during the three- and nine-month periods ended September 30, 2004 as
compared to the comparable periods ended September 30, 2003, due to the costs
associated with complying with Section 404 of the Sarbanes-Oxley Act of 2002.
For a discussion of field selling, general and administrative expenses, please
see "Sales and Field Operations," above.
Interest Income. Interest income is earned on our notes receivable, retained
interests in notes receivable sold and cash and cash equivalents. Interest
income was $4.4 million for the three months ended September 30, 2003 and $5.7
million for the three months ended September 30, 2004. Interest income was $12.3
million for the nine months ended September 30, 2003 and $15.5 million for the
nine months ended September 30, 2004.
The increases in interest income during the three- and nine-month periods ended
September 30, 2004 as compared to the comparable periods ended September 30,
2003, were due to higher interest income earned on our notes receivable
commensurate with higher average aggregate notes receivable balances during the
three- and nine-month periods ended September 30, 2004, as compared to the
comparable periods ended September 30, 2003. These increases in interest income
were partially offset during the three- and nine-month periods ended September
30, 2004 by other-than-temporary decreases of $716,000 and $1.7 million,
respectively, in the fair value of our retained interest in a 2002 vacation
ownership receivables securitization transaction, based on higher than projected
default rates in the portfolio sold.
Gain on Sales of Notes Receivable. During the three months ended September 30,
2003 and September 30, 2004, we recognized gains totaling $476,000 and $3.3
million, respectively, on the sale of notes receivable. During the nine months
ended September 30, 2003 and September 30, 2004, we recognized gains totaling
$3.4 million and $6.9 million, respectively, on the sale of notes receivable.
The sales of vacation ownership notes receivable were primarily pursuant to
vacation ownership receivables purchase facilities in place during the
respective periods and a term securitization that was consummated in July 2004.
The gain on sale of notes receivable increased $2.9 million during the three
months ended September 30, 2004 as compared to the three months ended September
30, 2003, primarily due to a $2.6 million gain recognized upon the consummation
of a private offering and sale of $156.6 million of vacation ownership
receivable-backed securities during the three months
26
ended September 30, 2004 (the "2004 Term Securitization"). See "Liquidity and
Capital Resources - Vacation Ownership Receivables Purchase Facilities -Off
Balance Sheet Arrangements" for further discussion about the 2004 Term
Securitization.
The gain on sale of notes receivable increased $3.6 million or 106% during the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003, due to the gain on the 2004 Term Securitization discussed
above and due to increased gains as we sold $58.4 million in receivables during
the nine months ended September 30, 2003 as compared to $86.6 million in
receivables during the nine months ended September 30, 2004.
The amount of notes receivable sold during a period depends on several factors,
including the amount of availability, if any, under receivables purchase
facilities, the amount of eligible receivables available for sale, our cash
requirements, the covenants and other provisions of the relevant vacation
ownership receivables purchase facilities (as described further below) and
management's discretion. Although there is no assurance that this will continue
in future periods, we have recognized gains on sales of notes receivable each
quarter beginning with the three months ended December 31, 2000 (16 consecutive
quarters).
Interest Expense. Interest expense was $3.7 million and $3.2 million for the
three months ended September 30, 2003 and September 30, 2004, respectively.
Interest expense was $9.6 million and $11.3 million for the nine months ended
September 30, 2003 and September 30, 2004, respectively. The increase in
interest expense during the nine-month period ended September 30, 2004 as
compared to the nine months ended September 30, 2003 was primarily due to
interest expense related to acquisition and development loans entered into in
connection with certain inventory acquisitions.
Provision for Loan Losses. We recorded provisions for loan losses totaling $2.3
million and $2.6 million for the three months ended September 30, 2003 and
September 30, 2004, respectively. The provisions for loan losses for the nine
months ended September 30, 2003 and September 30, 2004 were $5.5 million and
$6.5 million, respectively. The increases in the provision for loan losses
during the three- and nine-month periods ended September 30, 2004 as compared to
the comparable periods ended September 30, 2003, were primarily due to a higher
notes receivable balance outstanding at September 30, 2004 as compared to
September 30, 2003. The higher notes receivable balance was due to increased
Bluegreen Resorts sales during the nine months ended September 30, 2004 as
compared to the nine months ended September 30, 2003.
The allowance for loan losses by division as of December 31, 2003 and September
30, 2004 was:
Bluegreen Bluegreen
Resorts Communities Other Total
--------- ----------- --------- ---------
(dollars in thousands)
December 31, 2003
Notes receivable .................. $ 90,820 $ 10,555 $ 1,425 $ 102,800
Allowance for loan losses ......... (8,255) (239) (112) (8,606)
--------- --------- --------- ---------
Notes receivable, net ............. $ 82,565 $ 10,316 $ 1,313 $ 94,194
========= ========= ========= =========
Allowance as a % of gross notes
receivable ...................... 9% 2% 8% 8%
========= ========= ========= =========
September 30, 2004
Notes receivable .................. $ 120,429 $ 10,397 $ 195 $ 131,021
Allowance for loan losses ......... (10,102) (209) (112) (10,423)
--------- --------- --------- ---------
Notes receivable, net ............. $ 110,327 $ 10,188 $ 83 $ 120,598
========= ========= ========= =========
Allowance as a % of gross notes
receivable ...................... 8% 2% 57% 8%
========= ========= ========= =========
Other notes receivable at December 31, 2003 primarily consisted of a loan to the
property owners' association that is responsible for the maintenance of our La
Cabana Beach and Racquet Club resort, Casa Grande Cooperative Association I.
This loan was repaid in full during the nine months ended September 30, 2004.
Minority Interest in Income of Consolidated Subsidiary. We include the results
of operations and financial position of Bluegreen/Big Cedar Vacations, LLC (the
"Subsidiary"), our 51%-owned subsidiary, in our consolidated financial
statements (see Note 1 of the Notes to Condensed Consolidated Financial
Statements). The minority interest in income of consolidated subsidiary is the
portion of our consolidated pre-tax income that is earned by Big Cedar, L.L.C.,
the unaffiliated 49% interest holder in the Subsidiary. Minority interest in
income of consolidated subsidiary was $699,000
27
and $360,000 for the three months ended September 30, 2003 and September 30,
2004, respectively. Minority interest in income of consolidated subsidiary was
$1.9 million and $2.7 million for the nine months ended September 30, 2003 and
September 30, 2004, respectively. Pre-tax income for the Subsidiary has
increased during the nine months ended September 30, 2004 as compared to the
nine months ended September 30, 2003, as VOI sales at the Big Cedar Wilderness
Club have increased. Although VOI sales at the Big Cedar Wilderness Club have
increased during the three months ended September 30, 2004 as compared to the
three months ended September 30, 2003, this increase in sales had less of an
impact on pre-tax income for the Subsidiary as the gross margin on Big Cedar
Wilderness Club sales decreased from 76% to 66% in connection with increased
construction costs at the project.
Summary. Based on the factors discussed above, our net income was $10.2 million
and $16.3 million for the three months ended September 30, 2003 and September
30, 2004, respectively, and was $18.6 million and $30.1 million for the nine
months ended September 30, 2003 and September 30, 2004, respectively.
Changes in Financial Condition
The following table summarizes our cash flows for the nine months ended
September 30, 2003 and September 30, 2004 (in thousands):
Nine months ended
------------------------------
September 30, September 30,
2003 2004
------------- -------------
Cash flows provided by operating activities ... $ 5,356 $ 55,403
Cash flows used by investing activities ....... (499) (4,012)
Cash flows used by financing activities ....... (2,935) (18,801)
-------- --------
Net increase in cash and cash equivalents ..... $ 1,922 $ 32,590
======== ========
Cash Flows Provided By Operating Activities. Cash flows provided by operating
activities increased $50.0 million from $5.4 million to $55.4 million for the
nine months ended September 30, 2003 and September 30, 2004, respectively. The
increase in operating cash flows during the nine months ended September 30, 2004
as compared to the nine months ended September 30, 2003, was primarily due to
the $33.5 million increase in the amount of proceeds from the sale of and
borrowings collateralized by notes receivable, net of payments on such
borrowings. We report cash flows from borrowings collateralized by notes
receivable and sales of notes receivable as operating activities in the
consolidated statements of cash flows. The majority of Bluegreen Resorts' sales
result in the origination of notes receivable from its customers. We believe
that accelerating the conversion of such notes receivable into cash, either
through the pledge or sale of our notes receivable, on a regular basis is an
integral function of our operations, and have therefore classified such
activities as operating activities.
The remainder of the increase in operating cash flow was due to higher net
income, after adjustments for non-cash items, during the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003.
Cash Flows Used By Investing Activities. Cash flows used by investing activities
increased $3.5 million from $499,000 to $4.0 million for the nine months ended
September 30, 2003 and September 30, 2004, respectively. The increase was
primarily due to higher cash expenditures for property and equipment during the
nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003. These increased expenditures were partially offset by higher
amounts of cash received from our retained interests in notes receivable sold,
as we had not begun receiving cash flows on our retained interest in a 2002 term
securitization transaction until September 2003.
Cash Flows Used By Financing Activities. Cash flows used by financing activities
increased $15.9 million from $2.9 million to $18.8 million during the nine
months ended September 30, 2003 and September 30, 2004, respectively. Payments
under line-of-credit facilities increased from $33.8 million to $75.8 million
for the nine months ended September 30, 2003 and September 30, 2004,
respectively. The impact of these higher debt service payments was partially
offset by an increase of $25.6 million of cash proceeds received on new
borrowings under line-of-credit facilities and $2.0 million received upon the
exercise of stock options during the nine months ended September 30, 2004 as
compared to the nine months ended September 30, 2003.
Liquidity and Capital Resources
Our capital resources are provided from both internal and external sources. Our
primary capital resources from internal operations are: (i) cash sales, (ii)
downpayments on homesite and VOI sales which are financed, (iii) proceeds from
the sale of, or borrowings collateralized by, notes receivable, including cash
received from our retained interests in notes receivable
28
sold, (iv) principal and interest payments on the purchase money mortgage loans
and contracts for deed owned arising from sales of VOIs and homesites and (v)
net cash generated from other resort services and other communities operations.
Historically, external sources of liquidity have included non-recourse sales of
notes receivable, borrowings under secured and unsecured lines-of-credit, seller
and bank financing of inventory acquisitions and the issuance of debt
securities. Our capital resources are used to support our operations, including
(i) acquiring and developing inventory, (ii) providing financing for customer
purchases, (iii) funding operating expenses and (iv) satisfying our debt and
other obligations. As we are continually selling and marketing real estate (VOIs
and homesites), it is necessary for us to continually acquire and develop new
resorts and communities in order to maintain adequate levels of inventory to
support operations. We anticipate that we will continue to require external
sources of liquidity to support our operations, satisfy our debt and other
obligations and to provide funds for future acquisitions.
Our level of debt and debt service requirements has several important effects on
our operations, including the following: (i) we have significant cash
requirements to service debt, reducing funds available for operations and future
business opportunities and increasing our vulnerability to adverse economic and
industry conditions; (ii) our leveraged position increases our vulnerability to
competitive pressures; (iii) the financial covenants and other restrictions
contained in the indentures, the credit agreements and other agreements relating
to our indebtedness require us to meet certain financial tests and restrict our
ability to, among other things, borrow additional funds, dispose of assets, make
investments or pay cash dividends on, or repurchase, preferred or common stock;
and (iv) funds available for working capital, capital expenditures, acquisitions
and general corporate purposes may be limited. Certain of our competitors
operate on a less leveraged basis and have greater operating and financial
flexibility than we do.
We intend to continue to pursue a growth-oriented strategy, particularly with
respect to our Bluegreen Resorts business segment. In connection with this
strategy, we may from time to time acquire, among other things, additional
resort properties and completed but unsold VOIs; land upon which additional
resorts may be built; management contracts; loan portfolios of vacation
ownership mortgages; portfolios which include properties or assets which may be
integrated into our operations; interests in joint ventures; and operating
companies providing or possessing management, sales, marketing, development,
administration and/or other expertise with respect to our operations in the
vacation ownership industry. In addition, we intend to continue to focus
Bluegreen Communities' activities on larger, more capital intensive projects
particularly in those regions where we believe the market for our products is
strongest, such as new golf communities in the Southeast and other areas and
continued growth in our successful regions in Texas.
The following is a discussion of our purchase and credit facilities that were
important sources of our liquidity as of September 30, 2004. These facilities do
not constitute all of our outstanding indebtedness as of September 30, 2004. Our
other indebtedness includes outstanding convertible subordinated debentures,
senior secured notes payable, borrowings collateralized by real estate
inventories that were not incurred pursuant to an ongoing credit facility and
capital leases.
Vacation Ownership Receivables Purchase Facilities -Off Balance Sheet
Arrangements
Our ability to sell and/or borrow against our notes receivable from VOI buyers
is a critical factor in our continued liquidity. When we sell VOIs, a financed
buyer is only required to pay a minimum of 10% of the purchase in cash at the
time of sale, however, selling, marketing and administrative expenses are
primarily cash expenses and, in our case for the nine months ended September 30,
2004, approximated 58% of sales. Accordingly, having facilities available for
the hypothecation and sale of these vacation ownership receivables is a critical
factor to our ability to meet our short and long-term cash needs.
On October 8, 2003, Resort Finance, LLC ("RFL") acquired and assumed the rights,
obligations and commitments of ING Capital, LLC ("ING") as initial purchaser in
an existing vacation ownership receivables purchase facility (the "Purchase
Facility") originally executed between ING and us in April 2002. The Purchase
Facility utilizes an owner's trust structure, pursuant to which we sell
receivables to Bluegreen Receivables Finance Corporation V, our wholly-owned,
special purpose finance subsidiary ("BRFC V"), and BRFC V sells the receivables
to an owners' trust (a qualified special purpose entity) without recourse to us
or BRFC V except for breaches of certain representations and warranties at the
time of sale. We did not enter into any guarantees in connection with the
Purchase Facility. The Purchase Facility has detailed requirements with respect
to the eligibility of receivables for purchase, and fundings under the Purchase
Facility are subject to certain conditions precedent. Under the Purchase
Facility, a variable purchase price of 85.00% of the principal balance of the
receivables sold, subject to certain terms and conditions, is paid at closing in
cash. The balance of the purchase price is deferred until such time as RFL has
received a specified return and all servicing, custodial, agent and similar fees
and expenses have been paid.
On September 30, 2004, we executed an extension of the Purchase Facility to
allow for sales of notes receivable for a cumulative purchase price of up to
$100.0 million on a revolving basis through September 29, 2005, at a variable
purchase price of 85.00% of the principal balance, subject to the eligibility
requirements and certain conditions precedent. RFL earns a return equal to the
one-month London Interbank Offered Rate ("LIBOR") plus an additional return of
3.25%, subject to
29
use of alternate return rates in certain circumstances. In addition, RFL
receives a 0.25% annual program fee. We act as servicer under the Purchase
Facility for a fee.
On September 29, 2004, we sold $25.9 million in vacation ownership receivables
pursuant to the Purchase Facility. We received $22.0 million in cash proceeds
from this sale of receivables and recognized a $4.4 million retained interest, a
$268,000 servicing asset and a $701,000 gain on sale. After this sale, the
remaining availability under the Purchase Facility was $78.0 million.
The Purchase Facility includes various conditions to purchase, covenants,
trigger events and other provisions customary for a transaction of this type.
RFL's obligation to purchase under the Purchase Facility may terminate upon the
occurrence of specified events. These specified events, some of which are
subject to materiality qualifiers and cure periods, include, without limitation,
(i) our breach of the representations or warranties in the Purchase Facility;
(ii) our failure to perform our covenants in the Purchase Facility, including,
without limitation, a failure to pay principal or interest due to RFL; (iii) our
commencement of a bankruptcy proceeding or the like; (iv) a material adverse
change to us since December 31, 2001; (v) the amount borrowed under the Purchase
Facility exceeding the borrowing base; (vi) significant delinquencies or
defaults on the receivables sold; (vii) a payment default by us under any other
borrowing arrangement of $5 million or more, or an event of default under any
indenture, facility or agreement that results in a default under any borrowing
arrangement; (viii) a default or breach under any other agreement beyond the
applicable grace period if such default or breach (a) involves the failure to
make a payment in excess of 5% of our tangible net worth or (b) causes, or
permits the holder of indebtedness to cause, an amount in excess of 5% of our
tangible net worth to become due; (ix) our tangible net worth not equaling at
least $110 million plus 50% of net income and 100% of the proceeds from new
equity financing following the first closing under the Purchase Facility; (x)
the ratio of our debt to tangible net worth exceeding 6 to 1; or (xi) our
failure to perform our servicing obligations.
On July 8, 2004, BB&T Capital Markets, a division of Scott & Stringfellow, Inc.
("BB&T"), consummated a $156.6 million private offering and sale of vacation
ownership receivable-backed securities on our behalf (the "2004 Term
Securitization"). The $172.1 million in aggregate principal of vacation
ownership receivables offered and sold in the 2004 Term Securitization included
$152.8 million in aggregate principal of qualified receivables that were
previously sold to RFL under the Purchase Facility. The proceeds from the 2004
Term Securitization were used to pay RFL all amounts outstanding under the
Purchase Facility, pay fees associated with the transaction to third-parties,
deposit initial amounts in a required cash reserve account and provided net cash
proceeds of $1.3 million to us. We also received certain VOIs that were being
held in the Purchase Facility in connection with previously defaulted
receivables, certain vacation ownership notes receivable previously held in the
Purchase Facility which did not qualify for the 2004 Term Securitization and a
retained interest in the future cash flows from the 2004 Term Securitization.
In addition, the 2004 Term Securitization allowed for an additional $19.3
million in aggregate principal of our qualifying vacation ownership receivables
(the "Pre-funded Receivables") that could be sold by us through October 6, 2004
to Bluegreen Receivables Finance Corporation VIII, our wholly-owned, special
purpose finance subsidiary ("BRFC VIII"). BRFC VIII would then sell the
Pre-funded Receivables to an owners' trust (a qualified special purpose entity)
without recourse to BRFC VIII or us, except for breaches of certain
representations and warranties at the time of sale. On August 13, 2004 and
August 24, 2004, we sold $7.6 million and $11.7 million, respectively, of the
Pre-funded Receivables to BRFC VIII, which then sold the Pre-funded Receivables
to the owners' trust. We received proceeds of $6.9 million and $10.6 million (at
an advance rate of 91%) from the sale of the Pre-funded Receivables on August
13, 2004 and August 24, 2004, respectively.
As a result of the 2004 Term Securitization and the sale of the Pre-funded
Receivables, we recognized a $2.6 million gain on sale.
On August 3, 2004, we executed agreements for a vacation ownership receivables
purchase facility (the "GE Purchase Facility") with General Electric Capital
Corporation ("GE"). The GE Purchase Facility utilizes an owner's trust
structure, pursuant to which we sell receivables to Bluegreen Receivables
Finance Corporation VII, our wholly-owned, special purpose finance subsidiary
("BRFC VII"), and BRFC VII sells the receivables to an owner's trust (a
qualified special purpose entity) without recourse to us or BRFC VII except for
breaches of certain customary representations and warranties at the time of
sale. We did not enter into any guarantees in connection with the GE Purchase
Facility. The GE Purchase Facility has detailed requirements with respect to the
eligibility of receivables for purchase, and fundings under the GE Purchase
Facility are subject to certain conditions precedent. Under the GE Purchase
Facility, a variable purchase price of approximately 91.0% of the principal
balance of the receivables sold, subject to certain terms and conditions, is
paid at closing in cash. The balance of the purchase price is deferred until
such time as GE has received a specified return, a specified
overcollateralization ratio is achieved, a cash reserve account is fully funded
and all servicing, custodial, agent and similar fees and expenses have been
paid. GE earns a return equal to the applicable Swap Rate (which is essentially
a published interest swap arrangement rate as defined in the GE Purchase
Facility agreements) plus 3.50%, subject to use of
30
alternate return rates in certain circumstances. In addition, we paid GE a
structuring fee of approximately $938,000 in October 2004. We act as servicer
under the GE Purchase Facility for a fee.
The GE Purchase Facility allows for sales of notes receivable for a cumulative
purchase price of up to $125.0 million for a period which ends on October 2,
2006.
The GE Purchase Facility includes various conditions to purchase, covenants,
trigger events and other provisions customary for a transaction of this type.
GE's obligation to purchase under the GE Purchase Facility may terminate earlier
than the dates noted above upon the occurrence of certain specified events set
forth in the GE Purchase Facility agreements. These specified events, some of
which are subject to materiality qualifiers and cure periods, include, without
limitation, (i) the aggregate amount of all advances under the GE Purchase
Facility equaling $125.0 million; (ii) our breach of the representations or
warranties in the GE Purchase Facility; (iii) our failure to perform our
covenants in the GE Purchase Facility; (iv) our commencement of a bankruptcy
proceeding or the like; (v) the amount of any advance under the GE Purchase
Facility failing to meet a specified overcollateralization amount; (vi)
significant delinquencies or defaults on the receivables sold; (vii) recovery
rates falling below a pre-determined amount; (viii) a default or breach under
any other agreement beyond the applicable grace period if such default or breach
(a) involves the failure to make a payment in excess of 5% of our Tangible Net
Worth (as defined in the GE Purchase Facility agreements to include our
subordinated debentures) or (b) causes, or permits the holder of indebtedness to
cause, an amount in excess of 5% of our Tangible Net Worth to become due; (ix)
our Tangible Net Worth at the end of any calendar quarter not equaling at least
$185.0 million plus 50% of net income following June 30, 2004; (x) the ratio of
our debt (excluding our subordinated debentures and, after the expiration of the
funding period, up to $600.0 million of receivable-backed indebtedness) to
Tangible Net Worth exceeding 2.25 to 1; (xi) the ratio of our consolidated
earnings before interest, taxes, depreciation and amortization to our interest
expense (net of interest income) falling below 2.00 to 1; (xii) the number of
points available in the Bluegreen Vacation Club to be less than approximately
623.6 million; (xiii) our ceasing to conduct the vacation ownership business and
originate vacation ownership receivables or if certain changes in our ownership
or control occur; (xiv) the failure of certain of our resorts to be part of the
Bluegreen Vacation Club(R) or be managed by us, one of our subsidiaries or
another entity acceptable to GE; (xv) operating budgets and reserve accounts
maintained by the property owners' associations responsible for maintaining
certain of our resorts failing to comply with applicable laws and governing
documents; (xvi) our failure to discharge, stay or bond pending appeal any final
judgments for the payment of an amount in excess of 2.5% of our Tangible Net
Worth in a timely manner; (xvii) our default under or breach of certain resort
management or marketing contracts; or (xviii) our failure to perform our
servicing obligations, otherwise have our servicing rights terminated or if we
do not exercise the Servicer Purchase Option pursuant to the terms of the GE
Purchase Facility.
We have chosen to monetize our receivables through the Purchase Facility, the GE
Purchase Facility and, historically, other similar facilities, as these
off-balance sheet arrangements provide us with cash inflows both currently and
in the future at what we believe to be competitive rates without adding leverage
to our balance sheet or retaining recourse for losses on the receivables sold.
In addition, these sale transactions have generated gains on our income
statement on a quarterly basis, which would not be realized under a traditional
financing arrangement.
The Purchase Facility and the GE Purchase Facility discussed above are the only
ongoing receivables purchase facilities under which we currently have the
ability to sell receivables. We are currently finalizing terms for a potential
new vacation ownership receivables purchase facility with an unaffiliated
financial institution. There is no assurance that this potential new facility
will be obtained on favorable terms or at all. Factors which could adversely
impact our ability to obtain new or additional vacation ownership receivable
purchase facilities include a downturn in general economic conditions; negative
trends in the commercial paper or LIBOR markets; increases in interest rates; a
decrease in the number of financial institutions or other entities willing to
enter into facilities with vacation ownership companies; a deterioration in the
performance of our vacation ownership notes receivable or in the performance of
portfolios sold in prior transactions, specifically increased delinquency,
default and loss severity rates; and a deterioration in our performance
generally. There can be no assurance that we will obtain new purchase facilities
to replace the Purchase Facility and the GE Purchase Facility when these
facilities are fully funded or expire. As indicated above, our inability to sell
vacation ownership receivables under a current or future facility could have a
material adverse impact on our liquidity. However, management believes that to
the extent we could not sell receivables under a purchase facility, we could
potentially mitigate the adverse impact on our liquidity by using our
receivables as collateral under existing or future credit facilities.
Historically, we have also been a party to a number of securitization-type
transactions, all of which in our opinion utilize customary structures and terms
for transactions of this type. In each securitization-type transaction, we sold
receivables to a wholly-owned special purpose entity which, in turn, sold the
receivables either directly to third parties or to a trust established for the
transaction. In each transaction, the receivables were sold on a non-recourse
basis (except for breaches of certain representations and warranties) and the
special purpose entity has a retained interest in the receivables sold. We have
acted as servicer of the receivables pools in each transaction for a fee, with
the servicing obligations specified under the applicable transaction documents.
Under the terms of the applicable securitization transaction, the cash payments
31
received from obligors on the receivables sold are distributed to the investors
(which, depending on the transaction, may acquire the receivables directly or
purchase an interest in, or make loans secured by the receivables to, a trust
that owns the receivables), parties providing services in connection with the
facility, and our special purpose subsidiary as the holder of the retained
interests in the receivables according to specified formulas. In general,
available funds are applied monthly to pay fees to service providers, make
interest and principal payments to investors, fund required reserves, if any,
and pay distributions in respect of the retained interests in the receivables.
Pursuant to the terms of the transaction documents, however, to the extent the
portfolio of receivables fails to satisfy specified performance criteria (as may
occur due to an increase in default rates or loan loss severity) or other
trigger events, the funds received from obligors are distributed on an
accelerated basis to investors. In effect, during a period in which the
accelerated payment formula is applicable, funds go to outside investors until
they receive the full amount owed to them and only then are payments made to our
subsidiary in its capacity as the holder of the retained interests. Depending on
the circumstances and the transaction, the application of the accelerated
payment formula may be permanent or temporary until the trigger event is cured.
If the accelerated payment formula were to become applicable, the cash flow on
the retained interests in the receivables would be reduced until the outside
investors were paid or the regular payment formula was resumed. Such a reduction
in cash flow could cause a decline in the fair value of our retained interests
in the receivables sold. Declines in fair value that are determined to be other
than temporary are charged to operations in the current period. In each
facility, the failure of the pool of receivables to comply with specified
portfolio covenants can create a trigger event, which results in the use of the
accelerated payment formula (in certain circumstances until the trigger event is
cured and in other circumstances permanently) and, to the extent there was any
remaining commitment to purchase receivables from our special purpose
subsidiary, the suspension or termination of that commitment. In addition, in
each securitization facility certain breaches of our obligations as servicer or
other events allow the investor to cause the servicing to be transferred to a
substitute third party servicer. In that case, our obligation to service the
receivables would terminate and we would cease to receive a servicing fee.
We recognized other-than-temporary decreases of $716,000 and $1.7 million during
the three- and nine-month periods ended September 30, 2004, respectively, in the
fair value of our retained interest in a 2002 vacation ownership receivables
securitization transaction, based on higher than projected default rates in the
portfolio sold.
The following is a summary of significant financial information related to the
Purchase Facility and prior similar facilities during the periods presented
below (in thousands):
December 31, September 30,
2003 2004
-----------------------------
On Balance Sheet:
Retained interests in notes receivable sold $ 60,975 $ 67,678
Servicing assets (included in other assets) 2,677 3,160
Off Balance Sheet:
Notes receivable sold without recourse 266,662 308,202
Principal balance owed to note receivable purchasers 238,258 279,405
Three Months Ended
-----------------------------
Income Statement: September 30, September 30,
2003 2004
-----------------------------
Gain on sales of notes receivable $ 476 $ 3,333
Interest accretion on retained interests in notes
receivable sold 832 1,122
Servicing fee income 947 1,074
Amortization of servicing assets (196) (301)
Nine Months Ended
-----------------------------
September 30, September 30,
2003 2004
-----------------------------
Gain on sales of notes receivable $ 3,360 $ 6,929
Interest accretion on retained interests in notes
receivable sold 3,564 3,988
Servicing fee income 2,902 3,253
Amortization of servicing assets (559) (769)
32
Credit Facilities for Bluegreen Resorts' Receivables and Inventories
In addition to the vacation ownership receivables purchase facilities discussed
above, we maintain various credit facilities with financial institutions that
provide receivable, acquisition and development financing for our vacation
ownership projects.
In February 2003, we entered into a revolving vacation ownership receivables
credit facility (the "GMAC Receivables Facility") with Residential Funding
Corporation ("RFC"), an affiliate of GMAC. The borrowing limit under the GMAC
Receivables Facility, as increased by amendment, is $75.0 million. The borrowing
period on the GMAC Receivables Facility expires on March 10, 2005, and
outstanding borrowings mature no later than March 10, 2012. The GMAC Receivables
Facility has detailed requirements with respect to the eligibility of
receivables for inclusion and other conditions to funding. The borrowing base
under the GMAC Receivables Facility is 90% of the outstanding principal balance
of eligible notes arising from the sale of VOIs. The GMAC Receivables Facility
includes affirmative, negative and financial covenants and events of default.
All principal and interest payments received on pledged receivables are applied
to principal and interest due under the GMAC Receivables Facility. Indebtedness
under the facility bears interest at LIBOR plus 4%. During the nine months ended
September 30, 2004, we pledged approximately $18.7 million in aggregate
principal balance of vacation ownership receivables under the GMAC Receivables
Facility and received $16.8 million in cash borrowings. As of September 30,
2004, $27.9 million was outstanding under the GMAC Receivables Facility.
RFC has also provided us with a $75.0 million acquisition, development and
construction revolving credit facility for Bluegreen Resorts (the "GMAC AD&C
Facility"). The borrowing period on the GMAC AD&C Facility expires on February
10, 2005, and outstanding borrowings mature no later than February 10, 2009,
although specific draws typically are due four years from the borrowing date.
Principal will be repaid through agreed-upon release prices as VOIs are sold at
the financed resorts, subject to minimum required amortization. Indebtedness
under the facility bears interest at LIBOR plus 4.75%. Interest payments are due
monthly. In September 2003, we borrowed $17.4 million under the GMAC AD&C
Facility in connection with our acquisition of The Fountains (TM) resort in
Orlando, Florida, all of which was still outstanding at September 30, 2004.
During the three months ended September 30, 2004, we borrowed an additional $7.2
million under the GMAC AD&C Facility to fund the development of VOIs at The
Fountains. The balance of our borrowings under the GMAC AD&C Facility was
collateralized by VOIs and land held for future development at our 51%-owned Big
Cedar Wilderness Club(TM) resort. As of September 30, 2004, $26.8 million was
outstanding under the GMAC AD&C Facility.
During December 2003, we signed a combination $30.0 million Acquisition and
Development and Timeshare Receivables facility with Textron Financial
Corporation (the "Textron Facility"). The borrowing period for acquisition and
development loans under the Textron Facility expired on October 1, 2004, and
outstanding acquisition and development borrowings mature no later than January
1, 2006. The borrowing period for vacation ownership receivables loans under the
Textron Facility expires on March 1, 2006, and outstanding vacation ownership
receivables borrowings mature no later than June 30, 2009. Principal will be
repaid semi-annually commencing September 14, 2004, subject to minimum required
amortization, with the balance due upon the earlier of i) the date that 85% of
the VOIs in the financed resort are sold or ii) the maturity date. Acquisition
and development indebtedness under the facility bears interest at the prime
lending rate plus 1.25%, subject to a minimum interest rate of 6.25%. Interest
payments are due monthly. We utilized this facility to borrow approximately $9.6
million of the purchase price of The Hammocks at Marathon(TM) resort in December
2003. Receivable-backed borrowings under the Textron Facility will bear interest
at the prime lending rate plus 1.00%, subject to a 6.00% minimum interest rate.
During the nine months ended September 30, 2004, we borrowed an additional
$996,000 under the Textron Facility to finance a portion of the cost of
renovations at The Hammocks at Marathon(TM). As of September 30, 2004, $9.1
million was outstanding under the Textron Facility.
We are currently negotiating and have received a term sheet from an unaffiliated
financial institution for a $50.0 million acquisition and development facility
for Bluegreen Resorts. There can be no assurances that we will obtain this new
facility on acceptable terms or at all.
Under an existing $30.0 million revolving credit facility with Wells Fargo
Foothill, Inc. ("Foothill") primarily used for borrowings collateralized by
Bluegreen Communities receivables and inventory, we can also borrow up to $10.0
million of the facility collateralized by the pledge of vacation ownership
receivables. See "Credit Facilities for Bluegreen Communities' Receivables and
Inventories," below, for further details on this facility.
Credit Facilities for Bluegreen Communities' Receivables and Inventories
We have a $30.0 million revolving credit facility with Foothill secured by the
pledge of Bluegreen Communities' receivables, with up to $10.0 million of the
total facility available for Bluegreen Communities' inventory borrowings and, as
indicated above, up to $10.0 million of the total facility available for the
pledge of Bluegreen Resorts' receivables. In April 2004, we borrowed $10.0
million pursuant to the revolving credit facility collateralized by our
Traditions of
33
Braselton(TM) golf course community in Braselton, Georgia, all of which had been
repaid as of September 30, 2004. The borrowing requires principal payments based
on agreed-upon release prices as home sites are sold and bears interest at the
prime lending rate plus 1.25%, payable monthly. Outstanding indebtedness related
to the Traditions of Braselton(TM) borrowing is due on March 10, 2006. The
interest rate charged on outstanding receivable borrowings under the revolving
credit facility, as amended, is the prime lending rate plus 0.25% when the
average monthly outstanding loan balance is greater than or equal to $15.0
million. If the average monthly outstanding loan balance is less than $15.0
million, the interest rate is the greater of 4.00% or the prime lending rate
plus 0.50%. All principal and interest payments received on pledged receivables
are applied to principal and interest due under the facility. In September 2003,
Foothill extended our ability to borrow under the facility through December 31,
2006, and extended the maturity date to December 31, 2008 for borrowings
collateralized by receivables. At September 30, 2004, the outstanding principal
balance under this facility was approximately $4.4 million, approximately $2.6
million of which related to Bluegreen Communities' receivables borrowings and
$1.8 million of which related to Bluegreen Resorts' receivables borrowings. On
October 29, 2004, we borrowed an additional $10.0 million under this facility,
which was collateralized by our Traditions of Braselton(TM) golf course
community.
On September 25, 2002, certain of our direct and indirect wholly-owned
subsidiaries entered into a $50 million revolving credit facility (the "GMAC
Communities Facility") with RFC. We are the guarantor on the GMAC Communities
Facility. The GMAC Communities Facility is secured by the real property
homesites (and personal property related thereto) at the following Bluegreen
Communities projects, as well as any Bluegreen Communities projects acquired by
us with funds borrowed under the GMAC Communities Facility (the "Secured
Projects"): Brickshire (New Kent County, Virginia); Mountain Lakes Ranch
(Bluffdale, Texas); Ridge Lake Shores (Magnolia, Texas); Riverwood Forest
(Fulshear, Texas); Waterstone (Boerne, Texas); Catawba Falls Preserve(TM) (Black
Mountain, North Carolina); Lake Ridge at Joe Pool Lake(TM) (Cedar Hill and Grand
Prairie, Texas); Mystic Shores at Canyon Lake(TM) (Spring Branch, Texas); and
Yellowstone Creek Ranch (Pueblo, Colorado). In addition, the GMAC Communities
Facility is secured by our Carolina National and The Preserve at Jordan Lake
golf courses in Southport, North Carolina and Chapel Hill, North Carolina,
respectively. Borrowings can be drawn on such projects through September 25,
2006. Principal payments are effected through agreed-upon release prices paid to
RFC as homesites in the Secured Projects are sold. The outstanding principal
balance of any borrowings under the GMAC Communities Facility must be repaid by
September 25, 2006. The interest charged on outstanding borrowings is at the
prime lending rate plus 1.00% and is payable monthly. The GMAC Communities
Facility includes customary conditions to funding, acceleration and event of
default provisions and certain financial affirmative and negative covenants. We
use the proceeds from the GMAC Communities Facility to repay outstanding
indebtedness on Bluegreen Communities projects, finance the acquisition and
development of Bluegreen Communities projects and for general corporate
purposes. As of September 30, 2004, $17.2 million was outstanding under the GMAC
Communities Facility.
Over the past several years, substantially all of our homesite sales have been
for cash and we have not provided a significant amount of financing to homesite
purchasers. Accordingly, in recent years we have reduced the borrowing capacity
under credit agreements secured by Bluegreen Communities' receivables. We
attribute the significant volume of cash sales to an increased willingness on
the part of banks to extend direct customer homesite financing at attractive
interest rates. No assurances can be given that local banks will continue to
provide such customer financing.
Historically, we have funded development for road and utility construction,
amenities, surveys and engineering fees from internal operations and have
financed the acquisition of Bluegreen Communities properties through seller,
bank or financial institution loans. Terms for repayment under these loans
typically call for interest to be paid monthly and principal to be repaid
through homesite releases. The release price is usually an amount based on a
pre-determined percentage (typically 25% to 55%) of the gross selling price of
the homesites in the subdivision. In addition, the agreements generally call for
minimum cumulative annual amortization. When we provide financing for our
customers (and therefore the release price is not available in cash at closing
to repay the lender), we are required to pay the lender with cash derived from
other operating activities, principally from cash sales or the pledge of
receivables originated from earlier property sales.
Unsecured Credit Facility
We have a $15.0 million unsecured line-of-credit with Wachovia Bank, N.A.
Amounts borrowed under the line bear interest at LIBOR plus 2%. Interest is due
monthly and all outstanding amounts are due on December 31, 2004. We are only
allowed to borrow under the line-of-credit in amounts less than the remaining
availability under our current, active vacation ownership receivables purchase
facility plus availability under certain receivables warehouse facilities, less
any outstanding letters of credit. The line-of-credit agreement contains certain
covenants and conditions typical of arrangements of this type. As of September
30, 2004, no borrowings were outstanding under the line. In April and July 2004,
we issued an aggregate $3.9 million of irrevocable letters of credit under this
line-of-credit as required in connection with the obtaining of plats for one of
our Bluegreen Communities projects. These letters of credit expire on December
31, 2004. This line-of-credit has historically been a source of short-term
liquidity for us.
34
Commitments
Our material commitments as of September 30, 2004 included the required payments
due on our receivable-backed debt, lines of credit and other notes and
debentures payable, commitments to complete our vacation ownership and
communities projects based on our sales contracts with customers and commitments
under noncancelable operating leases.
The following table summarizes the contractual minimum principal payments
required on all of our outstanding debt (including our receivable-backed debt,
lines-of-credit and other notes and debentures payable) and our noncancelable
operating leases as of September 30, 2004, by period due (in thousands):
Payments Due by Period
----------------------------------------------------------------
Less
than 1 -- 3 4 -- 5 After 5
Contractual Obligations 1 year Years Years Years Total
----------------------------------------- -------- -------- -------- -------- --------
Receivable-backed notes payable $ -- $ -- $ 4,475 $ 27,933 $ 32,408
Lines-of-credit and notes payable 26,052 47,058 1,219 -- 74,329
10.5% senior secured notes -- -- 110,000 -- 110,000
8.25% convertible subordinated debentures -- 4,590 9,200 13,800 27,590
Noncancelable operating leases 5,359 7,669 4,813 6,072 23,913
-------- -------- -------- -------- --------
Total contractual obligations $ 31,411 $ 59,317 $129,707 $ 47,805 $268,240
======== ======== ======== ======== ========
We intend to use cash flow from operations, including cash received from the
sale of vacation ownership notes receivable, and cash received from new
borrowings under existing or future debt facilities in order to satisfy the
principal payments in the Contractual Obligations. While we believe that we will
be able to meet all required debt payments when due, there can be no assurance
that this will be the case.
In addition, we have $3.9 million in letters-of-credit outstanding at September
30, 2004, all of which were issued in April and July 2004 under the unsecured
line-of-credit with Wachovia Bank, N.A. These letters-of-credit, which expire on
December 31, 2004, were required in connection with the obtaining of
governmental approval of plats for one of our Bluegreen Communities projects.
We estimate that the total cash required to complete resort buildings in which
sales have occurred and resort amenities and other common costs in projects in
which sales have occurred to be approximately $19.2 million as of September 30,
2004. We estimate that the total cash required to complete our Bluegreen
Communities projects in which sales have occurred to be approximately $91.5
million as of September 30, 2004. These amounts assume that we are not obligated
to develop any building, project or amenity in which a commitment has not been
made through a sales contract to a customer; however, we anticipate that we will
incur such obligations in the future. We plan to fund these expenditures over
the next five years primarily with available capacity on existing or proposed
credit facilities and cash generated from operations. There can be no assurance
that we will be able to obtain the financing or generate the cash from
operations necessary to complete the foregoing plans or that actual costs will
not exceed those estimated.
We believe that our existing cash, anticipated cash generated from operations,
anticipated future permitted borrowings under existing or proposed credit
facilities and anticipated future sales of notes receivable under the purchase
facility and one or more replacement facilities we will seek to put in place
will be sufficient to meet our anticipated working capital, capital expenditures
and debt service requirements for the foreseeable future. We will be required to
renew or replace credit and receivables purchase facilities that have expired or
that will expire in the near term. We will, in the future, also require
additional credit facilities or will be required to issue corporate debt or
equity securities in connection with acquisitions or otherwise. Any debt
incurred or issued by us may be secured or unsecured, bear fixed or variable
rate interest and may be subject to such terms as the lender may require and
management deems prudent. There can be no assurance that the credit facilities
or receivables purchase facilities which have expired or which are scheduled to
expire in the near term will be renewed or replaced or that sufficient funds
will be available from operations or under existing, proposed or future
revolving credit or other borrowing arrangements or receivables purchase
facilities to meet our cash needs, including, our debt service obligations. To
the extent we are not able to sell notes receivable or borrow under such
facilities, our ability to satisfy our obligations would be materially adversely
affected.
We have a large number of credit facilities, indentures, and other outstanding
debt instruments, and receivables purchase facilities which include customary
conditions to funding, eligibility requirements for collateral, cross-default
and other acceleration provisions, certain financial and other affirmative and
negative covenants, including, among others, limits on the incurrence of
indebtedness, limits on the repurchase of securities, payment of dividends,
investments in joint ventures and other restricted payments, the incurrence of
liens, transactions with affiliates, covenants concerning net worth, fixed
charge coverage requirements, debt-to-equity ratios, portfolio performance
requirements and events of default or
35
termination. No assurance can be given that we will not be required to seek
waivers of such covenants or that such covenants will not limit our ability to
raise funds, sell receivables, satisfy or refinance our obligations or otherwise
adversely affect our operations. In addition, our future operating performance
and ability to meet our financial obligations will be subject to future economic
conditions and to financial, business and other factors, many of which will be
beyond our control.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation
under the supervision and with the participation of our principal executive
officer and principal financial officer of the effectiveness of our disclosure
controls and procedures, as defined in Exchange Act Rules 13a-15(e) and
15d-15(e), as of September 30, 2004. Based on such evaluation, such officers
have concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to us required to be
included in our periodic SEC filings. There has been no change in our internal
control over financial reporting during the quarter ended September 30, 2004
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. In addition, there have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
Management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures and internal
controls will prevent all error and all improper conduct. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that we have detected all control
issues and instances of improper conduct, if any. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control.
Further, the design of any system of controls also is based in part upon
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Chief Executive Officer and Chief Financial Officer Certifications
Appearing as Exhibits 31.1 and 31.2 to this quarterly report are the
Certifications of the principal executive officer and the principal financial
officer. The Certifications are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. This Item of this quarterly report is the
information concerning the evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
On August 21, 2000, we received a notice of Field Audit Action (the "First
Notice") from the State of Wisconsin Department of Revenue (the "DOR") alleging
that two corporations purchased by us had failed to collect and remit sales and
use taxes totaling $1.9 million to the State of Wisconsin prior to the purchase
during the period from January 1, 1994 through September 30, 1997. On May 24,
2003, we received a second Notice of Field Audit Action (the "Second Notice")
from DOR alleging that the two subsidiaries failed to collect and remit sales
and use taxes to the State of Wisconsin during the period from April 1, 1998
through March 31, 2002 totaling $1.4 million. The majority of the assessment is
based on the subsidiaries not charging sales tax to purchasers of VOIs at our
Christmas Mountain Village resort during the period from January 1, 1994 through
December 31, 1999. The statute requiring the assessment of sales tax on sales of
certain VOIs in Wisconsin was repealed in December 1999. We acquired the
subsidiaries that were the subject of the notices in connection with the
acquisition of RDI Group, Inc. ("RDI") on September 30, 1997. Under the RDI
purchase agreement, we had certain rights of off set for amounts owed the
sellers based on any breach of representations and warranties.
On August 31, 2004, we settled the sales tax assessments and all interest and
penalties for $2.3 million. Of this amount, $750,000 was already accrued in
connection with the indemnification by RDI's former stockholders and
approximately $210,000 will be reimbursed to us by certain property owners'
associations that serve the Christmas Mountain Village Resort. We recognized an
expense of $1.3 million from this settlement during the three months ended
September 30, 2004.
36
In the ordinary course of our business, we become subject to claims or
proceedings from time to time relating to the purchase, subdivision, sale or
financing of real estate. Additionally, from time to time, we become involved in
disputes with existing and former employees. We believe that these claims are
routine litigation incidental to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not purchase any of our equity securities registered pursuant to Section
12 of the Securities Exchange Act of 1934 during the three months ended
September 30, 2004. From time to time, our Board of Directors adopts and
publicly announces share repurchase programs. Repurchases under such programs
are subject to the price of our stock, prevailing market conditions, our
financial condition and available resources, other investment alternatives and
other factors. We are not required to seek shareholder approval of share
repurchase programs, have not done so in the past, and do not anticipate doing
so in the future, except to the extent we may be required to do so under
applicable law. We have not repurchased any shares since the fiscal year ended
April 1, 2001. As of September 30, 2004, there were 694,500 shares remaining for
purchase under our current repurchase program, however we have no current plans
to acquire these remaining shares.
Item 6. Exhibits
10.115 Extension Letter dated as of September 30, 2004, from Resort
Finance, LLC to BXG Receivables Note Trust 2001-A, Bluegreen
Corporation and Bluegreen Receivables Finance Corporation V.
10.167 Amendment No. 2 to Revolving Promissory Note (AD&C Loan) dated
as of September 15, 2004 between Bluegreen Vacations
Unlimited, Inc. and Residential Funding Corporation.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
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.
BLUEGREEN CORPORATION
(Registrant)
Date: November 12, 2004 By: /S/ GEORGE F. DONOVAN
-------------------------------------
George F. Donovan
President and
Chief Executive Officer
Date: November 12, 2004 By: /S/ JOHN F. CHISTE
-------------------------------------
John F. Chiste
Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 2004 By: /S/ ANTHONY M. PULEO
-------------------------------------
Anthony M. Puleo
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
37