UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-19292
[LOGO]
bluegreen(R)
BLUEGREEN CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 03-0300793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4960 Conference Way North, Suite 100, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 912-8000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference into Part III of this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
Large Accelerated filer |_| Accelerated filer |X| Non-Accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes |_| No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant: $238,850,099 based upon the closing sale
price of the Company's Common Stock on the New York Stock Exchange on June 30,
2006 ($11.46 per share). For this purpose, "affiliates" include members of the
Board of Directors of the Company, members of executive management and all
persons known to be the beneficial owners of more than 5% of the Company's
outstanding common stock.
As of March 7, 2007, there were 30,881,953 shares of the registrant's common
stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the Company's definitive proxy statement to
be filed for its 2007 Annual Meeting of Shareholders (the "Proxy Statement") are
incorporated by reference into Part III hereof.
EXPLANATORY NOTE
We are filing this Amendment No. 1 to Form 10-K for the annual period ended
December 31, 2006 to restate our Consolidated Statements of Cash Flows and
corresponding financial information for the years ended December 31, 2004, 2005
and, 2006 to correctly reflect the classification of borrowings collateralized
by notes receivable as financing activities. Previously, we reported cash flows
from borrowings collateralized by notes receivable as operating activities in
the Consolidated Statements of Cash Flows as the majority of Bluegreen Resorts'
sales result in the origination of notes receivable from its customers and
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. As this previous classification is not provided for
in Statement of Financial Accounting Standards ("SFAS") No. 95, Statement of
Cash Flow, SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, or SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions, relative to borrowings collateralized by notes
receivable, we are restating our Consolidated Statement of Cash Flows, with
conforming changes to Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Additionally, we have modified our Consolidated Statements of Income to conform
to the presentation required under SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions. Such presentation requires that estimated
uncollectible notes receivable generated from VOI sales (i.e., the provision for
loan losses) be shown on the face of the Consolidated Statement of Income as a
reduction to gross sales of real estate. We had previously provided such
information in the footnotes to the financial statements thereto.
Other changes relate to certain other disclosures in Item 1 and Item 7.
The restatement does not affect our consolidated financial condition at December
31, 2005, and 2006, or our results of operations and related earnings per share
amounts for the years ended December 31, 2004, 2005, and 2006. See Note 1 in the
Notes to Condensed Consolidated Financial Statements for further information
relating to the restatement.
This Amendment No. 1 continues to speak as of the date of the original Form
10-K, as originally filed with the SEC on March 16, 2007, for the year ended
December 31, 2006 and we have not updated or amended the disclosures contained
herein to reflect events that have occurred since the filing of the Form 10-K,
or modified or updated those disclosures in any way other than as described in
the preceding paragraph. Accordingly, this Amendment No. 1 should be read in
conjunction with our filings made with the SEC subsequent to the filing of the
original Form 10-K on March 16, 2007.
BLUEGREEN CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I
Page
Item 1. BUSINESS .......................................................... 1
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ......................................... 28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 53
Item 9A. CONTROLS AND PROCEDURES .......................................... 98
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES .......................... 100
SIGNATURES ................................................................ 101
EXHIBIT INDEX ............................................................. 103
TRADEMARKS
The terms "Bluegreen(R)," "Bluegreen Communities(R)," "Bluegreen Vacation
Club(R)," "Colorful Places To Live And Play(R)," "You're Going To Like What You
See!(R)," "Encore Rewards(R)," "Outdoor Traveler Logo(R)," and the "Bluegreen
Logo(R)" are registered in the U.S. Patent and Trademark Office by Bluegreen
Corporation.
The terms "The Hammocks at Marathon(TM)," "Orlando's Sunshine Resort(TM),"
"Solara Surfside(TM)," "Mountain Run at Boyne(TM)," "The Falls Village(TM),"
"Bluegreen Wilderness Club(TM)," "The Lodge Alley Inn(TM)," "Carolina
Grande(TM)," "Harbour Lights(TM)," "Patrick Henry Square(TM)," "SeaGlass
Tower(TM)," "Shore Crest Vacation Villas(TM)," "Laurel Crest(TM),"
"MountainLoft(TM)," "Daytona SeaBreeze(TM)," "Shenandoah Crossing(TM),"
"Christmas Mountain Village(TM)," "Traditions of Braselton(TM)," "Sanctuary Cove
at St. Andrews Sound(TM)," "Catawba Falls Preserve(TM)," "Mountain Lakes
Ranch(TM)," "Silver Lakes Ranch(TM)," "Mystic Shores(TM)," "Lake Ridge at Joe
Pool Lake(TM)," "Ridge Lake Shores(TM)," "Mountain Springs Ranch(TM),"
"Havenwood at Hunter's CrossingTM," "Vintage Oaks at the Vineyard(TM)," "The
Bridges at Preston Crossing(TM)," "Saddle Creek Forest(TM)," "The Settlement at
Patriot Ranch(TM)," "Carolina National(TM)," "Brickshire(TM)," "Golf Club at
Brickshire(TM)," "Preserve at Jordan Lake(TM)," "Encore Dividends(TM),"
Bluegreen Preferred(TM)," and "Bluegreen Traveler Plus(TM)," are trademarks or
service marks of Bluegreen Corporation in the United States.
The terms "Big Cedar(R)" and "Bass Pro Shops(R)" are registered in the
U.S. Patent and Trademark Office by Bass Pro Trademarks, LP.
The term "World Golf Village(R)" is registered in the U.S. Patent and
Trademark Office by World Golf Foundation, Inc.
All other marks are registered marks of their respective owners.
PART I
Item 1. BUSINESS.
Introduction
We are a leading provider of colorful places to live and play through our
resorts and residential community businesses. We are organized into two
divisions: Bluegreen Resorts and Bluegreen Communities. Bluegreen Resorts
acquires, develops and markets vacation ownership interests ("VOIs") in resorts
generally located in popular high-volume, "drive-to" vacation destinations.
Bluegreen Communities 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 related amenities. We also
generate significant interest income through our financing of individual
purchasers of VOIs and, to a nominal extent, homesites sold by Bluegreen
Communities.
Bluegreen Resorts
Bluegreen Resorts was founded in 1994 to capitalize on the growth of the
vacation ownership industry. As of December 31, 2006, we had approximately
170,000 VOI owners, including approximately 134,000 members in the Bluegreen
Vacation Club, which was established in 1997. We sell VOIs in the Bluegreen
Vacation Club through sales offices at all of our owned resorts and at our seven
off-site sales offices in Georgia, Indiana, Illinois, Michigan, Minnesota,
Nevada and Texas. A Bluegreen Vacation Club VOI in any of our resorts entitles
the buyer to an annual or biennial allotment of "points" in perpetuity. Club
members may use their points to stay in one of our 21 Bluegreen-owned resorts
and 22 other resorts or for other vacation options, including cruises and stays
at approximately 3,700 resorts offered through Resort Condominiums
International, LLC ("RCI") an external exchange network. The following table
sets forth the Bluegreen Vacation Club resorts:
Bluegreen-Owned Resorts (1)(2) Location
-------------------------------------------------- ----------------------------------
Daytona SeaBreeze (3) Daytona Beach Shores, Florida
The Hammocks at Marathon (3) Marathon, Florida
The Fountains (3) Orlando, Florida
Orlando's Sunshine Resort I & II (3) Orlando, Florida
Casa Del Mar Beach Resort Ormond Beach, Florida
Grande Villas at World Golf Village (3) St. Augustine, Florida
Solara Surfside (3) Surfside, Florida
Mountain Run at Boyne (3) Boyne Falls, Michigan
The Falls Village (3) Branson, Missouri
Bluegreen Wilderness Club at Big Cedar (3)(4) Ridgedale, Missouri
The Suites at Hershey (3) Hershey, Pennsylvania
The Lodge Alley Inn (3) Charleston, South Carolina
Carolina Grande (3) Myrtle Beach, South Carolina
Harbour Lights (3) Myrtle Beach, South Carolina
SeaGlass Tower (3) Myrtle Beach, South Carolina
Shore Crest Vacation Villas I & II (3) North Myrtle Beach, South Carolina
MountainLoft (3) Gatlinburg, Tennessee
Laurel Crest (3) Pigeon Forge, Tennessee
Shenandoah Crossing (3) Gordonsville, Virginia
Christmas Mountain Village (3) Wisconsin Dells, Wisconsin
La Cabana Beach and Racquet Club (5) Oranjestad, Aruba
1
Other Resorts (1) Location
------------------------------------------- ----------------------------------
Paradise Isle Resort Gulf Shores, Alabama
Shoreline Towers Resort Gulf Shores, Alabama
Via Roma Beach Resort (3) Bradenton Beach, Florida
Dolphin Beach Club (3) Daytona Beach Shores, Florida
Fantasy Island Resort II (3) Daytona Beach Shores, Florida
Mariner's Boathouse and Beach Resort Fort Myers Beach, Florida
Tropical Sands Resort Fort Myers Beach, Florida
Windward Passage Resort Fort Myers Beach, Florida
Gulfstream Manor (3) Gulfstream, Florida
Resort Sixty-Six (3) Holmes Beach, Florida
Outrigger Beach Club (3) Ormond Beach, Florida
Landmark Holiday Beach Resort Panama City Beach, Florida
Ocean Towers Beach Club Panama City Beach, Florida
Panama City Resort & Club Panama City Beach, Florida
Surfrider Beach Club Sanibel Island, Florida
Petit Crest Villas at Big Canoe Marble Hill, Georgia
Pono Kai Resort (3) Kapaa (Kauai), Hawaii
Lake Condominiums at Big Sky Big Sky, Montana
Foxrun Townhouses Lake Lure, North Carolina
Sandcastle Village New Bern, North Carolina
Waterwood Townhouses New Bern, North Carolina
Players Club Hilton Head Island, South Carolina
----------
(1) Throughout this Annual Report on Form 10-K ("Annual Report"), any
reference to resorts that we "own" refers to resorts where we acquired or
developed a significant number of the VOIs associated with the resorts,
even if substantially all of the VOIs in the property have been sold to
consumers. "Other Resorts" refer to component sites within the Bluegreen
Vacation Club where we did not acquire or develop a significant number of
the VOIs associated with the resorts.
(2) The table excludes acquisitions of vacation ownership resorts made during
2006 including property located in Las Vegas, Nevada; Newland, North
Carolina; Williamsburg, Virginia; and Wisconsin Dells, Wisconsin.
Occupancy in these resorts is expected following construction and
development activities at each of these resort locations.
(3) This resort is managed by Bluegreen Resorts Management, Inc., one of our
wholly-owned subsidiaries.
(4) This resort is being developed, marketed and sold by Bluegreen/Big Cedar
Vacations, LLC, a joint venture with Big Cedar, LLC We own a 51% interest
in this joint venture and the joint venture's results of operations, cash
flows and financial position are included in our consolidated financial
statements. See Note 1 of the Notes to Consolidated Financial Statements.
(5) This resort is managed by Casa Grande Cooperative Association I, which has
subcontracted with Bluegreen Resorts Management, Inc. to provide
management consulting services to the resort.
Throughout this Annual Report, "estimated remaining life-of-project sales"
assumes the aggregate sales of the existing, currently under construction or
development, and planned VOIs or homesites, at current retail prices. "Field
Operating Profit" means the operating profit of one of our business segments
prior to the allocation of corporate overhead, interest income, other income,
interest expense, other expense, minority interest, provision for income taxes,
income of consolidated subsidiary and cumulative effect of change in accounting
principle. See Note 18 of the Notes to Consolidated Financial Statements for
further information and a reconciliation of Field Operating Profit for our
business segments to consolidated income before provision for income taxes.
2
Since our inception, we have generated over 219,000 VOI sales transactions.
Bluegreen Resorts' estimated remaining life-of-project sales were approximately
$3.0 billion at December 31, 2006. For the year ended December 31, 2006,
Bluegreen Resorts had Sales and Field Operating Profit of $399.1 million and
$53.9 million, respectively.
Bluegreen Resorts uses a variety of techniques to attract prospective purchasers
of VOIs, including marketing of mini-vacations either through face-to-face
contact at kiosks in retail and leisure locations or through telemarketing
campaigns, marketing to current owners of VOIs and referrals. To support our
marketing and sales efforts, we have developed and continue to enhance our
database to track our vacation ownership marketing and sales programs. We
believe that as our vacation ownership operations grow, this database will
position us to take advantage of, among other things, less costly marketing and
referral opportunities.
While historical growth rates may not continue, based on ARDA and other industry
data, we believe that vacation ownership has been one of the fastest growing
segments of the hospitality industry with a 9% increase in U.S. timeshare sales
year-over-year since 2004, and a 5% increase in the number of households owning
one or more U.S. timeshare weekly intervals or points equivalents. According to
ARDA, the primary reason cited by consumers for purchasing a VOI is the ability
to exchange a VOI for accommodations at other resorts through worldwide exchange
networks. Our affiliation with RCI, the largest worldwide vacation ownership
exchange company, entitles members of the Bluegreen Vacation Club to stay at
approximately 3,700 participating RCI resorts located in over 100 countries
worldwide.
Our Bluegreen Vacation Club system permits our VOI owners to purchase a real
estate timeshare interest which provides them with an annual or biennial
allotment of points, which can be redeemed for occupancy rights at Bluegreen
Vacation Club resorts. We believe the Bluegreen Vacation Club allows our VOI
owners to customize their vacation experience in a more flexible manner than
traditional fixed-week vacation ownership programs. We also have implemented the
Sampler Program, which allows Sampler package purchasers to enjoy substantially
the same amenities, activities and services offered to Bluegreen Vacation Club
members during a one-year trial period. We believe that we benefit from the
Sampler Program as it gives us the opportunity to market our VOIs to customers
when they use their trial memberships at our resorts and to recapture some of
the cost incurred relative to the initial marketing of prospective customers.
Prior to acquiring a property for a resort, Bluegreen Resorts undertakes a
property review of a resort location for potential acquisition, which includes
physical and environmental assessments. This review is presented for approval to
our Management Investment Committee, which was established in 1990 and consists
of certain key members of senior management. Once approved by this committee,
the acquisition is submitted to the Investment Committee of our Board of
Directors for final approval. During the review process, we consider market,
tourism and demographic data as well as the quality and diversity of the
location's existing amenities and attractions to determine the potential
strength of the vacation ownership market in the area and the availability of a
variety of recreational opportunities for prospective VOI purchasers. Another
important consideration of potential acquisition is the demand for resorts in
specific geographic areas by existing Bluegreen Vacation Club members. We
periodically monitor this demand through surveys and other means. We generally
seek to acquire real estate or interests in real estate in markets that will
provide incremental sales distribution opportunities and/or satisfy our existing
Bluegreen Vacation Club members' desires for alternate vacation destinations. No
assurance can be given that we will be able to be successful in our acquisition
strategy.
We have historically provided financing to approximately 95% of our vacation
ownership customers. Customers are required to make a downpayment of at least
10% of the VOI sales price and typically finance the balance of the sales price
over a period of ten years. As discussed in more detail in Note 1 of the Notes
to Consolidated Financial Statements, the Company adopted the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS"), SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions
("SFAS No. 152). SFAS No. 152, among other things, clarified the 10% downpayment
computation as it applies to revenue recognition. As of December 31, 2006, our
vacation ownership receivables portfolio totaled approximately $150.6 million in
principal amount, with a
3
weighted-average contractual yield of approximately 14.3% per annum. During the
year ended December 31, 2006, we maintained vacation ownership receivables
warehouse facilities and separate vacation ownership receivables purchase
facilities to maintain liquidity associated with our vacation ownership
receivables. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" for a further
discussion of our vacation ownership receivables facilities and certain risks
relating to such facilities.
Bluegreen Communities
Bluegreen Communities focuses on developing residential homesites near major
metropolitan centers or popular retirement areas. We believe that a majority of
our Bluegreen Communities customers seek a lifestyle that is generally
unavailable in traditional, intensely subdivided suburban developments. As of
December 31, 2006, Bluegreen Communities was actively developing and selling
homesites directly to retail consumers in communities primarily located in
Georgia, North Carolina, Texas and Virginia. We had $116.0 million of inventory
for Bluegreen Communities on our balance sheet as of December 31, 2006 and
Bluegreen Communities' estimated remaining life-of-project sales were
approximately $528.8 million. For the year ended December 31, 2006, Bluegreen
Communities recognized Sales and Field Operating Profit of $164.0 million and
$35.8 million, respectively.
The objective of our communities marketing and sales program is to generate
on-site sales presentations to potential prospects through a combination of
newspaper, direct mail, television, billboard, Internet and radio advertising.
In addition, we believe Bluegreen Communities' customer relationship management
computer software system enables us to compile, process and maintain information
concerning future sales prospects within each of our operating regions with the
goal of tracking the effectiveness of our advertising and marketing programs
relative to sales generated. During 2005 and 2006 our conversion ratio of sales
to prospects receiving on-site presentations was 28% and 26% respectively. We
believe that we have been able to achieve an attractive conversion ratio of
sales to prospects receiving on-site sales presentations, through these
programs.
Bluegreen Communities acquires and develops land near major metropolitan
centers, but outside the perimeter of intense subdivision development, and in
popular retirement areas. Prior to acquiring undeveloped land, we consider
market depth and attempt to forecast market absorption. In new market areas, we
typically engage a third-party to perform a market study in the area to evaluate
market response and price acceptance. Our sales and marketing efforts begin as
soon as practicable after we enter into an agreement to acquire a parcel of
land. Our ability to bond projects to completion and/or provide a corporate
guaranty generally allows us to sell a portion of our residential land inventory
on a pre-development basis, thereby reducing the amount of external capital
needed to complete improvements. As is the case with Bluegreen Resorts, all
acquisitions of properties by Bluegreen Communities are subject to the approval
of both our Management Investment Committee and Investment Committee of our
Board of Directors.
In fiscal 1997, we began construction of our first daily-fee golf course and to
date have developed daily fee golf courses. We believe that daily-fee golf
courses are an attractive amenity that increases the marketability of adjacent
homesites. We currently intend to expand our golf course community residential
land offerings into markets with attractive demographics for such properties.
There can be no assurance that our strategy for this expansion or the operation
of the courses will be successful.
Industry Overview
Bluegreen Resorts
The Market. The resorts component of the leisure industry is serviced primarily
by two separate alternatives for overnight accommodations: commercial lodging
establishments and vacation ownership resorts. Commercial lodging consists
principally of hotels and motels in which a room is rented on a nightly, weekly
or monthly basis for the duration of the visit or rentals of privately-owned
condominium units or homes. For many vacationers, particularly those with
families, a lengthy stay at a quality
4
commercial lodging establishment can be expensive, and the space provided to
such vacationers by these establishments relative to the cost is often not
economical. In addition, room rates at commercial lodging establishments are
subject to change periodically and availability is often uncertain. We believe
that vacation ownership presents an attractive vacation alternative to
commercial lodging.
First introduced in Europe in the mid-1960's, vacation ownership has been one of
the fastest growing segments of the hospitality industry over the past two
decades. We believe that, based on ARDA reports and other industry data, the
following factors have contributed to the increased acceptance of the vacation
ownership concept among the general public and the substantial growth of the
vacation ownership industry:
o growing consumer awareness of the potential value and benefits of
vacation ownership, including the cost savings relative to certain
other lodging alternatives;
o increasing flexibility of vacation ownership due to the growth of
international exchange organizations such as RCI and Interval
International, and points-based vacation club systems (such as the
Bluegreen Vacation Club);
o the improving quality of the vacation ownership resorts and their
management; and
o growing consumer confidence resulting from enhanced consumer
protection regulation of the vacation ownership industry and the
entry of brand name national lodging companies to the vacation
ownership industry.
Historically, the vacation ownership industry was highly fragmented and
dominated by a large number of local and regional resort developers and
operators, each with small resort portfolios generally of differing quality. We
believe that one of the most significant factors contributing to the current
success of the vacation ownership industry has been the entry into the market of
some of the world's major lodging, hospitality and entertainment companies, such
as Marriott International, Inc., the Walt Disney Company, Hilton Hotels
Corporation, Hyatt Corporation, Four Seasons Hotels and Resorts, Starwood Hotels
and Resorts Worldwide, Inc. and Wyndham Worldwide Corporation. Although vacation
ownership operations currently comprise only a portion of these companies'
overall operations, we believe that their involvement in the vacation ownership
industry has enhanced the industry's image with the general public.
Our Bluegreen Vacation Club resorts are primarily "drive-to" resort
destinations. We believe that, in general, Americans still desire to take family
vacations and that our vacation club is positioned to benefit from consumer
demand for family vacations. However, international hostilities, economic
conditions and the rising cost of gasoline may have an adverse effect on our
operations in the future.
The Consumer. According to information compiled by industry sources, customers
in our target demographic of 40 to 59 years old represented approximately 60% of
all VOI owners in the United States in 2002. According to the U.S. Census, the
45 to 54 year old age group is expected to grow 18% from 2000 through 2010. The
average age of recent VOI buyers is 51 with a median annual household income of
approximately $85,000. Despite the industry's growth, VOI ownership has achieved
only an approximate 5% market penetration among United States households with
incomes above $50,000 per year.
VOI Ownership. The purchase of a fixed-week VOI typically entitles the buyer to
use a fully-furnished vacation residence, generally for a one-week period each
year in perpetuity. Typically, the buyer acquires an ownership interest in the
vacation residence, which is often held as tenant-in-common with other buyers of
interests in the property. This traditional vacation ownership product lacks the
flexibility provided to owners of a points-based vacation ownership product, and
hence we have not sold fixed week VOIs for several years.
Under a points system, such as our Bluegreen Vacation Club, the members purchase
a real estate interest in a specific VOI resort, which is held in trust on the
member's behalf and provides the member with an annual or biennial allotment of
points that can be redeemed for occupancy rights at participating resorts. We
believe that compared to other vacation ownership arrangements, the points
system offers members
5
greater flexibility in planning their vacations. The number of points required
for a stay at any one resort varies, depending on a variety of factors,
including the resort location, the size of a unit, the vacation season and the
days of the week used. Under this system, members can select vacations according
to their schedules, space needs, available inventory, and available points.
Members' unused points are typically automatically saved for one year beyond the
year they were allotted, subject to certain usage restrictions. Members also
typically may "borrow" points from the next year, subject to certain
restrictions and pre-payment of owner's maintenance fees. Since January 2004,
all of our sales offices have only sold VOIs within our Bluegreen Vacation Club
system, although all but one of our sales offices have been selling the points
product since 2000.
The owners of VOIs manage the property through a nonprofit homeowners'
association, that is governed by a board of directors or trustees, consisting of
representatives of the developer (so long as the developer owns VOIs in the
resort) and owners of VOIs at the resort. The board hires a management company
to which it delegates many of the rights and responsibilities of the homeowners'
association, including grounds landscaping, security, housekeeping and operating
supplies, garbage collection, utilities, insurance, laundry and repairs and
maintenance. As of December 31, 2006, we managed 31 resorts, including 26 of the
resorts in the Bluegreen Vacation Club.
Each VOI owner is required to pay the vacation club homeowners' association a
share of all costs of maintaining the properties in the Bluegreen Vacation Club
system. These charges generally consist of an annual maintenance fee plus
applicable real estate taxes and special assessments, assessed on an as-needed
basis. If the VOI owner does not pay such charges, such owner's use rights may
be suspended and the homeowners' association may foreclose on the owner's VOI,
subject to our first mortgage lien on the VOI, if any.
Participation in Independent VOI Exchange Networks. We believe that our VOIs are
made more attractive by our affiliation with an international VOI exchange
network such as RCI. All of our VOI resorts are currently affiliated with RCI,
and most of our owned resorts have been awarded RCI's highest designation (Gold
Crown). A VOI owner's participation in the RCI exchange network allows such
owner to exchange his annual VOI for occupancy at approximately 3,700
participating resorts, based upon availability and the payment of a variable
exchange fee. RCI's participating resorts are located throughout the world in
over 100 countries. A Bluegreen Vacation Club owner may make a reservation for
occupancy in a club VOI and then may attempt to exchange this occupancy right
for one in another participating RCI resort. The owner lists his occupancy right
as available with RCI and requests occupancy at another participating resort,
indicating the particular resort or geographic area to which the owner desires
to travel, the size of the unit desired and the period during which occupancy is
desired. The exchange network assigns ratings to each listed VOI, based upon a
number of factors, including the location and size of the unit, the quality of
the resort and the period during which the VOI is available, and attempts to
satisfy the exchange request by providing an occupancy right in another VOI with
a similar rating. If the exchange network is unable to meet the member's initial
request, it suggests alternative resorts based on availability. If the owner
consummates the exchange, they are charged an exchange fee by RCI. No assurance
can be given that our resorts will continue to qualify for participation in
international exchange networks, or that our customers will continue to be
satisfied with these networks. Our failure or the failure of any of our resorts
to participate in qualified exchange networks or the failure of such networks to
operate effectively could have a material adverse effect on us. In 2006, only
14.4% of our owners utilized the RCI exchange network.
Bluegreen Communities
Bluegreen Communities operates within a specialized niche of the real estate
industry, which focuses on the sale of residential homesites to retail customers
who typically intend to build a home on such homesites at some point in the
future. The participants in this market are generally individual landowners who
are selling specific parcels of property and small developers who focus
primarily on projects in their region.
Unlike commercial homebuilders who focus on vertical development, such as the
construction of single and multi-family housing structures, Bluegreen
Communities focuses primarily on horizontal development
6
activities, such as grading, roads and utilities. As a result, the projects
undertaken by us are significantly less capital intensive than those generally
undertaken by commercial homebuilders. We believe that our market is also the
beneficiary of a number of trends, including the large number of people entering
into the 40 to 59 year old age bracket and the economic and population growth in
certain of our primary markets.
Bluegreen Communities also focuses on the development of daily-fee golf courses
and related amenities as the centerpieces of certain of our residential land
communities. As of December 31, 2006, we were marketing homesites in five
communities that include golf courses developed either by us or third parties.
We currently intend to acquire and develop additional golf communities, as we
believe that the demographics and marketability of such properties are
consistent with our overall residential land strategy. Golf communities
typically are larger, multi-phase properties that require a greater capital
commitment than our single-phase residential land projects, but which also
typically realize higher gross margins. There can be no assurance that we will
be able to successfully implement our golf community strategy.
Bluegreen Communities also undertakes the development of large lakes in certain
of our projects as the centerpiece amenity. We believe that while these
development activities require a greater capital commitment than certain other
amenities that we may provide in our communities, we benefit from the
anticipated increased marketability and pricing of lakefront homesites.
Company Products
Bluegreen Resorts
Set forth below is a description of each of our owned vacation ownership
resorts. We consider resorts "owned" if we acquired or developed a significant
number of the VOIs associated with the resorts, even if we no longer own
substantial VOIs in the resorts. Units at most of the properties have certain
standard amenities, including a full kitchen, at least two televisions, a VCR
and a CD player. Some units have additional amenities, such as big screen
televisions, DVD players, fireplaces, whirlpool tubs and video game systems.
Most properties offer guests a clubhouse (with an indoor or outdoor pool, a game
room, exercise facilities and a lounge) and a hotel-type staff. We manage all of
our owned resorts, either directly or through a subcontract, with the exception
of the Casa Del Mar Beach Resort. The Casa Del Mar Beach Resort is managed by
The Amber Group, Inc., an unaffiliated third party that managed the resort prior
to our acquisition of Casa Del Mar's unsold VOI inventory in 2003.
Florida
Daytona SeaBreeze-- Daytona Beach Shores, Florida. This 80-unit resort is
located on the "World's Most Famous Beach." Amenities include private
ocean-front balconies, a heated outdoor swimming pool, a children's pool, a hot
tub, a fitness center, barbeque grill area and a game room. The resort is on a
barrier island less than six miles long and is located near the world-famous
Daytona International Speedway and DAYTONA USA(R).
The Hammocks at Marathon-- Marathon, Florida. The Hammocks at Marathon is
located in the Florida Keys within easy reach of both Miami and Key West,
Florida. This 58-unit beachfront resort offers such amenities as a pool, boat
slips, an outside tiki bar and a variety of water sport recreational vehicle
rentals.
The Fountains-- Orlando, Florida. This 54-acre resort is located on Lake Eve and
is minutes away from Central Florida's family attractions, including Walt Disney
World(R), SeaWorld(R) and Universal Studios(R). Amenities include a clubhouse
with a heated indoor/outdoor swimming pool, a pool bar, a massage room, steam
and sauna rooms, a family activity room, a tennis court and a basketball court.
When fully developed, we anticipate that the Fountains will include 752 units.
Orlando's Sunshine Resort-- Orlando, Florida. Orlando's Sunshine Resort is
located on International Drive, near Wet'n'Wild(R) water park and Universal
Studios Florida(R). This 90-unit property features an outdoor swimming pool, a
hot tub and tennis courts.
7
Casa Del Mar Beach Resort-- Ormond Beach, Florida. Casa del Mar is a 43-unit
resort located directly on the ocean and includes an outdoor pool and miniature
golf. In nearby Daytona Beach, Florida guests can drive on the beach or visit
the Daytona International Speedway.
Grande Villas at World Golf Village-- St. Augustine, Florida. Grande Villas is
located approximately 30 minutes away from the Atlantic Ocean and next to the
World Golf Hall of Fame(R). This resort features an extensive array of
amenities, including a golf course (separately owned and operated; separate fee
required), outdoor and indoor swimming pools, a hot tub, a sauna and a
playground. When fully developed we anticipate that this resort will include 227
units.
Solara Surfside-- Surfside, Florida. This 58-unit oceanfront resort is located
in Surfside, Florida, near Miami Beach. Solara Surfside captures the art deco
style of its surrounding area and features one- and two-bedroom vacation homes,
a swimming pool, a sun deck and a hot tub.
Michigan
Mountain Run at Boyne-- Boyne Falls, Michigan. Boyne Mountain is known for
skiing, snowboarding and tubing on more than 50 runs with convenient lift and
trail systems. In the summer, Boyne Mountain offers golf on nearby world-class
courses designed by some of the game's masters, including Robert Trent Jones,
Arthur Hills, Donald Ross and others. Mountain Run has 104 units. Amenities for
Winter and Summer use are separately owned and operated.
Missouri
The Falls Village-- Branson, Missouri. The Falls Village is located in the Ozark
Mountains. Fishing, boating and swimming are available at nearby Table Rock Lake
and Lake Taneycomo, and area theaters feature shows by renowned country music
stars. Most resort guests come from areas within an eight to ten hour drive of
Branson. When fully developed, we anticipate that this resort will include 219
units.
Bluegreen Wilderness Club at Big Cedar-- Ridgedale, Missouri. The Bluegreen
Wilderness Club at Big Cedar is a wilderness-themed resort adjacent to the world
famous Big Cedar Lodge luxury hotel resort. This vacation ownership resort is
being developed, marketed and sold by Bluegreen/Big Cedar Vacations, LLC, a
joint venture between Big Cedar, LLC and us, in which we own a 51% interest. The
resort is located on Table Rock Lake, and is near Dogwood Canyon. Guests staying
in the two-bedroom cabins or one- and two-bedroom lodge villas enjoy fireplaces,
private balconies, full kitchens and Internet access. Amenities include, or are
expected to include indoor and outdoor swimming pools and hot tubs, a lazy
river, hiking trails, a campfire area, a beach and playground. Guests also have
access to certain of the luxury amenities at the Big Cedar Lodge, including the
Jack Nicklaus Signature Top of the Rock Par Three Golf Course, a marina,
horseback riding, tennis courts and a spa. When fully developed, we anticipate
that this resort will include 324 units.
Pennsylvania
The Suites at Hershey-- Hershey, Pennsylvania. This 3.2-acre, 79 unit resort is
located near HersheyPark(R) and Hershey's(R) Chocolate World. Amenities include
an outdoor swimming pool, a hot tub, a playground, a picnic area with barbeque
grills, a game room, a fitness center and indoor basketball courts.
South Carolina
The Lodge Alley Inn-- Charleston, South Carolina. Located in Charleston's
historic district, The Lodge Alley Inn includes one- and two-bedroom suites,
many furnished with an equipped kitchen, a living room with a fireplace, a
dining room, a whirlpool bath, pine wood floors and 18th century-style furniture
reproductions. This 90-unit resort, which features the on-site High Cotton
restaurant, is within walking distance of many of Charleston's historical sites,
open-air markets and art galleries.
8
Carolina Grande-- Myrtle Beach, South Carolina. This 118 unit, 20-story tower is
located across the street from the beach. An arrangement with The Carolinian
Beach Resort offers guests an accessible breezeway directly to the beach and
other amenities, including indoor and outdoor swimming pools, hot tubs, full
kitchens, washers and dryers, and views of the ocean and city from each room.
The resort is located near the Pavilion Amusement Park, NASCAR(R) SpeedPark,
Broadway at the BeachSM (a 350-acre complex featuring approximately 100
specialty shops, 20 restaurants, 15 attractions and 10 nightclubs), Myrtle Waves
Water Park, Carolina Opry, Dixie Stampede and the Convention Center.
Harbour Lights-- Myrtle Beach, South Carolina. Harbour Lights is located in the
Fantasy Harbour Complex in the center of Myrtle Beach. Nearby are Theater Row,
shopping, golf courses and restaurants. The resort's activities center overlooks
the Intracoastal Waterway. When fully developed, we anticipate that this resort
will include 356 units.
SeaGlass Tower-- Myrtle Beach, South Carolina. The SeaGlass Tower is a 19-story,
144 unit mirrored tower located directly on the beach in Myrtle Beach. Amenities
include balconies, fully equipped kitchens, whirlpool baths and other amenities,
including an indoor and two outdoor swimming pools, a hot tub, and two saunas.
SeaGlass Tower is located near the Pavilion Amusement Park, Broadway at the
BeachSM, Myrtle Beach Convention Center, and the Myrtle Beach International
Airport.
Shore Crest Vacation Villas-- North Myrtle Beach, South Carolina. Shore Crest
Vacation Villas, consisting of two multi-stored towers and consisting of 240
units, is located on the beach in the Windy Hill section of North Myrtle Beach,
a mile from the famous Barefoot Landing, featuring its restaurants, theaters,
shops and outlet stores.
Tennessee
MountainLoft-- Gatlinburg, Tennessee. MountainLoft is located near the Great
Smoky Mountains National Park and is minutes from the family attractions of
Pigeon Forge, Tennessee. Units are located in individual chalets or mid-rise
villa buildings. Each unit is fully furnished with a whirlpool bath and private
balconies; and certain units include gas fireplaces. When fully developed, we
anticipate that this resort will include 414 units.
Laurel Crest-- Pigeon Forge, Tennessee. Laurel Crest is located in proximity to
the Great Smoky Mountains National Park and the Dollywood theme park. In
addition, visitors to Pigeon Forge can enjoy over 200 factory outlet stores and
music shows featuring renowned country music stars as well as partake in a
variety of outdoor activities, such as horseback riding, trout fishing, boating,
golfing and white water rafting. When fully developed, we anticipate that this
resort will include 202 units.
Virginia
Shenandoah Crossing-- Gordonsville, Virginia. Shenandoah Crossing, which
currently includes 162 units, features an 18-hole golf course (which is owned
and operated by an unaffiliated third party), indoor and outdoor swimming pools,
tennis courts, horseback riding trails and a lake for fishing and boating.
Wisconsin
Christmas Mountain Village-- Wisconsin Dells, Wisconsin. Christmas Mountain
Village, offers a 27-hole golf course and seven ski trails served by two chair
lifts. Other on-site amenities include horseback riding, tennis courts, a
five-acre lake with paddleboats and rowboats and four outdoor swimming pools.
This resort attracts customers primarily from the greater Chicago area and other
locations within an eight to ten hour drive of Wisconsin Dells. When fully
developed, we anticipate that this resort will include 361 units.
9
Aruba
La Cabana Beach & Racquet Club-- Oranjestad, Aruba. La Cabana Beach & Racquet
Club is a 449-suite ocean front resort that offers one-, two- and three-bedroom
suites, garden suites and penthouse accommodations. On-site amenities include
racquetball, squash, two pools and private beach cabanas, none of which are
owned by us.
The following table describes the relative size, stage of development and amount
of remaining inventory at each of our owned resorts. Although all inventory is
sold as VOIs, we disclose the size and inventory information in terms of number
of vacation homes for ease of comparability between our resorts and those of
other companies in the industry. "Vacation homes" are individual lodging units
(e.g., condominium-style apartments, town homes, cabins, etc.).
The Orlando's
Daytona Hammocks The Sunshine Casa Del Mar
Resort SeaBreeze at Marathon Fountains Resort Beach Resort
----------------------------------------------------------------------
Daytona Ormond
Beach Shores, Marathon, Orlando, Orlando, Beach,
Location FL FL FL FL FL
----------------------------------------------------------------------
Year acquired (1) 2005 2003 2003 1997 2003
Number of vacation homes completed 80 58 382 90 43
Number of vacation homes under
construction -- -- 91 -- --
Number of future vacation homes (2) -- -- 279 -- --
Total current and future vacation
homes 80 58 752 90 43
Percentage of total current and
future vacation homes sold (3) 73% 87% 54% 99% 85%
Estimated remaining life-of-project
sales (in millions) (4) $ 12.9 $ 10.5 $ 339.4 $ 6.3 $ 3.9
Bluegreen
Grande Villas Solara Wilderness
at World Golf Surfside Mountain The Falls Club at Big
Resort Village Resort Run at Boyne Village Cedar
---------------------------------------------------------------------
St. Augustine, Surfside, Boyne Falls, Branson, Ridgedale,
Location FL FL MI MO MO
---------------------------------------------------------------------
Year acquired (1) 2003 2001 2002 1997 2000
Number of vacation homes
completed 92 58 104 144 249
Number of vacation homes under
construction 60 -- -- 9 --
Number of future vacation homes (2) 75 -- -- 66 75
Total current and future
vacation homes 227 58 104 219 324
Percentage of total current and
future vacation homes sold(3) 36% 99% 72% 49% 45%
Estimated remaining
life-of-project sales (in
millions) (4) $ 139.9 $ 6.8 $ 15.1 $ 102.3 $ 123.0
10
The Suites at The Lodge Carolina Harbour SeaGlass
Resort Hershey Alley Inn Grande Lights Tower
-----------------------------------------------------------------------------
Hershey, Charleston, Myrtle Beach, Myrtle Beach, Myrtle Beach,
Location PA SC SC SC SC
-----------------------------------------------------------------------------
Year acquired (1) 2004 1998 2005 1997 2005
Number of vacation homes completed 79 90 118 252 144
Number of vacation homes under
construction -- -- -- -- --
Number of future vacation homes (2) -- -- -- 104 --
Total current and future vacation
homes 79 90 118 356 144
Percentage of total current and
future vacation homes sold (3) 71% 96% 78% 86% 4%
Estimated remaining life-of-project
sales (in millions) (4) $ 18.4 $ 2.3 $ 19.5 $ 89.0 $ 81.9
Shore Crest Christmas
Vacation Mountain Laurel Shenandoah Mountain
Resort Villas Loft Crest Crossing Village
-------------------------------------------------------------------------
North Myrtle Wisconsin
Beach, Gatlinburg, Pigeon Forge, Gordonsville, Dells,
Location SC TN TN VA WI
-------------------------------------------------------------------------
Year acquired (1) 1996 1994 1995 1997 1997
Number of vacation homes completed 240 284 152 162 309
Number of vacation homes under
construction -- -- -- -- --
Number of future vacation homes (2) -- 130 50 100 52
Total current and future vacation
homes 240 414 202 262 361
Percentage of total current and
future vacation homes sold (3) 94% 37% 65% 60% 68%
Estimated remaining life-of-project
sales (in millions) (4) $ 8.8 $ 252.6 $ 64.1 $ 115.1 $ 183.9
11
La Cabana
Beach and
Resort Racquet Club
--------------
Oranjestad,
Location Aruba
--------------
Year acquired (1) 1997
Number of vacation homes completed 449
Number of vacation homes under
construction --
Number of future vacation homes (2) --
Total current and future vacation
homes 449
Percentage of total current and
future vacation homes sold (3) 94%
Estimated remaining life-of-project
sales (in millions) (4) $ 21.0
(1) Year that we first acquired the land to develop each resort or the year we
first acquired existing VOIs at each resort, as applicable.
(2) Number of vacation homes that can be developed at each resort in the
future. We cannot provide any assurance that we will have the resources,
or will decide to commence or complete the development of any of these
future vacation homes or that the resulting VOIs will be sold at favorable
prices.
(3) This is the portion of each resort that has been sold through December 31,
2006, including sales made by prior owners of the resorts, if applicable.
The unsold portion includes vacation homes that are either completed,
under construction or subject to future development.
(4) Estimated remaining life-of-project sales as of December 31, 2006. This
table excludes VOI inventory that we own at several non-owned resorts
("Miscellaneous Inventory"). The aggregate estimated remaining
life-of-project sales for our Miscellaneous Inventory as of December 31,
2006 was $16.0 million or less than 1% of Bluegreen Resorts' estimated
remaining life-of-project sales. This table also excludes the estimated
life-of-project sales at the 2006 resort acquisitions as discussed below.
There is no assurance that we will realize the estimated remaining
life-of-project sales.
The table excludes acquisitions of property for future vacation ownership
resorts made during 2006 including properties in Newland, North Carolina;
Williamsburg, Virginia; Las Vegas, Nevada, and Wisconsin Dells, Wisconsin, (the
"2006 Resort Acquisitions"). Occupancy is expected following the completion of
construction and development activities at each of these resorts. The aggregate
estimated remaining life-of-project sales for our 2006 Resort Acquisitions as of
December 31, 2006 was $1.2 billion or 41% of Bluegreen Resorts' estimated
remaining life-of-project sales.
Each of our resorts has property and casualty insurance coverage. In the case of
our completed resorts, or builder's risk insurance, in the case of resorts that
are under construction. In addition, we, or general contractors hired by us,
purchase performance bonds if required by the local jurisdictions in which we
develop our resorts. There is no assurance that insurance will remain available
on attractive terms, at acceptable prices, or at all.
12
Bluegreen Communities
Described below are the communities with the most significant estimated
remaining life-of-project sales marketed by Bluegreen Communities as of December
31, 2006.
North Carolina
Chapel Ridge-- Chatham County, North Carolina. In July 2004, we acquired
approximately 800 acres of land centrally located between Chapel Hill/Durham,
Cary/Apex, Sanford/Siler City and the Triad areas in Chatham County, North
Carolina for $5.5 million. Amenities at this golf community will include an
18-hole Fred Couples Signature Golf Course, a clubhouse and conservation areas.
The golf course and clubhouse will be owned by us and operated on a daily-fee
basis. General improvements relative to the homesites at Chapel Ridge being
performed by us include in most cases, water, sewer, electric, telephone and
cable television utilities as well as selective homesite clearing. We began
selling homesites at Chapel Ridge in July 2004. During 2006, we acquired 242
acres of land as an addition to Chapel Ridge for $7.4 million. Sales at this
addition began in March of 2007.
Texas
Mystic Shores-- Canyon Lake, Texas. We acquired 6,966 acres located 25 miles
north of San Antonio, Texas in October 1999 for $14.9 million. On May 5, 2000,
we purchased an additional 435 acres for $2.7 million. The community is expected
to include approximately 2,400 homesites, ranging in size from one to 20 acres.
Mystic Shores is situated on Canyon Lake and is in close proximity to the
Guadeloupe River, which is well known for fishing, rafting and water sports. The
property also features a junior Olympic swimming pool, bathhouse, open-air
pavilion and picnic area. General improvements on homesites at Mystic Shores
performed by us included, in most cases, water and selective homesite clearing,
while some sections of the community also include electric and telephone
utilities. We began selling homesites at Mystic Shores in March 2000.
Lake Ridge at Joe Pool Lake-- Cedar Hill, Texas. We acquired 1,400 acres located
approximately 19 miles outside of Dallas, Texas and 30 miles outside of Fort
Worth, Texas, in April 1994 for $6.1 million. In fiscal 2000, we acquired an
additional 1,766 acres for $14.9 million. The property is located at Joe Pool
Lake and is atop the highest elevation within 100 miles. The lake, which is a
public recreation areas, has in excess of 7,500 acres of water for boating,
fishing, windsurfing and other water activities. Adjacent amenities, also not
owned by us, include a 154-acre park with baseball, football and soccer fields,
camping areas and an 18-hole golf course. The existing acreage is expected to
yield approximately 2,530 homesites, with most homesites ranging in size from
1/4 to five acres. General improvements on the homesites at Lake Ridge performed
by us include, in most cases, water, sewer, electric, telephone and cable
television utilities as well as selective homesite clearing. We began selling
homesites at Lake Ridge at Joe Pool Lake in April 1994.
King Oaks-- College Station, Texas. In September 2006, we acquired a 953-acre
parcel in College Station, Texas, located northwest of Houston for $3.1 million.
The property is expected to be developed into a community with 432 homesites.
General improvements on the homesites at King Oaks being performed by us
include, in most cases, water and sewer, utilities and selective homesite
clearing. We began selling homesites at King Oaks in November 2006.
The Bridges at Preston Crossing-- Grayson County, Texas. In March 2006, we
acquired 1,580-acres for a planned golf community in Grayson County, Texas,
located just outside of Dallas, for $26.1 million. Amenities at this golf
community are expected to include an 18-hole Fred Couples Signature Golf Course,
a clubhouse and conservation areas. The golf course and clubhouse will be owned
by us and operated on a daily-fee basis. General improvements relative to the
homesites at The Bridges at Preston Crossing being performed by us include, in
most cases, water, sewer, electric, telephone and cable television utilities as
well as selective homesite clearing. We began selling homesites at The Bridges
at Preston Crossing in September 2006.
13
Saddle Creek Forest-- Magnolia, Texas. In January 2005, we acquired
approximately 1,053 acres of land located near Houston, Texas in Montgomery
County for $2.7 million. Saddle Creek Forest features 464 heavily wooded,
private lake and creekside homesites, ranging in size from one to five acres.
General improvements on the homesites at Saddle Creek Forest being performed by
us include, in most cases, water and sewer utilities and selective homesite
clearing. We began sales of homesites at Saddle Creek Forest in August 2005. We
also acquired 130 acres in April 2006 for $0.7 million for a new section of
Saddle Creek Forest, to be called Legacy Oaks in Magnolia, TX.
Havenwood at Hunter's Crossing-- New Braunfels, Texas. In July 2005 we acquired
approximately 1,263 acres of land with convenient access to Austin and San
Antonio, Texas in Comal County, Texas for $7.5 million. This gated community
offers premium hilltop homesites on one to three acres of land. Havenwood at
Hunter's Crossing features dense oaks and stunning views of the surrounding Hill
Country. General improvements on the homesites at Havenwood at Hunter's Crossing
being performed by us include, in most cases, water, sewer, electric, telephone
and cable television utilities as well as selective homesite clearing. We began
sales of homesites at Havenwood at Hunter's Crossing in January 2006.
Vintage Oak at the Vineyard-- New Braunfels, Texas. In April 2006, we acquired a
3,300-acre parcel in New Braunfels, Texas, which is located just outside San
Antonio, for $27.3 million. Amenities at this community are expected to include
walking trails, a large pool complex and a park. General improvements on the
homesites at Vintage Oaks being performed by us include, in most cases, water
and sewer utilities and selective homesite clearing. We began selling homesites
at Vintage Oaks in October 2006.
SugarTree on the Brazos-- Parker County, Texas. In November 2004, we acquired
approximately 429 acres of land located near Fort Worth, Texas in Parker County,
Texas for $4.3 million. SugarTree on the Brazos is surrounded by a championship
golf course (separately owned) and is nestled along the shores of the Brazos
River. Amenities at this community are expected to include a swimming center and
clubhouse. General improvements on the homesites at SugarTree on the Brazos
being performed by us include, in most cases, water and sewer utilities and
selective homesite clearing. We began sales of homesites at this community in
March 2005.
The following table provides additional information about the significant
Bluegreen Communities projects listed above:
Chapel Mystic Lake Ridge at
Community Ridge Shores Joe Pool Lake King Oaks
---------------------------------------------------------
Chatham Canyon Lake, Cedar Hill, College
Location County, NC TX TX Station, TX
---------------------------------------------------------
Year acquired (1) 2004 1999 1994 2006
Total acreage 1,040 7,401 3,166 953
Number of homesites anticipated (2) 779 2,328 2,451 432
Percentage of anticipated homesites sold (3) 69% 81% 88% 3%
Estimated remaining life-of-project sales
(in millions) (4) $ 33.9 $ 36.0 $ 42.7 $ 28.5
Havenwood at Vintage Oaks
The Bridges at Saddle Creek Hunter's at the
Community Preston Crossing Forest Crossing Vineyard
-------------------------------------------------------------------
Grayson County, Magnolia, New Braunfels, New Braunfels,
Location TX TX TX TX
-------------------------------------------------------------------
Year acquired (1) 2006 2005 2005 2006
Total acreage 1,580 1,053 1,263 3,300
Number of homesites anticipated (2) 2,007 544 679 2,019
Percentage of anticipated homesites sold (3) 3% 63% 31% 5%
Estimated remaining life-of-project sales
(in millions) (4) $ 165.4 $ 12.3 $ 34.4 $ 142.0
14
SugarTree on
Community the Brazos
---------------
Parker County,
Location TX
---------------
Year acquired (1) 2004
Total acreage 429
Number of homesites anticipated (2) 346
Percentage of anticipated homesites sold (3) 41%
Estimated remaining life-of-project sales
(in millions) (4) $12.2
(1) Year that we first acquired the land to commence development of each
community. Certain communities were acquired in phases.
(2) Number of homesites anticipated within each community. We cannot
provide any assurance that we will have the resources, or will
decide, to develop such homesites at each community, that required
platting and other approvals will be obtained to develop such
homesites or that such homesites will be sold at favorable prices.
(3) This is the percentage of anticipated homesites sold through
December 31, 2006.
(4) Estimated remaining life-of-project sales as of December 31, 2006.
This table excludes additional projects currently being marketed by
Bluegreen Communities with an aggregate estimated remaining
life-of-project sales as of December 31, 2006 of $21.4 million, or
approximately 4% of Bluegreen Communities total estimated remaining
life-of-project sales. There is no assurance that we will realize
the estimated remaining life-of-project sales.
While there may be limits on the amount of insurance available and some policies
have significant deductibles, we believe that each of our Bluegreen Communities
properties is adequately covered by builder's risk insurance during the
construction period or property and casualty insurance for our owned golf
amenities and homesites that are held in our inventory prior to sale to
consumers. Once a homesite is sold, the consumer assumes the risk of loss on
such homesite. In addition, the applicable property owners' association bears
the risk of loss on any common amenities at each project and carries its own
insurance on such property.
We also purchase performance bonds in connection with the development of most of
our communities, in order to provide assurance to homesite buyers that
construction of the community will be completed. We believe that our ability to
obtain such performance bonds assists us in our pre-construction sales efforts.
Acquisition of Bluegreen Resorts and Bluegreen Communities Inventory
Bluegreen Resorts
We intend to continue to pursue growth by expanding or supplementing our
existing resorts operations through acquisitions in destinations that we believe
will complement such operations. We may consider acquiring additional VOI
inventory, operating companies, management contracts, VOI mortgage portfolios
and properties or other vacation ownership-related assets that may be integrated
into our operations.
We obtain information with respect to resort acquisition opportunities through
interaction by our management team with resort operators, lodging companies and
financial institutions with which we have established business relationships. We
evaluate the following factors, among others, to determine the viability of a
potential new vacation ownership resort:
o attractiveness of the market as a source of incremental sales;
15
o anticipated supply/demand ratio for VOIs in the relevant market;
o the market's potential growth as a vacation destination;
o competitive accommodation alternatives in the market;
o the uniqueness of location and demand for the location by existing
Bluegreen Vacation Club members;
o barriers to entry that would limit competition; and
o we believe will result in an acceptable profit margin and cash flow
to us based upon anticipated retail value.
Bluegreen Communities
Bluegreen Communities seeks to acquire property that:
o is located near a major population center but outside the perimeter
of intense subdivision development or in popular retirement areas;
o is suitable for subdivision;
o has attractive topographical features;
o for certain projects, could accommodate a golf course and related
amenities; and
o we believe will result in an acceptable profit margin and cash flow
to us based upon anticipated retail value.
Communities are generally subdivided for sale into homesites typically ranging
in size from 1/4 acre to five acres.
In connection with our review of potential Bluegreen Communities inventory, we
consider economic conditions in the area in which the parcel is located,
environmental sensitivity, availability of financing, whether the property is
consistent with our general policies and the anticipated ability of that
property to produce acceptable profit margins and cash flow. As part of our
long-term strategy for Bluegreen Communities, in recent years we have focused on
fewer, more capital-intensive communities. We intend to continue to focus
Bluegreen Communities on those regions where we believe the market for our
products is strongest, such as the southeast and southwest regions of the United
States, and to replenish and increase our residential land inventory in such
regions as existing projects are sold out.
Bluegreen Communities has established contacts with numerous land owners and
real estate brokers in many of our market areas, and because of such contacts
and our long history of acquiring properties, we believe that we are generally
in a favorable position to learn of available properties, sometimes before the
availability of such properties is publicly known. In order to ensure such
access, we attempt to develop and maintain strong relationships with major
property owners and brokers in our markets.
Prior to acquiring property in new areas, we will generally conduct test
marketing for a prospective community to determine whether sufficient customer
demand exists for the community.
By requiring, in most cases, that regulatory approvals be obtained prior to
closing and by limiting the amount of the down payment upon signing a purchase
agreement, we are typically able to place a number of properties under contract
without expending significant amounts of cash. This strategy helps Bluegreen
Communities to reduce:
16
o the time during which it actually owns specific communities between
initial acquisition and the ultimate sale;
o the market risk associated with holding such communities; and
o the risk of acquiring properties that may not be suitable for sale.
Marketing and Sale of Inventory
Bluegreen Resorts
Bluegreen Resorts uses a variety of methods to attract prospective purchasers of
VOIs, including selling discount mini-vacations either face-to-face with
consumers we meet in connection with various marketing alliances or through
telemarketing methods (see further discussion of our marketing alliances below),
placing marketing kiosks in retail locations and acquiring the right to market
to prospective purchasers from third-party vendors. In addition to attracting
new customers, we seek additional sales to existing VOI owners ("Upgrades"), and
referrals of prospective purchasers from existing VOI owners and others.
Upgrades involve relatively less marketing expense and typically result in
relatively higher operating margins than sales through other marketing channels.
Bluegreen Resorts sometimes provides hotel accommodations or accommodations in
one of our resorts to prospective purchasers at reduced rates in exchange for
their touring one of our resorts. To support our marketing and sales efforts, we
have developed and work to continue to enhance our customer relationship
management methods, techniques and computer software tools to track our VOI
marketing and sales programs. We believe that as Bluegreen Resorts' operations
grow, this database will become an increasingly significant asset, positioning
us to focus our marketing and sales efforts to take advantage of, among other
things, less costly marketing and referral opportunities.
In recent years, we have been focusing on increasing Bluegreen Resorts use of
"permission" marketing and branding programs. "Permission" marketing methods
involve obtaining the prospective purchasers' permission, directly or
indirectly, to contact them in the future regarding an offer to purchase a
product or service. Branding involves forming alliances with third-party
entities that possess what we believe to be a nationally or regionally known
brand name, a good reputation and a customer base with similar demographic
characteristics to our target market.
In June 2000, we entered into an exclusive marketing agreement with Bass Pro,
Inc. ("Bass Pro") and a joint venture with Big Cedar, LLC, a Bass Pro affiliate.
Under the terms of the ten-year agreement, we have the right to market our VOIs
at each of Bass Pro's retail locations, in Bass Pro's catalogs and on Bass Pro's
website. We believe that the branding aspects of this alliance are consistent
with our overall marketing strategy for Bluegreen Resorts. We compensate Bass
Pro for successful marketing efforts pursuant to our agreement. No compensation
is paid to Bass Pro on sales made by the Bluegreen Wilderness Club at Big Cedar
sales office, as this sales office is part of a joint venture between Big Cedar,
LLC, which is an affiliate of Bass Pro and us. We currently market discounted
three-day, two-night mini-vacation packages at most of Bass Pro's national
retail locations. Most of these mini-vacation packages require the buyer to
participate in a sales presentation at either a Bluegreen Vacation Club sales
office or the Bluegreen Wilderness Club at Big Cedar sales office. We also have
an exclusive VOI marketing presence on Bass Pro's website, which is linked to
our website. We believe that this arrangement results in effective and
cost-efficient marketing for Bluegreen Resorts.
On June 16, 2000, we prepaid $9.0 million to Bass Pro in connection with the
above marketing agreement. The prepayment was amortized from compensation earned
by Bass Pro and member distributions otherwise payable to Big Cedar, LLC as a
member of the joint venture from the earnings of the joint venture. As of
December 31, 2005, the prepayment had been fully utilized. The marketing
agreement expires on the earlier of: (1) June 16, 2010; or (2) such time as 90%
of the joint venture's proposed VOIs have been sold and conveyed.
17
On October 2, 2002, through our wholly-owned subsidiary, Great Vacation
Destinations, Inc. ("GVD"), we acquired substantially all of the assets and
assumed certain liabilities of TakeMeOnVacation, LLC and certain of its
affiliates ("TMOV"). Utilizing the assets acquired from TMOV, GVD generates
"permission" marketing sales leads for VOI sales utilizing various marketing
strategies. These leads are then contacted and given the opportunity to purchase
discount mini-vacation packages. These packages sometimes combine hotel stays,
cruises and gift premiums. Buyers of these mini-vacation packages are then
usually required to participate in a VOI sales presentation. GVD seeks to
generate sales prospects for our VOI sales business and, prior to 2006, for
sales prospects that could be sold to other VOI developers. We believe that
GVD's "permission" marketing lead generation programs and the potential benefits
of tracking and controlling the subsequent marketing efforts are consistent with
Bluegreen Resorts' overall marketing strategy.
Also in October 2002, in connection with the acquisition of certain land and
completed VOIs from Boyne USA Resorts ("Boyne"), we obtained the right to market
the Bluegreen Vacation Club at two of Boyne's resort properties: Boyne Mountain
and Boyne Highlands. In addition, Bluegreen Resorts entered into an exclusive
marketing arrangement with an affiliate of Boyne, Boyne Country Sports ("BCS").
BCS owns and operates six ski, snowboard and golf equipment retail stores
throughout Michigan. Bluegreen Resorts markets our vacation club through a
variety of programs directed to BCS's customer base, including lead generation
operations in four of BCS's locations and tour generation operations in two of
BCS's locations. We believe that these arrangements will allow us to benefit
from marketing to customers that we believe are within our target demographic
through an affiliation with a known regional brand.
In 2006, we entered into separate agreements, with Six Flags, Inc., the world's
largest recreational theme park company, and Cedar Fair Entertainment (successor
to Paramount Parks), pursuant to which we market mini-vacations in certain of
their theme parks.
Our VOI resorts are staffed with sales representatives, sales managers and an
on-site manager who oversees the day-to-day operations, all of whom are our
employees. We sponsor ongoing training for our personnel. During the year ended
December 31, 2006, total selling and marketing expense for Bluegreen Resorts was
$239.8 million or 60% of the division's $399.1 million in sales.
It is our policy to require our sales staff to provide each VOI customer with a
written disclosure statement regarding the VOI to be sold prior to the time the
customer signs a purchase agreement. The purpose of this disclosure statement is
to explain relevant information regarding VOI ownership at the resort and
pursuant to our policies the statement must be signed by every purchaser. After
deciding to purchase a VOI, a purchaser enters into a purchase agreement and is
required to pay us a deposit of at least 10% of the purchase price (see Note 1
of the Notes to Consolidated Financial Statements for a discussion of the impact
of SFAS No. 152 on the calculations of the amount of the down payment for
purposes of generally accepted accounting principles). Purchasers are entitled
to cancel purchase agreements within required legal rescission periods after
execution in accordance with statutory requirements. Substantially all VOI
purchasers visit one of our resorts or one of our off-site sales offices prior
to purchasing.
In addition to sales offices located at our resorts, we also operate seven
off-site sales offices serving the Atlanta, Georgia; Chicago, Illinois;
Indianapolis, Indiana; Detroit, Michigan; Minneapolis, Minnesota; Dallas, Texas;
and Las Vegas, Nevada markets. Our off-site sales offices market and sell VOIs
in the Bluegreen Vacation Club, and allow us to bring our products to markets
with favorable demographics and low competition for prospective buyers. We
continue to evaluate our ongoing utilization of off-site sales operations and
may elect to open new locations or close existing locations in the future.
18
Bluegreen Communities
In general, as soon as practicable after agreeing to acquire a property and
during the time period that improvements are being completed, we establish
selling prices for the individual homesites. In pricing the homesites, we
attempt to take into account such matters as regional economic conditions,
quality as a building site, scenic views, road frontage, golf course views (if
applicable) and natural features such as lakes, mountains, streams, ponds and
wooded areas. We also consider recent sales of comparable parcels in the area.
Once selling prices are established, we commence our marketing efforts.
The marketing method most widely used by Bluegreen Communities is advertising in
local newspapers and in major newspapers in metropolitan areas located within a
one to three hour drive from the community. In addition, we use our customer
relationship management system, which we believe enables us to identify
prospects that are most likely to be interested in a particular community.
Bluegreen Communities also conducts direct mail campaigns to market communities
through the use of brochures describing available homesites, as well as
television, billboard, Internet and radio advertising. A sales representative,
who is knowledgeable about the community, answers inquiries generated by our
marketing efforts, discusses the community with the prospective purchaser,
attempts to ascertain the purchaser's needs and arranges an appointment for the
purchaser to visit the community. Substantially all prospective purchasers
inspect a property before purchasing.
The success of our marketing efforts depends heavily on the knowledge and
experience of our sales personnel. We generally require that all sales
representatives walk the community and become knowledgeable about each homesite
and applicable zoning, subdivision and building code requirements prior to
initiating the marketing effort for a community. Continued training programs are
conducted, including training with regional office sales managers, weekly sales
meetings and frequent site visits by our executive officers. We believe we
enhance our sales and marketing organization through our Bluegreen Institute, a
mandatory training program that is designed to instill our marketing and
customer service philosophy in middle and lower-level management. Additionally,
the sales staff is evaluated against performance standards established by our
executive officers. Substantially all of a sales representatives' compensation
is commission-based.
It is our policy to require our sales staff to provide each prospective homesite
purchaser with a written disclosure statement regarding the property to be sold
prior to the time such purchaser signs a purchase agreement. This information
statement, which is either in the form of a U.S. Department of Housing and Urban
Development ("HUD") lot information statement ("Property Report"), where
required, or a "Vital Information Statement" that we generate, states relevant
information with respect to, and risks associated with, the property, a receipt
for which must be signed by each purchaser.
After deciding to purchase a homesite, a purchaser enters into a purchase
agreement and is required to pay us a deposit of at least 10% of the purchase
price. Purchasers may cancel purchase agreements within specified periods after
execution in accordance with statutory requirements. The closing of a homesite
sale usually occurs two to eight weeks after payment of the deposit. Upon
closing of a homesite sale, we typically deliver a warranty deed and a recent
survey of the property to the purchaser. Title insurance is available at the
purchaser's expense.
Customer Financing
General
Sales of VOIs accounted for 71% of consolidated sales, and approximately 95% of
our VOI customers utilized our financing during the year ended December 31,
2006. In recent years, the percentage of Bluegreen Communities customers who
utilized our financing has been less than 2% of all homesite purchasers due to,
among other things, continued willingness on the part of banks to extend direct
homesite financing to purchasers.
19
We offer financing to our VOI customers of up to 90% of the purchase price of
our VOIs. The typical financing extended by us on a VOI during the year ended
December 31, 2006, provided for a term of 10 years and a fixed interest rate. In
connection with our VOI sales within the Bluegreen Vacation Club, we deliver the
deed on behalf of the purchasers to the trustee of the vacation club and secure
repayment of the purchaser's obligation by obtaining a mortgage on the
purchaser's real estate-based VOI.
The weighted-average interest rate on our owned notes receivable by division was
as follows:
As of December 31,
-------------------------
Division 2005 2006
-------------------------- ---- ----
Bluegreen Resorts.......... 14.8% 14.3%
Bluegreen Communities...... 10.7% 11.9%
Consolidated............... 14.6% 14.2%
See "Sale of Receivables/Pledging of Receivables," below, for information
regarding our receivable financing activities.
Loan Underwriting
Bluegreen Resorts
Our VOI financing is not subject to any significant loan underwriting criteria,
a characteristic typically shared with subprime loans. Currently, customer
financing on sales of VOIs typically requires the following: (1) receipt of a
minimum down payment of 10% of the purchase price; (2) a note and mortgage (or
deed of trust); and, (3) other closing documents between the purchaser and
ourselves. We encourage purchasers to make higher down payments by offering a
lower interest rate. In addition, purchasers who do not elect to participate in
our pre-authorized checking payment plan are charged interest at a rate which is
1% greater than the otherwise prevailing rate, where allowed by applicable laws
and regulations. As of December 31, 2006, approximately 82% of our VOI notes
receivable serviced were on our pre-authorized payment plan.
In connection with one of our vacation ownership receivables purchase
facilities, we are required to obtain a Fair Isaac Corporation score ("FICO(R)")
on the obligors for the receivables we sell. The median FICO(R) score for the
obligors whose notes were sold in this facility for the two latest sales
(totaling $49.6 million in aggregate principle sold) in 2006 was 665 for those
obligors with a FICO(R) score. We believe that there was no adverse selection in
determining which loans to sell in these portfolios; however, this median
FICO(R) score may differ, perhaps materially, from the median FICO(R) score for
our entire portfolio, which is unknown.
Bluegreen Communities
At Bluegreen Communities, we have established loan underwriting criteria and
procedures designed to reduce credit losses. The loan underwriting process
undertaken by our credit department may include reviewing the applicant's credit
history and for credit score, verifying employment and income as well as
calculating certain debt-to-income ratios. The primary focus of our underwriting
review is to determine the applicant's ability to repay the loan in accordance
with our terms.
Collection Policies
Bluegreen Resorts
Financed sales of VOIs sold through the Bluegreen Vacation Club are affected
using a note and mortgage arrangement. Collection efforts in substantially all
cases and delinquency information concerning Bluegreen Resorts' notes
receivables are managed at our corporate headquarters. A staff of experienced
collectors, assisted by a mortgage collection computer system, handles servicing
of the division's receivables. Our collectors are incentivized through a
performance-based compensation program. We
20
generally make collection efforts to customers by mail and by telephone. In
addition to telephone contact commencing at 16 days past due, a 30-day
collection letter is sent (if a U.S. resident), advising such customer that if
the loan is not brought current, the delinquency will be reported to the credit
reporting agencies. At 60 days delinquent, we send a lockout letter, return
receipt requested, to the customer advising that they cannot make any future
reservations for lodging at a resort. If the delinquency continues at 90 days
past due, we stop the accrual of, and reverse previously accrued but unpaid,
interest on the note receivable and mail a "Notice of Intent to Cancel
Membership", return receipt requested, which informs the customer that unless
the delinquency is cured within 30 days, we will terminate the customer's VOI
ownership. At this point, the account may be reviewed by the collection manager
to determine if, in certain limited circumstances, additional correspondence
should be sent offering repayment options. If the customer fails to respond to
the correspondence with the given timeframe, the loan will be defaulted and the
customer's VOI terminated. At approximately 120 days delinquent, we send a
"Termination Letter", return receipt requested. We then resell the VOI to a new
purchaser.
Bluegreen Communities
Collection efforts and delinquency information concerning Bluegreen Communities'
notes receivable are also managed at our corporate headquarters. A staff of
collectors handles servicing of the division's receivables. We generally make
collection efforts by mail and telephone. Collection efforts begin when an
account is sixteen days past due, at which time we contact the customer by
telephone and attempt to determine the reason for the delinquency and to attempt
to bring the account current. The determination of how to handle a delinquent
loan is based upon many factors, including the customer's payment history and
the reason for the current inability to make timely payments. If the customer
does not abide by an agreed-upon collection agreement, or if no agreement is
reached, collection efforts continue until the account is either brought current
or legal action is commenced. If not accelerated sooner, we typically declare
the loan in default when the loan becomes 60 days delinquent. When the loan is
90 days past due, we stop the accrual of, and reverse previously accrued but
unpaid, interest (unless the loan is deemed to be an in-substance foreclosure
loan, in which case all accrued interest is reversed since our means of recovery
is determined through the resale of the underlying collateral and not through
collection on the note) and the collection manager determines any further action
required to be taken.
21
The allowance for loan losses as a percentage of our outstanding notes
receivable was approximately 9% at both December 31, 2005 and 2006. We determine
the adequacy of our reserve for loan losses and review it on a regular basis
considering, among other factors, historical frequency of default, loss
experience, static pool analyses, estimated value of the underlying collateral,
present and expected economic conditions, as well as other factors. Effective
January 1, 2006, we changed our accounting for loan losses on our vacation
ownership notes receivable in accordance with SFAS No. 152. Under SFAS No. 152,
we estimate uncollectibles based on historical uncollectibles for similar VOI
notes receivable over the past 10 years (if available). During the years ended
December 31, 2004, 2005, and 2006, the average annual default rates and
delinquency rates on Bluegreen Resorts' and Bluegreen Communities' receivables
owned or serviced by us were as follows:
Average Annual Default Rates Year Ended December 31,
---------------------------------- ----------------------------------
Division 2004 2005 2006
------------------------------ ---- ---- ----
Bluegreen Resorts ............ 8.5% 8.5% 7.5%
Bluegreen Communities ........ 1.9% 1.9% 1.8%
Delinquency Rates As of December 31,
---------------------------------- ----------------------------------
Division 2004 2005 2006
------------------------------ ---- ---- ----
Bluegreen Resorts ............ 6.3% 5.9% 4.0%
Bluegreen Communities ........ 20.2% 12.0% 7.8%
Substantially all defaulted vacation ownership notes receivable result in
the holder of the note receivable acquiring the related VOI that secured the
note receivable. In cases where we have retained ownership of the vacation
ownership notes receivable, the VOI is reacquired and resold in the normal
course of business.
Sales of Receivables/Pledging of Receivables
During the years ended December 31, 2004, 2005, and 2006, all of our notes
receivable sold and the majority of our notes receivable pledged consisted of
notes receivable generated by Bluegreen Resorts.
Since 1986, we have sold or pledged a significant amount of our receivables,
generally retaining the right and obligation to service such receivables. In the
case of Bluegreen Communities' receivables pledged to a financial institution,
we generally must maintain a debt-to-eligible collateral rate (based on the
outstanding principal balance of the pledged loans) of 90%. We are obligated to
pledge additional eligible receivables or make additional principal payments in
order to maintain this collateralization rate.
Since fiscal 1999, we have maintained various vacation ownership receivables
purchase facilities with financial institutions. Our ability to sell and/or
borrow against our notes receivable from VOI buyers is a critical factor in our
continued liquidity. The vacation ownership business involves making sales of a
product pursuant to which a financed buyer is only required to pay a minimum of
10% of the purchase price up front, yet selling, marketing and administrative
expenses are primarily cash expenses, which, in our case for the year ended
December 31, 2006, approximated 60% of sales. Accordingly, having facilities for
the sale and hypothecation of these vacation ownership receivables is a critical
factor to our meeting our short- and long-term cash needs.
The vacation ownership receivables purchase facilities that we have historically
maintained have typically utilized an owner's trust structure, pursuant to which
we sell receivables to one of our wholly-owned, special purpose finance
subsidiaries. These subsidiaries then sell the receivables to an owner's trust
(a qualified special purpose entity) without recourse to us or our subsidiaries,
except for breaches of certain representations and warranties at the time of
sale. We historically have not entered into any guarantees in connection with
our vacation ownership receivables purchase facilities. These facilities usually
have detailed requirements with respect to the eligibility of receivables for
purchase and fundings under these facilities are typically subject to certain
conditions precedent. Under such purchase facilities, a variable purchase price
of a portion 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 the purchaser of our vacation
ownership receivables has received a specified return and all servicing,
custodial, agent and similar fees and expenses have been paid and as applicable,
a specified over collateralization ratio is achieved and a cash reserve account
is fully funded. We have historically acted as servicer of the vacation
ownership receivables we have sold under these purchase facilities for a fee.
Our vacation ownership receivables purchase facilities typically include various
conditions to purchase, covenants, trigger events and other provisions customary
for these types of transactions.
Although sales of our receivables pursuant to vacation ownership receivables
purchase facilities have historically been deemed "true sales" from a legal
perspective, the accounting for such transactions could be either as off-balance
sheet sales or as on-balance sheet borrowings, depending on the application of
the requirements of SFAS No. 140. In our disclosures relative to each vacation
ownership receivables purchase facility, we indicate how these transactions are
accounted for.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Vacation Ownership Receivables Purchase Facilities - Off-Balance
Sheet Arrangements" for information about our current VOI receivables purchase
facilities.
Receivables Servicing
Receivables servicing includes collecting payments from borrowers and remitting
such funds to the owners, lenders or investors in such receivables, accounting
for principal and interest on such receivables, making advances when required,
contacting delinquent borrowers, terminating a membership in our vacation club
in the event that defaults are not remedied, and performing other administrative
duties. Our obligation to service the receivables and our right to collect fees
for a given pool of receivables are set forth in a servicing agreement. We have
the obligation and right to service all of the receivables we originate and
22
have retained the obligation and right with respect to the receivables we have
sold under any of our vacation ownership receivable purchase facilities to date,
although in certain circumstances the purchasers may elect to appoint a new
servicer. We typically receive an annual servicing fee of approximately 1.5% to
2.0% of the principal balance of the loans serviced on behalf of others. During
the years ended December 31, 2004, 2005, and 2006, we recognized aggregate
servicing fee income of $2.9 million, $5.0 million, and $7.0 million,
respectively.
Regulation
The vacation ownership and real estate industries are subject to extensive and
complex regulation. We are subject to compliance with various federal, state,
local and foreign environmental, zoning, consumer protection and other statutes
and regulations regarding the acquisition, subdivision and sale of real estate
and VOIs and various aspects of our financing operations. On a federal level,
the Federal Trade Commission has taken an active regulatory role through the
Federal Trade Commission Act, which prohibits unfair or deceptive acts or unfair
competition in interstate commerce. In addition to the laws applicable to our
customer financing and other operations discussed below, we are or may be
subject to the Fair Housing Act and various other federal statutes and
regulations. We are also subject to various foreign laws with respect to La
Cabana Beach and Racquet Club in Oranjestad, Aruba. In addition, there can be no
assurance that in the future, VOIs will not be deemed to be securities subject
to regulation as such, which could have a material adverse effect on us. There
is no assurance that the cost of complying with applicable laws and regulations
will not be significant or that we are in compliance at all times with all
applicable laws, including those discussed below. Any failure to comply with
current or future applicable laws or regulations could have a material adverse
effect on us.
Our sales and marketing of homesites are subject to various consumer protection
laws and to the Federal Interstate Land Sales Full Disclosure Act, which
establishes strict guidelines with respect to the marketing and sale of land in
interstate commerce. HUD has enforcement powers with respect to this statute. In
some instances, we have been exempt from HUD registration requirements because
of the size or number of the subdivided parcels and the limited nature of our
offerings. In those cases where we and our legal counsel determine parcels must
be registered to be sold, we file registration materials disclosing financial
information concerning the property, evidence of title and a description of the
intended manner of offering and advertising such property. We bear the cost of
such registration, which includes legal and filing fees. Many states also have
statutes and regulations governing the sale of real estate. Consequently, we
regularly consult with counsel for assistance in complying with federal, state
and local law. We must obtain the approval of numerous governmental authorities
for our acquisition and marketing activities; and, changes in local
circumstances or applicable laws may necessitate the application for, or the
modification of, existing approvals.
Our vacation ownership resorts are subject to various regulatory requirements
including state and local approvals. The laws of most states require us to file
a detailed offering statement describing our business and all material aspects
of the project and sale of VOIs with a designated state authority. Laws in each
state where we sell VOIs, generally grant the purchaser of a VOI the right to
cancel a contract of purchase at any time within a specified rescission period
following the earlier of the date the contract was signed or the date the
purchaser has received the last of the documents required to be provided by us.
Most states have other laws that regulate our activities, including: real estate
licensure; sellers of travel licensure; anti-fraud laws; telemarketing laws;
prize, gift and sweepstakes laws; and, labor laws. In addition, certain state
and local laws may impose liability on property developers with respect to
construction defects discovered or repairs made by future owners of such
property. Under these laws, future owners may recover from us amounts in
connection with the repairs made to the developed property. As required by state
laws, we seek to provide our VOI purchasers with a public disclosure statement
that contains, among other items, detailed information about the surrounding
vicinity, the resort and the purchaser's rights and obligations as a VOI owner.
The development and management of our resorts is subject to various federal,
state and local laws and regulations, including the Americans with Disabilities
Act.
Under various federal, state and local laws, ordinances and regulations, the
owner of real property generally is liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in, or
23
emanating from, the property, as well as related costs of investigation and
property damage. These laws often impose such liability without regard to
whether the owner knew of the presence of such hazardous or toxic substances.
The presence of these substances, or the failure to properly remediate these
substances if they exist, may adversely affect the owner's ability to sell or
lease a property or to borrow using the real property as collateral. Other
federal and state laws require the removal or encapsulation of
asbestos-containing material when this material is in poor condition or in the
event of construction, demolition, remodeling or renovation. Other statutes may
require the removal of underground storage tanks. Noncompliance with these and
other environmental, health or safety requirements may result in the need to
cease or alter operations at a property.
Our customer financing activities are also subject to extensive regulation,
which may include: the Truth-in-Lending Act and Regulation Z; the Fair Housing
Act; the Fair Debt Collection Practices Act; the Equal Credit Opportunity Act
and Regulation B; the Electronic Funds Transfer Act and Regulation E; the Home
Mortgage Disclosure Act and Regulation C; Unfair or Deceptive Acts or Practices
and Regulation AA; the Patriot Act; the Right to Financial Privacy Act; the
Gramm-Leach-Bliley Act; and, anti-money laundering laws.
During the year ended December 31, 2006, approximately 7% of our VOI sales were
generated by marketing to prospective purchasers obtained through internal and
affiliated telemarketing efforts. In addition, approximately 15% of our VOI
sales during the year ended December 31, 2006, were generated by marketing to
prospective purchasers obtained from third-party VOI prospect vendors, many of
whom use telemarketing operations to generate these prospects. In recent years,
state regulators have increased legislation and enforcement regarding
telemarketing operations, including requiring the adherence to state "do not
call" laws. In addition, the Federal Trade Commission has implemented national
"do not call" legislation. While we continue to be subject to telemarketing
risks and potential liability, we believe that our exposure to adverse impacts
from this heightened telemarketing legislation and enforcement has been and will
continue to be mitigated in some instances by the use of "permission marketing"
techniques and branding, whereby prospective purchasers have granted us
permission to contact them in the future, and through our exclusive marketing
agreement with Bass Pro. We have implemented procedures which we believe will
help reduce the possibility that individuals who have formally requested to the
applicable federal or state regulators that they be placed on a "do not call"
list are not contacted through one of our in-house or third-party contracted
telemarketing operations, although there can be no assurance that such
procedures will be effective in ensuring regulatory compliance. These measures
have increased and are expected to continue to increase our marketing costs.
Through December 31, 2006, we have not been subject to any material fines or
penalties as a result of our telemarketing operations but from time to time we
have been the subject of proceedings for violation of the "do not call" laws.
There is no assurance that we will be able to efficiently or effectively market
to prospective purchasers through telemarketing operations in the future or that
we will be able to develop alternative sources of prospective purchasers of our
VOI products at acceptable costs.
Competition
Bluegreen Resorts competes with various high profile and well-established
operators. Many of the world's most recognized lodging, hospitality and
entertainment companies develop and sell VOIs in resort properties. Major
companies that now operate or are developing or planning to develop vacation
ownership resorts include Marriott International, Inc., the Walt Disney Company,
Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels and Resorts,
Starwood Hotels and Resorts Worldwide, Inc. and Wyndham Worldwide Corporation.
We also compete with numerous other smaller owners and operators of vacation
ownership resorts. In addition to competing for sales leads and prospects, we
compete with other VOI developers for sales personnel. We believe that each of
our vacation ownership resorts faces the same general competitive conditions.
Although, as noted above, Bluegreen Resorts competes with various high profile
and well-established operators, we believe that we can compete on the basis of
our general reputation, the price, location and quality of our vacation
ownership resorts and the flexibility of our Bluegreen Vacation Club product.
However, the development and operation of additional vacation ownership resorts
by competitors in our markets could have a material adverse impact on the demand
for our VOIs and our results of operations.
24
Bluegreen Communities competes with builders, developers and others for the
acquisition of property and with local, regional and national developers,
homebuilders and others with respect to the sale of homesites. We believe that
each of our Bluegreen Communities projects faces the same general competitive
conditions. We believe that we can compete on the basis of our reputation and
the price, location and quality of the products we offer for sale, as well as on
the basis of our experience in land acquisition, development and sale.
Our golf courses face competition for business from other operators of daily fee
and, to a lesser extent, private golf courses within the local markets where we
operate. Competition in these markets affects the rates that we charge per round
of golf, the level of maintenance on the golf courses and the types of
additional amenities available to golfers, such as food and beverage operations.
We do not believe that such competitive factors have a material adverse impact
on our results of operations or financial position.
In our customer financing activities, we compete with banks, mortgage companies,
other financial institutions and government agencies offering financing of real
estate. In recent years, we have experienced increased competition with respect
to the financing of Bluegreen Communities sales, as evidenced by the low
percentage of homesite sales internally financed since 1995.
Website Access to Exchange Act Reports
We post publicly available reports required to be filed with the Securities
Exchange Commission ("SEC") ("Exchange Act Reports") on our website,
www.bluegreencorp.com, as soon as reasonably practicable after filing such
reports with the SEC. We also make available on our website the beneficial
ownership reports (Forms 3, 4 and 5) filed by our officers, directors and other
reporting persons under Section 16 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Our website and the information contained therein or connected
thereto are not incorporated into this Annual Report.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The website address for this site is www.sec.gov.
Personnel
As of December 31, 2006, we had 5,342 employees of which 623 were located at our
headquarters in Boca Raton, Florida, and 4,719 in regional field offices
throughout the United States and Aruba (the field personnel include 369 field
employees supporting Bluegreen Communities and 4,350 field employees supporting
Bluegreen Resorts). Only our employees in Aruba are represented by a collective
bargaining unit. We believe that our relations with our employees are
satisfactory.
25
Executive Officers
The following table sets forth certain information regarding our executive
officers as of March 12, 2007.
Name Age Position
------------------------- --- -------------------------------------------------------
John M. Maloney, Jr...... 45 President and Chief Executive Officer
(Appointed effective December 31, 2006)
Daniel C. Koscher........ 49 Senior Vice President and Chief Executive Officer --
Bluegreen Communities
Anthony M. Puleo......... 39 Senior Vice President, Chief Financial Officer and
Treasurer
Sheila B. Donahoe........ 42 Senior Vice President and Chief Information Officer
Allan J. Herz............ 47 Senior Vice President, Mortgage Operations
Douglas O. Kinsey........ 48 Senior Vice President, Acquisitions and Development
Laurel M. Liber.......... 53 Senior Vice President, Owner Relations
James R. Martin.......... 59 Senior Vice President, General Counsel and Clerk
Susan J. Saturday........ 47 Senior Vice President and Chief Human Resources Officer
Raymond S. Lopez......... 31 Vice President and Chief Accounting Officer
John M. Maloney, Jr. joined us in 2001 as Senior Vice President of Operations
and Business Development for Bluegreen Resorts. In May 2002, Mr. Maloney was
named our Senior Vice President of the Company and President of Bluegreen
Resorts and he was elected Executive Vice President and Chief Operating Officer
in November 2005. Effective January 2007, Mr. Maloney was appointed President
and Chief Executive Officer. From 1997 to 2000, Mr. Maloney served in various
positions with ClubCorp, most recently as the Senior Vice President of Sales and
Marketing for the Owners Club by ClubCorp. From 1994 to 1997, Mr. Maloney held
various positions with Hilton Grand Vacations Company, most recently as the
Director of Sales and Marketing for the South Florida area.
Daniel C. Koscher joined us in 1986. During his tenure, he has served in various
financial management positions including Chief Accounting Officer and Vice
President and Director of Planning/Budgeting. In 1996, he became Senior Vice
President of the Company and President of Bluegreen Communities. In November
2005, Mr. Koscher was elected Chief Executive Officer of Bluegreen Communities.
Mr. Koscher holds an M.B.A. along with a B.B.A. in Accounting and is a
Registered Resort Professional.
Anthony M. Puleo joined us in 1997 as Chief Accounting Officer. In 1998, Mr.
Puleo was elected Vice President and he was elected Senior Vice President in
2004. Mr. Puleo served as Interim Chief Financial Officer from April through
August 2005. In August 2005, he was elected Chief Financial Officer and
Treasurer. From December 1990 through October 1997, Mr. Puleo held various
positions with Ernst & Young LLP, most recently serving as a Senior Manager in
the Assurance and Advisory Business Services group. Mr. Puleo holds a B.B.A. in
Accounting and is a Certified Public Accountant.
Sheila B. Donahoe joined us in 2004 as Senior Vice President and Chief
Information Officer. From 1997 to 1999, Ms. Donahoe served as Vice President of
Information Technology for the North American Rental Group of AutoNation, Inc.,
a publicly held automobile retailer. From 1999 to 2003, Ms. Donahoe was the
Senior Vice President and Chief Information Officer of Martha Stewart Living
Omnimedia, Inc., a publicly
26
held, integrated content and commerce company that creates "how-to" content and
domestic merchandise for homemakers and other consumers. Ms. Donahoe holds a
B.S. in Computer Science.
Allan J. Herz joined us in 1992 and was named Director of Mortgage Operations in
September 1992. Mr. Herz was elected Vice President in 1993 and Senior Vice
President in 2004. From 1982 to 1992, Mr. Herz worked for AmeriFirst Federal
Savings Bank based in Miami, Florida. During his 10-year tenure with the bank,
he held various lending positions, the most recent being Division Vice President
in Consumer Lending. Mr. Herz holds a B.B.A. in Finance and Management and an
M.B.A.
Douglas O. Kinsey joined us in 2003 as Senior Vice President, Acquisitions and
Development. From 1996 to 2003, Mr. Kinsey served as Senior Vice President of
Real Estate Acquisitions for Fairfield Resorts, a vacation ownership resort
developer that was publicly-traded until its acquisition by Cendant Corporation.
Mr. Kinsey holds a B.S.B.A. in finance.
Laurel M. Liber joined us in 2000 as Director of Bluegreen Vacation Rentals and
was elected Vice President of Resort Services in 2001. In 2004, Ms. Liber was
elected Senior Vice President of Owner Relations for Bluegreen Resorts and in
2005, she was named Senior Vice President of the Company. From 1997 to 2000, Ms.
Liber served as a Director at Sunterra Corporation, focusing on the
implementation of their points-based vacation club product and new resort
operating system.
James R. Martin joined us in 2004 as Senior Vice President, General Counsel and
Clerk. Prior to joining us, Mr. Martin was a partner with the law firm of Baker
& Hostetler LLP since 1985, focusing his practice on real estate, resort
development, vacation ownership, federal and state regulatory matters and
commercial and consumer law. Mr. Martin holds a B.A. and J. D. degree.
Susan J. Saturday joined us in 1988. During her tenure, she has held various
management positions with us including Assistant to the Chief Financial Officer,
Divisional Controller and Director of Accounting. In 1995, she was elected Vice
President and Director of Human Resources and Administration. In 2004, Ms.
Saturday was elected Senior Vice President and Chief Human Resources Officer.
From 1983 to 1988, Ms. Saturday was employed by General Electric Company in
various financial management positions including the corporate audit staff. Ms.
Saturday holds a B.B.A. in Accounting and a M.S. in Human Resource Management.
Raymond S. Lopez joined us in 2004 as Controller. In August 2005, he was elected
Vice President and Chief Accounting Officer (Principal Accounting Officer).
Prior to joining us, Mr. Lopez served as Manager of External Reporting for
Office Depot, Inc. and as a Senior Auditor with Arthur Andersen LLP. Mr. Lopez
is a Certified Public Accountant and holds a B.S. in Accounting.
Our by-laws provide that, except as otherwise provided by law or our charter and
by-laws, the President, Treasurer and the Clerk hold office until the first
meeting of the Board of Directors following the next annual meeting of
shareholders and until their respective successors are chosen and qualified.
Additionally, all other officers hold office for the same period unless a
shorter time is specified in the vote appointing such officer(s).
27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Certain Definitions, Cautionary Statement Regarding Forward-Looking Statements
The following discussion of our results of operations and financial condition
should be read in conjunction with our Consolidated Financial Statements and
related Notes and other financial information included elsewhere in this Annual
Report. Unless otherwise indicated in this discussion (and throughout this
Annual Report), references to "real estate" and to "inventories" collectively
encompass the inventories held for sale by Bluegreen Resorts and Bluegreen
Communities.
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 Annual
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 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,
availability of financing, increases in interest rates, changes in regulations
and other factors discussed throughout our SEC filings, including the Risk
Factor section, 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.
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.
Effective January 1, 2006, we adopted the provisions of SFAS No. 152,
Accounting for Real Estate Time-Sharing Transactions, which changes the rules
for many aspects of timeshare accounting, including revenue recognition,
inventory costing and incidental operations (See Note 2 of the financial
statements for more information on SFAS No. 152 and its impact on our financial
statements). The adoption of SFAS No. 152 decreased income before cumulative
effect of change in accounting principle by $3.4 million or $0.11 per diluted
share for 2006. In addition, we recognized a $4.5 million or $0.14 per diluted
share charge for the cumulative effect of a change in accounting principle, net
of income tax and minority interest in 2006, for the adoption of SFAS No. 152.
Therefore, on a pro forma basis excluding the impact of SFAS No. 152, net income
would have been $37.7 million or $1.21 per diluted share for 2006. See "Results
of Operations" below for a discussion of the impact of the adoption of SFAS No.
152 on the Resort Division.
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
28
quarters ending in June and September each year. However, as a result of the
required adoption of SFAS No. 152, we anticipate that prospectively the majority
of our Bluegreen Resorts gross revenues and net earnings will be recognized in
the quarters ending in September and December of each year, primarily due to the
deferral and subsequent recognition of VOI sales revenue due to the buyers
commitment requirement. Also, as SFAS No. 152 does not allow the restatement of
prior year results of operations, our 2006 quarterly Statements of Income are
not easily comparable to the respective 2005 quarterly Statements of Income.
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 as a consequence, 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 believe that inflation and changing prices have materially impacted our
revenues and results of operations, specifically due to periodic increases in
the sales prices of our VOIs and homesites and continued increases in
construction and development costs. We expect construction and development costs
to continue to increase for the foreseeable future. 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 gross margin.
In addition, to the extent that inflation in general or increased prices for our
VOI and homesites adversely impact consumer sentiment, our results of operations
could be adversely impacted. Also, to the extent inflationary trends affect
interest rates, a portion of our debt service costs may increase.
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. Refund or
rescission periods include those required by law and those provided for in our
sales contracts. The provisions of SFAS No. 152 require that incentives and
other similarly treated items such as customer down payment equity earned
through our Sampler Program be considered in calculating the required down
payment for our VOI sales. If, after considering the value of sales incentives
provided, the required 10% of sales price down payment threshold is not met, the
VOI sale and the related cost of sale and direct selling costs are deferred and
not recognized until the buyer's commitment test is satisfied, generally through
the receipt of required mortgage note payments from the buyer. Further, in cases
where all development has not been completed, recognition of income is subject
to 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 statement of income and the related retained
interests in the notes receivable sold are recorded on our consolidated balance
sheet at the time of sale. Effective January 1, 2006, pursuant to SFAS No. 152,
the portion of these gains related to the reversal of previously recorded
allowances for loan losses on the receivables sold is recorded as a component of
revenue on sales of VOIs. 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
29
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.
In addition, we have historically sold vacation ownership receivables to
financial institutions through warehouse purchase facilities to monetize the
receivables while accumulating receivables for a future term securitization
transaction. We have structured our current warehouse purchase facility with
BB&T so that legal sales of vacation ownership receivables through this facility
will be accounted for as on-balance sheet borrowings rather than as off-balance
sheet sales. Therefore, we will not recognize a gain on the sales of receivables
transferred to BB&T until such receivables are subsequently included in a
properly structured term securitization transaction. In September 2006, we
included in the 2006 Term Securitization receivables previously transferred to
the 2006 BB&T Purchase Facility. As a result, as of December 31, 2006, there
were no amounts outstanding under the 2006 BB&T Purchase Facility. We expect to
transfer additional receivables to the BB&T Purchase Facility or a similar
on-balance sheet facility for the foreseeable future which will continue to
impact future quarterly earnings patterns as compared to comparable prior
periods.
We continue to spend a substantial amount of management time and resources
to comply with changing laws, regulations and standards relating to accounting,
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new Securities and Exchange Commission regulations and New York Stock
Exchange rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002
requires management's annual review and evaluation of our internal control
systems, and attestations as to the effectiveness of these systems by our
independent registered accounting firm. We expect to continue to expend
significant management time and resources documenting and testing our internal
control systems and procedures. If we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented or amended from
time to time, we may not be in a position to conclude on an ongoing basis that
we have effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002. Failure to maintain an effective
internal control environment could have a material adverse effect on the market
price of our common stock.
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 United States generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported 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.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements (see also Note 1 of the Notes to Consolidated Financial
Statements):
30
o Revenue Recognition and Inventory Cost Allocation. In accordance
with the requirements of SFAS No. 66, Accounting for Sales of Real
Estate, as amended by SFAS No. 152 regarding VOI sales, we recognize
revenue on VOI and homesite sales when a minimum of 10% of the sales
price has been received in cash (buyer's commitment), the legal
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 related to the real estate sold. We
believe that we use a reasonably reliable methodology to estimate
the collectibility of the receivables representing the remainder of
the sales price of real estate sold. See the further discussion of
our policies regarding the estimation of credit losses on our notes
receivable below. Should we become unable to reasonably estimate the
collectibility of our receivables, we may have to defer the
recognition of sales and our results of operations could be
negatively impacted. Upon the adoption of SFAS No. 152 on January 1,
2006, the calculation of the adequacy of the buyer's commitment
changed so that cash received towards the purchase of our VOIs is
reduced by the value of certain incentives provided to the buyer at
the time of sale. If, after consideration of the value of the
incentive, the total down payment received from the buyer is less
than 10% of the sales price, the VOI sale, and the related cost of
sales and direct selling expenses, are deferred until such time that
sufficient cash is received from the customer, generally through
receipt of mortgage payments. Changes to the quantity, type, or
value of sales incentives that we provide to buyers of our VOIs may
result in additional VOI sales being deferred, and thus our results
of operations could be materially, adversely impacted.
In cases where all development has not been completed, we recognize
revenue in accordance with the percentage-of-completion method of
accounting. Should our estimates of the total anticipated cost of
completing of our Bluegreen Resorts' or Bluegreen Communities'
projects increase, we may be required to defer a greater amount of
revenue or may be required to defer revenue for a longer period of
time, and thus our results of operations could be materially,
adversely impacted.
In accordance with SFAS No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, the capitalized costs of
our real estate projects are assigned to individual homesites in the
projects based on the relative estimated sales value of each
homesite. Prior to 2006 this method of allocation was also used to
determine the inventory value and related costs of sales for our
VOIs. Effective January 1, 2006, as a result of the adoption of SFAS
No. 152, VOI inventory and cost of sales is accounted for using the
relative sales value method. Under the relative sales value method,
cost of sales is calculated as a percentage of net sales using a
cost-of-sales percentage--the ratio of total estimated development
cost to total estimated VOI revenue, including the estimated
incremental revenue from the resale of VOI inventory repossessed,
generally as a result of the default of the related receivable.
Should our estimates of the sales values of our VOI and homesite
inventories differ materially from their ultimate selling prices,
our gross profit could be adversely impacted.
o Allowance for Loan Losses. Prior to January 1, 2006, we estimated
credit losses on our notes receivable portfolios generated in
connection with the sale of VOIs in accordance with SFAS No. 5,
Accounting for Contingencies, as our notes receivable portfolios
consist of a large group of smaller-balance, homogeneous loans.
Consistent with Staff Accounting Bulletin No. 102, Selected Loan
Loss Allowance Methodology and Documentation Issues, we first
segmented our notes receivable by identifying risk characteristics
that were common to groups of loans and then estimated credit losses
based on the risks associated with these segments. Effective January
1, 2006, we changed our accounting for loan losses in accordance
with SFAS No. 152. Under SFAS No. 152, we estimate uncollectible
notes receivable based on historical default rates for similar VOI
notes receivable over the applicable historical period. We use a
static pool analysis, which tracks uncollectibles for each year's
sales over the entire life of those notes. We also consider whether
the historical economic conditions are comparable to current
economic conditions. We currently group our notes receivable in two
pools for analytical purposes. Although our credit policies are
identical in all locations, the customer demographics and historical
uncollectibility have varied between these two pools. We review our
reserve for loan losses on at least a quarterly basis. Should our
estimates of these and
31
other pertinent factors change, our results of operations, financial
condition and liquidity position could be materially, adversely
affected.
o Transfers of Financial Assets. When we transfer financial assets to
third parties, such as when we sell notes receivable pursuant to our
vacation ownership receivables purchase facilities, we evaluate
whether or not such transfer should be accounted for as a sale
pursuant to SFAS No. 140 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 or the reach of 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 (1) an agreement that both entitles and obligates the
transferor to repurchase or redeem them before their maturity or (2)
the ability to unilaterally cause the holder to return specific
assets (other than through a cleanup call). We believe that we have
obtained appropriate legal opinions and other guidance deemed
necessary to properly account for our transfers of financial assets
as sales in accordance with SFAS No. 140.
In connection with the sales of notes receivable referred to above,
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 notes
receivable 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 initially and
periodically estimate fair value based on the present value of
future expected cash flows using management's best estimates of the
key assumptions -- prepayment rates, loss severity rates, default
rates and discount rates commensurate with the risks involved.
Should our estimates of these key assumptions change or should the
portfolios sold fail to satisfy specified performance criteria and
therefore trigger provisions whereby outside investors in the
portfolios are paid on an accelerated basis, there could be a
reduction in the fair value of the retained interests and our
results of operations and financial condition could be materially
and adversely impacted. During the years ended December 31, 2006,
2005, and 2004, we recognized an other-than-temporary decrease of
approximately $39,000, $539,000, and $1.2 million, respectively, in
the fair market value of our retained interest in a 2002 vacation
ownership receivables securitization, based on higher than
anticipated default rates in the portfolio sold. There were no
other-than-temporary decreases recognized in 2004.
o Asset Impairment. We periodically evaluate the recovery of the
carrying amounts of our long-lived assets including our real estate
properties under the guidelines of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Factors that we
consider in making this evaluation include our estimates of
remaining life-of-project sales for each project based on current
retail prices and our estimates of costs to complete each project.
Should our estimates of these factors change, our results of
operations and financial condition could be adversely impacted.
o Goodwill. Goodwill is not amortized but is subject to an annual
impairment test in accordance with SFAS No. 142, Accounting for
Goodwill and Other Intangible Assets. Goodwill is tested for
impairment on an annual basis by estimating the fair value of the
reporting unit to which the goodwill or intangible assets have been
assigned. As of December 31, 2005 and 2006, only our Bluegreen
Resorts reporting unit had any recorded goodwill. Should our
estimates of the fair value of our reporting units change, our
results of operations and financial condition could be adversely
impacted.
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
32
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.
Bluegreen Resorts Bluegreen Communities Total
---------------------- ---------------------- -----
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
--------- -------- --------- -------- --------- --------
(dollars in thousands)
Year Ended December 31, 2004:
Sales of real estate ............. $ 310,608 100% $ 191,800 100% $ 502,408 100%
Cost of real estate sales ........ (73,969) (24) (105,759) (55) (179,728) (36)
--------- --------- ---------
Gross profit ..................... 236,639 76 86,041 45 322,680 64
Other resort and communities
operations revenues ............. 59,007 19 7,402 4 66,409 13
Cost of other resort
and communities operations ....... (63,510) (20) (7,275) (4) (70,785) (14)
Selling and marketing
expenses ........................ (165,162) (53) (36,766) (19) (201,928) (40)
Field general and
administrative expenses (1) ..... (16,098) (5) (11,680) (6) (27,778) (6)
--------- --------- ---------
Field operating profit ........... $ 50,876 16% $ 37,722 20% $ 88,598 18%
========= ========= =========
Year Ended December 31, 2005:
Sales of real estate ............. $ 358,240 100% $ 192,095 100% $ 550,335 100%
Cost of real estate sales ........ (77,455) (22) (100,345) (52) (177,800) (32)
--------- --------- ---------
Gross profit ..................... 280,785 78 91,750 48 372,535 68
Other resort and communities
operations revenues ............. 64,276 18 9,521 5 73,797 13
Cost of other resort
and communities
operations ....................... (68,633) (19) (8,684) (5) (77,317) (14)
Selling and marketing
expenses ........................ (195,407) (55) (33,588) (17) (228,995) (42)
Field general and
administrative expenses (1) ..... (21,443) (6) (11,772) (6) (33,215) (6)
--------- --------- ---------
Field operating profit ........... $ 59,578 17% $ 47,227 25% $ 106,805 19%
========= ========= =========
Year Ended December 31, 2006:
Sales of real estate ............. $ 399,105 100% $ 164,041 100% $ 563,146 100%
Cost of real estate sales ........ (88,086) (22) (90,968) (55) (179,054) (32)
--------- --------- ---------
Gross profit ..................... 311,019 78 73,073 45 384,092 68
Other resort and communities
operations revenues ............. 51,688 13 11,922 7 63,610 11
Cost of other resort
and communities
operations ....................... (42,417) (11) (10,776) (7) (53,193) (9)
Selling and marketing
expenses ........................ (239,788) (60) (27,636) (17) (267,424) (47)
Field general and
administrative expenses (1) ..... (26,565) (7) (10,759) (7) (37,324) (7)
--------- --------- ---------
Field operating profit ........... $ 53,937 14% $ 35,824 22% $ 89,761 16%
========= ========= =========
33
-------------
(1) General and administrative expenses attributable to corporate
overhead have been excluded from the tables. Corporate general and
administrative expenses totaled $32.7 million, $38.0 million and
$52.2 million for the years ended December 31, 2004, 2005, and 2006,
respectively. See "Corporate General and Administrative Expenses,"
below, for further discussion.
Sales and Field Operations. Consolidated sales were $502.4 million, $550.3
million and $563.1 million for 2004, 2005, and 2006, respectively. Consolidated
sales increased 10% from 2004 to 2005 and 2% from 2005 to 2006. Excluding the
impact of adopting SFAS No. 152, consolidated sales during 2006 would have
totaled $578.0 million.
Bluegreen Resorts. We will use the pro forma presentations below to discuss
Bluegreen Resorts results of operations for the 2006 period, as we believe that
the pro forma results provide a better basis for comparison to 2005 than our
United States generally accepted accounting principles results of operations
under SFAS No. 152.
Year Ended
Year Ended December 31, 2006 December 31, 2005
---------------------------------------------------------------------------
Pro Forma Excluding
Impact of SFAS No. 152
--------------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
------ -------- ------ -------- ------ --------
Sales of real estate ............. $ 399,105 100% $ 413,929 100% $ 358,240 100%
Cost of real estate sales ........ (88,086) (22) (88,835) (21) (77,455) (22)
--------- --------- ---------
Gross profit ..................... 311,019 78 325,094 79 280,785 78
Other resort operations revenue .. 51,688 13 60,762 15 64,276 18
Cost of other resort operations .. (42,417) (11) (56,696) (14) (68,633) (19)
Selling and marketing expenses ... (239,788) (60) (237,331) (57) (195,407) (55)
Field general and administrative
expenses ...................... (26,565) (7) (26,565) (6) (21,443) (6)
--------- --------- ---------
Field operating profit ........... $ 53,937 14% $ 65,264 16% $ 59,578 17%
========= ========= =========
During 2005 and 2006, sales of VOIs contributed $358.2 million (65%) and $399.1
million (71%) of our total consolidated sales, respectively. Excluding the
impact of SFAS No. 152, sales of VOIs during 2006 would have contributed $413.9
million (72%) of our total consolidated sales.
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 and the deferral of sales in accordance with SFAS No. 152.
Year Ended
--------------------------------------------
December 31, December 31, December 31,
2004 2005 2006
---- ---- ----
Number of VOI sale transactions ... 31,574 37,605 41,097
Average sales price per transaction $ 10,025 $ 9,834 $ 10,507
Gross margin ...................... 76% 78% 78%
Bluegreen Resorts' sales increased $40.9 million or 11% during 2006 as compared
to 2005. Excluding the impact of SFAS No. 152, sales would have increased $55.7
million or 16% during 2006 as compared to 2005. The pro forma increase was due
primarily to same-resort sales increases at many of our sales offices.
Same-resort sales increased by approximately 12% during 2006 as compared to 2005
and were highlighted by increases in sales at The Fountains sales office in
Orlando, Florida, our Bluegreen Wilderness Club at Big Cedar sales office in
Ridgedale, Missouri, our Falls Village sales office in Branson, Missouri, and
our
34
MountainLoft sales office in Gatlinburg, Tennessee. The overall increase in
sales was due in part to our continued focus on marketing to our growing
Bluegreen Vacation Club owner base. Sales to owners increased by 46% and
accounted for 34% of Resort sales during 2006 as compared to 28% during 2005.
This, combined with an 8% overall increase in the number of sales prospects seen
by Bluegreen Resorts from approximately 287,000 prospects during 2005 to
approximately 310,000 prospects during 2006, and a relatively consistent,
overall sale-to-tour conversion ratio of 13% during these periods, significantly
contributed to the overall sales increase during 2006 as compared to 2005. Our
sale-to-tour conversion ratio for new prospects (i.e., excluding sales to our
existing owners) was 11% and 10% during 2005 and 2006, respectively. The
increase in the number of prospects seen by Bluegreen Resorts and, consequently
the increase in sales was partially due to our eight new sales sites. Our new
sales offices include an offsite sales office in Atlanta, Georgia (opened in
November 2005), an offsite sales office in Chicago, Illinois (opened in February
2006), an offsite sales office in Las Vegas, Nevada (opened in July 2006), and
sales offices located at two of our new resorts: Daytona SeaBreeze in Daytona
Beach Shores, Florida (opened in December 2005), and Carolina Grande in Myrtle
Beach, South Carolina (opened in March 2006). We also opened sales offices in
Williamsburg, Virginia (opened in August 2006) and Wisconsin Dells, Wisconsin
(opened in July 2006) on the grounds where we recently purchased properties for
future resort locations. The increase in the average sales price per
transaction, primarily due to a system-wide price increase effective January 1,
2006 also contributed to the increase in sales.
The $47.6 million or 15% increase in Bluegreen Resorts' sales during 2005 as
compared to 2004 was due primarily to same-site sales increases at our various
sales offices. Same-site sales increases aggregated $42.2 million and were
highlighted by the increase in sales at The Fountains sales office in Orlando,
Florida, our Dallas, Texas offsite sales office, our Harbour Lights sales office
in Myrtle Beach, South Carolina and our Bluegreen Wilderness Club at Big Cedar
sales office. We opened four new sales sites in 2005, which generated an
aggregate of $5.4 million in sales. Our new sales sites were our offsite sales
office in King of Prussia, Pennsylvania (opened March 2005 and subsequently
closed in December of 2006), our sales office at the Suites at Hershey resort
(opened June 2005), our offsite sales office in Atlanta, Georgia (opened
November 2005) and our sales office at the Daytona SeaBreeze resort (opened
December 2005). The overall sales increase was also due to our continued focus
on marketing to our growing Bluegreen Vacation Club owner base. Sales to owners
increased to approximately 28% of Resorts' sales during 2005 as compared to 24%
of Resorts' sales in 2004. This, combined with a 12% overall increase in the
number of sales prospects seen by Bluegreen Resorts from approximately 257,000
prospects during 2004 to approximately 287,000 prospects during 2005, and a
slightly higher sale-to-tour conversion ratio during 2005 (increasing to 13% in
2005 from 12% in 2004) significantly contributed to the overall sales increase
during 2005 as compared to 2004.
Bluegreen Resorts' gross margin percentages vary between periods based on the
relative costs of the specific VOIs sold in each respective period. Excluding
the adoption of SFAS No. 152, our gross margin would have increased from 78%
during 2005 to 79% during 2006, primarily as a result of the previously
discussed price increase. As compared to the 26% gross margin in 2004, our gross
margin for 2005 was favorably impacted by the sale of relatively lower cost VOIs
acquired through opportunistic acquisitions in 2003. Approximately 144
condominium units in which we were selling VOIs were constructed and became
available for sale at the beginning of 2005 at The Fountains, which had a
product cost of approximately 20% of sales price.
Other resort operations revenues decreased $12.6 million or 20% during 2006 as
compared to 2005. Excluding the impact of SFAS No. 152, other resort operations
revenue would have decreased $3.5 million or 5% during 2006 as compared to 2005.
The adoption of SFAS No. 152 had the impact of decreasing other resort
operations revenue due to the reclassification of rental proceeds from other
resort operations revenue to net against cost of other resort operations,
partially offset by the classification of revenue for sales incentives for VOI
sales to other resort operations revenue. The 2006 results also represent lower
sales of mini-vacation packages on behalf of third parties. During 2006, we have
been transitioning our mini-vacation package business from primarily selling the
packages to third-parties to using the sales tours generated by mini-vacations
primarily for use at our own sales offices. This transition was substantially
completed in the second half of 2006. As a result, this has had the effect of
increasing the profitability of our other resort operations (reducing costs in
excess of revenues) but increasing our selling and marketing
35
costs. These decreases were partially offset by increases in fees earned by our
wholly-owned title company as well as higher resort management fees earned by
our resort management company. Resort management fees increased in the aggregate
due to an increase in the number of resorts for which we provide management
services.
Other resort operations revenues increased $5.3 million or 9% during 2005 as
compared to 2004. The increase was primarily due to higher fees earned by our
wholly-owned title company for providing title processing services on all of our
VOI sales, commensurate with the increase in resort sales.
Cost of other resort operations decreased $26.2 million, or 38%, during 2006 as
compared to 2005. Excluding the impact of SFAS No. 152, cost of other resort
operations would have decreased $11.9 million or 17% during 2006 as compared to
2005. The adoption of SFAS No. 152 had the impact of decreasing cost of other
resort operations due primarily to the reclassification of rental proceeds from
other resort operations revenue and the reclassification of the net proceeds of
the Sampler Program from selling and marketing expenses to a reduction to cost
of other resort operations. The decrease also reflects a significant reduction
in the amount of cost related to mini-vacations sold on behalf of third parties,
as previously discussed, partially offset by higher subsidies incurred relative
to the property owners' associations that maintain our resorts. These subsidies
increased in the aggregate based on an increase in our unsold VOI inventory.
Cost of other resort operations increased $5.1 million or 8% during 2005 as
compared to 2004. The increase in the cost of other resort operations was in
connection with increases in the related revenues discussed above as well as due
to higher subsidies paid to the property owners' associations that maintain our
resorts. These subsidies increased in the aggregate based on an increase in our
VOI inventory.
Selling and marketing expenses for Bluegreen Resorts increased $44.4 million or
23% during 2006 as compared to 2005. As a percentage of sales, selling and
marketing expenses increased from 55% during 2005 to 60% during 2006. The
increase in selling and marketing expense during 2006, as compared to 2005, also
reflects a general increase in overall marketing expenses due primarily to
start-up costs related to new marketing alliances, higher marketing expenses as
a percentage of sales at our newly opened off-site sales offices and the
previously discussed transition of our mini-vacations packages from being sold
externally to being used internally. These increases are partially offset by the
favorable impact on selling and marketing cost of the increase in sales to
existing owners during 2006 as compared to 2005. Excluding the impact of SFAS
No. 152, selling and marketing expense would have increased $41.9 million or 21%
during 2006 as compared to 2005. As a percentage of sales, on a pro forma basis,
selling and marketing expenses increased from 55% during 2005 to 57% during
2006. The adoption of SFAS No. 152 had the impact of increasing selling and
marketing expenses as a percentage of sales as a result of the immediate
recognition of marketing expenses associated with certain VOI sales that have
not yet been recognized, and due to the reclassification of the net profits of
the Sampler Program from selling and marketing expenses to a reduction of cost
of other resort operations.
Selling and marketing expenses for Bluegreen Resorts increased $30.2 million or
18% during 2005 as compared to 2004. As a percentage of sales, selling and
marketing expenses increased to approximately 55% during 2005 as compared to 53%
for 2004. The increase in selling and marketing expenses as a percentage of
sales was primarily a result of start-up marketing costs incurred at our new
sales offices, partially offset by the favorable impact on selling and marketing
cost of the increase in sales to existing owners during 2005 as compared to
2004.
We believe that selling and marketing expenses as a percentage of sales is an
important indicator of the performance of Bluegreen Resorts and our performance
as a whole. No assurances can be given that selling and marketing expenses will
not continue to increase as a percentage of sales in future periods.
Field general and administrative expenses for Bluegreen Resorts increased $5.1
million or 24% during 2006 as compared to 2005. As a percentage of sales, field
general and administrative expenses increased from 6% during 2005 to 7% in 2006;
however, excluding the impact of SFAS No. 152, the expenses would have only been
6% of sales. Field general and administrative expenses for Bluegreen Resorts
increased
36
$5.3 million or 33% during 2005 as compared to 2004. The increase in field
general and administrative expenses in both periods was primarily a result of
the cost of opening and operating our new sales offices. Additionally, the
increase in 2006 also reflects costs to close an off-site sales office located
in King of Prussia, Pennsylvania.
As of December 31, 2006, approximately $27.3 million and $15.3 million of Sales
and Field Operating Profit, respectively, were deferred under SFAS No. 152
because such sales did not meet the minimum required initial investment.
Bluegreen Communities. During 2004, 2005, and 2006, Bluegreen Communities
generated $191.8 million (38%), $192.1 million (35%), and $164.0 million (29%),
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, sales in
certain properties that had not completed the platting process, and excluding
sales of bulk parcels.
Year Ended
--------------------------------------------
December 31, December 31, December 31,
2004 2005 2006
---- ---- ----
Number of homesites sold .......... 2,765 2,287 1,750
Average sales price per homesite .. $ 69,136 $ 80,188 $ 81,478
Gross margin ...................... 45% 48% 45%
Bluegreen Communities' sales decreased $28.1 million or 15% during 2006 as
compared to 2005 as a result of several of the Company's more mature
developments either approaching sell out or selling out during 2006, as well as
the impact of certain revenue recognition policies described below, partially
offset by sales generated at new Bluegreen Communities that commenced sales in
2006. Before giving effect to the percentage-of-completion method of accounting,
during 2006 we entered into contracts to sell homesites totaling $158.1 million,
as compared to $200.4 million during 2005. These sales consisted of real estate
sold at the following properties:
Properties Not Substantially Sold Out at
December 31, 2006 (in 000's)
----------------------------
Project 2005 2006 Difference
------- ---- ---- ----------
Chapel Ridge $ 27,492 $ 23,894 $ (3,598)
Mystic Shores 26,639 36,819 10,180
Havenwood at Hunter's Crossing -- 13,166 13,166
Lake Ridge at Joe Pool Lake 12,688 12,919 231
Vintage Oaks at the Vineyard -- 6,764 6,764
The Bridges at Preston Crossing -- 4,487 4,487
SugarTree on the Brazos 6,229 1,351 (4,878)
Saddle Creek Forest 10,207 6,454 (3,753)
The Settlement at Patriot Ranch 2,749 6,468 3,719
King Oaks -- 724 724
--------- --------- ---------
Total $ 86,004 $ 113,046 $ 27,042
========= ========= =========
37
Properties Substantially Sold Out as of or Prior to
December 31, 2006 (in 000's)
----------------------------
Project 2005 2006 Difference
------- ---- ---- ----------
Sanctuary Cove at St. Andrews Sound $ 55,798 $ 7,400 $ (48,398)
Traditions of Braselton 22,490 2,797 (19,693)
Mountain Springs Ranch 13,585 16,488 2,903
Big Country -- 7,000 7,000
Mountain Lakes Ranch 5,534 -- (5,534)
Catawba Falls Preserve 4,271 6,418 2,147
Silver Lakes Ranch 4,216 185 (4,031)
Brickshire 3,873 2,074 (1,799)
Yellow Stone Creek Ranch 1,061 1,265 204
Quail Springs 897 40 (857)
Winding River 636 -- (636)
RidgeLake 614 577 (37)
Riverwood Forest 463 -- (463)
Terra Medina 213 -- (213)
Miscellaneous 759 859 100
---------- ---------- ----------
Total $ 114,410 $ 45,103 $ (69,307)
========== ========== ==========
Bluegreen Communities sales were reduced by $3.4 million during 2005 and were
increased by $12.1 million during 2006 as a result of the application of the
percentage-of-completion method of accounting. Additionally, because the
platting process for certain properties sold near the end of 2006 was not
completed until before the end of 2006, we were unable to recognize
approximately $8.4 million sales in 2006, that is anticipated to be recognized
in 2007.
Bluegreen Communities' sales increased approximately $0.3 million or less than
1% during 2005 as compared to 2004 due primarily to the sell-out of several
communities during 2005. The primary reason for our slower growth in Communities
was Traditions of Braselton, a 1,142-acre golf course community in Braselton,
Georgia, and Brickshire, our golf course community located in New Kent Virginia
were substantially sold out and higher sales were generated during 2004.
Partially offsetting these declines were higher sales at many of our other
communities, including Sanctuary Cove at St. Andrews Sound, our approximately
500-acre golf course community in Brunswick, Georgia, and Chapel Ridge, our
approximately 800-acre golf course community in Chatham County, North Carolina.
During 2005, we commenced sales at SugarTree on the Brazos, our community
located outside Fort Worth, Texas, Saddle Creek Forest, our community located
near Houston, Texas and The Settlement at Patriot Ranch, our community located
near San Antonio, Texas.
As noted above, certain of our properties substantially sold out earlier in 2005
and 2006 than previously anticipated as a result of the continued strong demand
for our communities and our challenge to replace sold-out properties with new
communities with similar profit margins. Although there is no assurance that we
will be successful, we are continually exploring the acquisition of properties
in markets where we currently conduct business, and in new regions of the
country, in an attempt to maintain appropriate levels of properties in our
portfolio.
Bluegreen Communities' gross margin decreased from 48% in 2005 to 45% in 2006.
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.) 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 45% and 55% of sales and
is expected to approximate these percentages for the foreseeable future. In
addition, during 2006, our gross margin was negatively impacted by the bulk sale
of property near San Diego, California, which had a relatively low margin, as
well as the recognition of a charge of approximately $3.0 million to repair a
lake amenity at a nearly sold-out Bluegreen community.
Bluegreen Communities' gross margin increased from 45% in 2004 to 48% in 2005 as
a result of 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.).
38
Other communities operations include the operation of our golf courses, as well
as realty resale operations at several of our residential land communities.
Other communities operations revenues increased $2.4 million or 25% from $9.5
million to $11.9 million and the related costs increased $2.1 million or 24%
from $8.7 million to $10.8 million during 2005 and 2006, respectively. These
increases were primarily due to the opening of daily-fee golf courses located at
our Chapel Ridge and Sanctuary Cove at St. Andrew's Sound communities.
Other communities' operations revenues increased $2.1 million or 28% from $7.4
million to $9.5 million and the related costs increased $1.4 million or 19% from
$7.3 million to $8.7 million during 2004 and 2005, respectively. This was
primarily due to increased play at our Traditions of Braselton and the Preserve
at Jordan Lake golf courses located in Georgia and North Carolina, respectively.
Our golf course operations incurred aggregate losses of $176,000, and $380,000
during 2004 and 2005, respectively, and in 2006 earned an aggregate profit of
$431,000. The results of golf course operations reflect fixed operating
expenses, low seasonal revenues during the winter months and high maintenance
costs during periods when we are marketing homesites in the surrounding
community. Also, certain of our golf courses are still in their early years of
operations during the periods presented. We believe that the operating results
of these new courses should improve as individuals who have purchased homesites
in the communities in which these courses are located build their homes and
begin living in the community, as this should increase the amount of play on our
golf courses. However, there is no assurance that such improvement in operating
results will be achieved.
Selling and marketing expenses for Bluegreen Communities decreased from $33.6
million in 2005 to $27.6 million in 2006. As a percentage of sales, selling and
marketing expenses remained constant at 17% during 2005 and 2006. The decrease
in total selling and marketing costs in 2006 reflected lower commission
commensurate with the sales decrease and as a result of 2006 bulk sales which
typically carry a lower commission percentage. This decrease was partially
offset by higher advertising expenses, which were the result of start up
advertising associated with our new developments.
Selling and marketing expenses for Bluegreen Communities decreased from $36.8
million in 2004 to $33.6 million in 2005. As a percentage of sales selling and
marketing expenses decreased from 19% in 2004 to 17% in 2005. These expenditures
decreased as a percentage of sales due to a higher average sales price per
homesite coupled with relative advertising efficiencies at our golf course
communities in Georgia, as compared to our other projects.
Bluegreen Communities' general and administrative expenses decreased from $11.8
million during 2005 to $10.8 million during 2006. This decrease in general and
administrative expenses in 2006 was due to the closure of five sales offices in
the second half of 2005. The offices at Silver Lakes Ranch, Mountain Lakes
Ranch, Quail Springs Ranch, Brickshire, and the Traditions of Braselton were
closed as a result of the substantial sell out at these locations. As a
percentage of sales, general and administrative expenses increased from 6% in
2005 to 7% in 2006, reflecting the overall decrease in sales. Bluegreen
Communities' general and administrative expenses remained constant from 2004 to
2005.
As of December 31, 2005, Bluegreen Communities had $30.7 million of sales and
$12.4 million of Field Operating Profit deferred under percentage-of-completion
accounting. As of December 31, 2006, Bluegreen Communities had $18.6 million of
sales and $7.7 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, resorts'
acquisition and development, mortgage servicing, treasury and legal. Such
expenses were $32.7 million, $38.0 million and $52.2 million for 2004, 2005, and
2006, respectively.
39
The $14.2 million or 37% increase in corporate general and administrative
expenses during 2006 as compared to 2005 was primarily due to:
o the recognition of stock compensation expense of $2.9 million as a
result of adopting the provisions of SFAS No. 123R (revised 2004),
Share-Based Payment, ("SFAS No. 123R"), including $0.6 million
related to the modification of existing stock options of our Chief
Executive Officer who retired at the end of 2006 (our "Former Chief
Executive Officer") and charges totaling $2.6 million related to the
total compensation payable under a separation agreement with our
Former Chief Executive Officer;
o the recognition of expenses totaling approximately $2.1 million
associated with the adoption of our shareholders' rights plan and
related litigation;
o a $1.1 million write-off related to the abandonment of a software
development project; and,
o an overall increase in corporate headcount to support our growth at
Bluegreen Resorts.
These increases were partially off-set by higher profits from our mortgage
servicing operations in 2006 as compared to 2005. As previously discussed, we
earn fees for servicing the notes receivable that we have sold in term
securitization transactions and through our vacation ownership receivables
purchase facilities.
The $5.3 million or 16% increase in corporate general and administrative
expenses during 2005 as compared to 2004 was primarily due to:
o the expansion of our corporate facilities, as well as increased
personnel and other expenses in our information technology, resort
acquisitions and development, and accounting departments to support
our growth;
o increased accounting and auditing expenses of $1.8 million,
primarily incurred in connection with requirements associated with
the Sarbanes-Oxley Act of 2002; and,
o severance charges of approximately $1.0 million associated with the
departure of our former Chief Financial Officer.
These increases were partially off-set by lower legal expenses and higher
profits from our mortgage servicing operation realized during 2005 as compared
to 2004.
For a discussion of field selling, general and administrative expenses, see
"Sales and Field Operations," above.
Interest Income. Interest income is earned from our notes receivable, retained
interests in notes receivable sold and cash and cash equivalents. Interest
income was $35.9 million, $34.8 million, and $40.8 million for 2004, 2005, and
2006, respectively. The increase in interest income during 2006 as compared to
2005 was due primarily to higher interest accretion on our retained interest in
notes receivable sold (as a result of higher average retained interests in 2006
due to the sale of additional notes receivable) and higher average vacation
ownership notes receivable balances during 2006 as compared to 2005. In
addition, we recognized an other-than-temporary decrease of approximately
$39,000 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 decrease in interest income during 2005 was due to lower interest income
earned from our notes receivable commensurate with a lower average aggregate
notes receivable balance during the period as compared to 2004. In addition, we
recognized an other-than-temporary decrease of approximately $539,000 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. We recognized gains on the sale of notes
receivable totaling $26.0 million, $25.2 million, and $44.7 million during 2004,
2005, and 2006, respectively. As a result of adopting SFAS No. 152,
approximately $38.8 million of the gain in 2006 was reflected as an increase to
VOI sales. We sell a portion of our vacation ownership notes receivable pursuant
to vacation ownership receivables
40
securitization transactions or through vacation ownership receivables purchase
facilities that qualify for sale treatment per SFAS No. 140.
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 facility (as described further below) and
management's discretion. The generally accepted accounting principles governing
our sale of receivable transactions is evolving and achieving off-balance sheet
accounting treatment is becoming more difficult. Due to the complexity of the
accounting rules surrounding such transactions, we have decided to limit the use
of off-balance sheet structures in the future. In 2006, we structured a vacation
ownership receivables purchase facility that is used to accumulate receivables
pending a term securitization transaction in a manner so as to account for sales
of receivables under such facilities as on-balance sheet borrowings pursuant to
SFAS No. 140. No gains were recognized on the sales of receivables to this
facility until the receivables were included in an appropriately structured term
securitization transaction. We expect to continue this accounting treatment for
similarly structured facilities in the foreseeable future. As a result, we
expect that the volatility of our quarterly earnings will increase
prospectively, but we do not anticipate that this will materially impact annual
earnings, assuming the continued availability of the facilities and ultimate
securitizations.
Interest Expense. Interest expense was $18.4 million, $14.5 million, and $18.8
million for 2004, 2005, and 2006, respectively. The 30% increase in interest
expense for 2006 as compared 2005, was primarily a result of higher average debt
outstanding and higher interest rates in 2006 partially offset by increased
capitalized interest on current development activity. Average debt outstanding
in 2006 increased in part as a result of our on-balance sheet treatment of
transfers to the BB&T Purchase Facility (as discussed further under "Credit
Facilities for Bluegreen Resorts Receivables and Inventories") and due to
increased borrowings in connection with inventory acquisition and development
activities. The 21% decrease in interest expense for 2005 as compared 2004, was
primarily a result of lower average debt outstanding and more interest being
capitalized due to increased construction activity, partially off-set by the
impact of increased borrowing rates.
Total interest expense capitalized to construction in progress was $7.9 million,
$10.0 million and $12.1 million for 2004, 2005, and 2006, respectively.
Our effective cost of borrowing was 8.1%, 8.9%, and 10.5% for 2004, 2005, and
2006, respectively.
Provision for Loan Losses. We recorded provisions for loan losses totaling $24.4
million and $27.6 million during 2004 and 2005, respectively. This provision was
based on our estimate of the expected performance of our vacation ownership
notes receivable, reduced by the estimated value of the underlying inventory
that was anticipated to be recovered upon default. Effective January 1, 2006,
SFAS No. 152 requires that the estimated losses on originated vacation ownership
mortgages exclude the benefit of an estimate for the value of future recoveries
and further requires that the provision for loan losses for vacation ownership
receivables be reflected as a reduction of VOI sales. Accordingly, during 2006
our provision for loan losses of $59.6 million was recorded as reduction of VOI
sales. The 13% and 116% increases in the provision for loan losses during 2005
and 2006, respectively, were primarily due to increases in Bluegreen Resorts
sales, approximately 95% of which were financed by us. The increase in 2006 as
compared to 2005 was also attributable to no longer accounting for the value of
the future inventory recoveries as an offset to the provision for loan losses.
SFAS No. 152 provides for the benefit of future inventory recoveries in the
computation of cost of sales. Excluding the impact of SFAS No. 152, our 2006
provision for loan losses would have been $31.9 million.
The following table summarizes our allowance for loan losses by division as of
December 31, 2005 and 2006 (in thousands):
41
Bluegreen Bluegreen
Resorts Communities Other Total
--------- ----------- ------ ---------
(dollars in thousands)
December 31, 2005:
Notes receivable ........................ $ 131,058 $ 7,408 $ 186 $ 138,652
Allowance for loan losses ............... (10,466) (217) (186) (10,869)
--------- -------- ------ ---------
Notes receivable, net ................... $ 120,592 $ 7,191 $ -- $ 127,783
========= ======== ====== =========
Allowance as a % of gross notes
receivable ............................ 8% 3% 100% 8%
========= ======== ====== =========
December 31, 2006:
Notes receivable ........................ $ 150,649 $ 6,915 $ 186 $ 157,750
Allowance for loan losses ............... (13,140) (173) (186) (13,499)
--------- -------- ------ ---------
Notes receivable, net ................... $ 137,509 $ 6,742 $ -- $ 144,251
========= ======== ====== =========
Allowance as a % of gross notes
receivable ............................ 9% 3% 100% 9%
========= ======== ====== =========
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 Consolidated Financial Statements for
further information). The minority interest in income of consolidated subsidiary
is the portion of our consolidated pre-tax income that is earned by Big Cedar,
LLC, the unaffiliated 49% interest holder in the Subsidiary. Minority interest
in income of consolidated Subsidiary was $4.1 million, $4.8 million, and $7.3
million for 2004, 2005, and 2006, respectively. Pre-tax income for the
subsidiary has increased over the periods presented as sales at the Bluegreen
Wilderness Club at Big Cedar have increased.
Provision for Income Taxes. Our effective income tax rate during 2006 was
approximately 37.8% as compared to 38.5% during 2005 and 2004. Our annual
effective income tax rate varies as our mix of taxable earnings shifts amongst
the various states in which we operate. In March of 2007, we received notice
from the IRS that our 2004 federal income tax return had been selected for
examination.
Cumulative Effect of Change in Accounting Principle, Net. The adoption of SFAS
No. 152 on January 1, 2006 resulted in a net after-tax charge of $4.5 million,
which is presented as a cumulative effect of change in accounting principle. The
cumulative effect of change in accounting principle primarily consists of the
deferral of VOI sales and related costs for sales that were previously
recognized but did not meet the required down payment threshold at January 1,
2006, due to certain sales incentives provided to buyers and the treatment of
our Sampler Program, and the related tax benefit, net of the cumulative effect
of change in accounting principle charge related to the minority interest in the
Subsidiary.
Summary. Based on the factors discussed above, our net income was $42.6 million,
$46.6 million, and $29.8 million for 2004, 2005, and 2006, respectively.
42
Changes in Financial Condition
The following table summarizes our cash flows for 2004, 2005, and 2006 (in
thousands):
Year Ended
-----------------------------------------
December 31, December 31, December 31,
2004 2005 2006
-----------------------------------------
(restated) (restated) (restated)
Cash flow provided by operating activities $ 160,590 $ 95,525 $ 8,426
Cash flow (used) provided by investing activities (10,538) (8,141) 4,461
Cash flow used by financing activities (108,066) (103,245) (26,443)
---------- ---------- ----------
Net increase (decrease) in cash $ 41,986 $ (15,861) $ (13,556)
========== ========== ==========
Cash Flows From Operating Activities. Cash flows from operating activities
decreased $87.1 million or 91% from net cash inflows of $95.5 million to $8.4
million during the years ended December 31, 2005 and December 31, 2006,
respectively. The decrease in cash flows provided by operating activities during
2006 compared to 2005 was primarily driven by higher inventory acquisition and
development spending and an increase in notes receivable due to increased VOI
sales. During 2006 we acquired land for four Bluegreen Communities (The Bridges
at Preston Crossing, King Oaks, Vintage Oaks at the Vineyard, and Legacy Oaks)
as well as four parcels of land for Bluegreen Resorts (located in Newland, North
Carolina; Williamsburg, Virginia; Las Vegas, Nevada; and Wisconsin Dells,
Wisconsin). Partially offsetting the decrease in cash flows from operations was
higher proceeds from the sale of notes receivable during 2006, as compared to
2005.
Cash flows from operating activities decreased $65.1 million or 41% from net
cash inflows of $160.6 million to $95.5 million during the years ended December
31, 2004 and December 31, 2005, respectively. This decrease was due primarily to
higher construction and development spending during 2005 as compared to 2004.
Additionally, during 2005 we acquired land for three Bluegreen Communities
developments (Saddle Creek Forest, The Settlement at Patriot Ranch, and
Havenwood at Hunter's Crossing) and three vacation ownership resorts (Daytona
SeaBreeze, SeaGlass Tower, and Carolina Grande), as compared to the acquisition
of only one vacation ownership resort (the Suites at Hershey) and only two
communities (SugarTree on the Brazos and Chapel Ridge) during 2004. These
acquisition and related construction and development costs were paid with a
combination of cash and borrowings.
Cash Flows From Investing Activities. Cash flows from investing activities
increased $12.6 million or 155% from net cash outflows of $8.1 million to net
inflows of $4.5 million for the years ended December 31, 2005 and December 31,
2006, respectively. This increase was due primarily to higher amounts of cash
received in 2006 from our retained interests in notes receivable sold. This
increase was partially offset by higher expenditures in 2006 for property and
equipment as compared to 2005.
Cash flows from investing activities increased $2.4 million or 23% from net cash
outflows of $10.5 million to $8.1 million for the years ended December 31, 2004
and December 31, 2005, respectively. This increase was due primarily to higher
amounts of cash received in 2005 from our retained interests in notes receivable
sold, as we did not begin receiving cash flows on our retained interest in a
2004 Term Securitization transaction until the third quarter of 2005 due to
reserve funding requirements. The remainder of the increase in cash flows from
investing activities was due to lower expenditures in 2005 for property and
equipment as compared to 2004.
Cash Flows From Financing Activities. Cash flows from financing activities
increased $76.8 million or 74% from net cash outflows of $103.2 million to $26.4
million during the years ended December 31, 2005 and December 31, 2006,
respectively. In 2005, we redeemed $55.0 million of our 10.5% Senior Secured
Notes. Additionally, we borrowed $56.7 million in 2006 under our lines-of-credit
compared to $26.4 million in 2005, and incurred higher net repayments under our
collateralized notes receivable facilities in 2005 as compared to 2006. These
cash flows were partially offset by the receipt of $59.3 million of proceeds in
connection with our issuance of the junior subordinated debentures in 2005, as
compared to the receipt of only $30.9 million of such proceeds during 2006
Cash flows from financing activities increased $4.8 million or 4% from net cash
outflows of $108.1 million to $103.2 million during the years ended December 31,
2004 and December 31, 2005, respectively. This increase was due primarily to the
receipt of $59.3 million of cash in connection with our issuance of the junior
subordinated debentures as well as lower net repayments under our collateralized
notes receivable facilities during 2005 as compared to 2004. These increases
were partially offset by the redemption of $55.0 million of our senior secured
notes and higher net repayments under our line-of-credit facilities and notes
payable in 2005 as compared to 2004.
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)
down payments 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 sold, (iv) principal
and interest payments on the purchase money mortgage loans 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 growth.
Our level of debt and debt service requirements have 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
economic and 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.
Subject to the continued availability of financing and liquidity, we currently
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 December 31, 2006. These facilities do
not constitute all of our outstanding indebtedness as of December 31, 2006. Our
other indebtedness includes outstanding senior secured notes payable, junior
subordinated debentures, 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 year ended December 31, 2006,
approximated 60% of sales. Accordingly, having facilities available for the
hypothecation or sale of these vacation ownership receivables is a critical
factor to our ability to meet our short and long-term cash needs.
43
The 2006 GE Purchase Facility. In March 2006, we executed agreements for a
vacation ownership receivables purchase facility (the "2006 GE Purchase
Facility") with General Electric Real Estate ("GE"). The 2006 GE Purchase
Facility utilizes an owner's trust structure, pursuant to which we sell
receivables to Bluegreen Receivables Finance Corporation XI, our wholly-owned,
special purpose finance subsidiary ("BRFC XI"), and BRFC XI sells the
receivables to an owner's trust (a qualified special purpose entity) without
recourse to us or BRFC XI 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 2006 GE Purchase Facility. The 2006 GE
Purchase Facility has detailed requirements with respect to the eligibility of
receivables for purchase, and fundings under the 2006 GE Purchase Facility are
subject to certain conditions precedent. Under the GE Purchase Facility, a
variable purchase price of approximately 90% of the principal balance of the
receivables sold, subject to adjustment under 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 is entitled to receive a return equal to the applicable Swap Rate
(which is essentially a published interest swap arrangement rate as defined in
the 2006 GE Purchase Facility agreements) plus 2.35%, subject to use of
alternate return rates in certain circumstances. In addition, we paid GE a
structuring fee of approximately $437,500 in March 2006, which is being
amortized on a straight-line basis through March 2008. Subject to the terms of
the agreements, we will act as servicer under the 2006 GE Purchase Facility for
a fee.
The 2006 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 2006 GE Purchase Facility may
terminate earlier than the dates noted above upon the occurrence of certain
specified events set forth in the 2006 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 2006 GE Purchase Facility; (iii) our
failure to perform our covenants in the 2006 GE Purchase Facility; (iv) our
commencement of bankruptcy or similar proceedings; (v) the amount of any advance
under the 2006 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 2006 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 $303.3 million plus 50% of net income
following December 31, 2005; (x) the ratio of our debt (excluding our
subordinated debentures and receivable-backed debt of no more than $600 million)
to Tangible Net Worth exceeding 2.50 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 falling below approximately
930.7 million points; (xiii) our ceasing to conduct the vacation ownership
business or to 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 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 2006 GE Purchase Facility.
The 2006 GE Purchase Facility allows for sales of notes receivable for a
cumulative purchase price of up to $125.0 million through March 2008. During
2006, the Company sold $72.0 million in vacation ownership receivables under the
2006 GE Purchase Facility for an aggregate purchase price of $64.8 million. As
of
44
December 31, 2006, the remaining availability under the 2006 GE Purchase
Facility was $60.2 million in cumulative purchase price, subject to eligibility
requirements and fulfillment of conditions precedent.
In January 2007, we sold $22.3 million in vacation ownership receivables under
the 2006 GE Purchase Facility and received $20.1 million in cash proceeds. In
March 2007, we sold $16.0 million of vacation ownership receivables under the
same facility and received $14.4 million in cash proceeds.
The 2006 GE Purchase Facility discussed above and the on-balance sheet BB&T
Purchase Facility discussed under "Credit Facilities for Bluegreen Resorts'
Receivables and Inventories" are the only ongoing receivables purchase
facilities under which we currently have the ability to sell or transfer
receivables. 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 or will be in a position
to replace our existing purchase facilities when they 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.
We have historically chosen to monetize our receivables through the 2006 GE
Purchase Facility and through periodic term securitization transactions, 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 periodic basis, which would not be realized under a
traditional financing arrangement.
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
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
45
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 indenture
trustee 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 an other-than-temporary decrease of $539,000 and $39,000 during
2005 and 2006, 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
2006 GE Purchase Facility and prior similar facilities during the periods
presented below (in thousands):
As of As of
December 31, December 31,
2005 2006
---------------------------
On-Balance Sheet:
Retained interests in notes receivable sold $ 105,696 $ 130,623
Off-Balance Sheet:
Notes receivable sold without recourse 429,403 540,536
Principal balance owed to note receivable
purchasers 396,679 503,854
Year Ended
------------------------------------------
December 31, December 31, December 31,
2004 2005 2006
------------------------------------------
Income Statement:
Gain on sales of notes receivable (1) $ 25,972 $ 25,226 $ 44,700
Interest accretion on retained interests
in notes receivable sold 6,035 9,310 14,569
Servicing fee income 2,931 4,969 6,955
(1) Includes amounts classified as VOI sales, pursuant to SFAS No. 152.
Credit Facilities for Bluegreen's 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 operations. We
had the following credit facilities, as of December 31, 2006 (see further
discussion below):
46
Outstanding
Borrowings
as of Availability as Advance Period
December of December Expiration; Borrowing Borrowing Current
Credit Facility 31, 2006 31, 2006 Borrowing Maturity Limit Rate Rate
------------------------------------------------------------------------------------------------------------------------------------
The GMAC $16.9 million $ 58.1 million February 15, 2008; $ 75.0 million 30-day LIBOR 9.33%
Receivables February 15, 2015 + 4.00%
Facility
The GMAC $38.6 million $111.4 million February 15, 2008; $150.0 million 30-day LIBOR 9.83%
AD&C Facility August 15, 2013 + 4.50%
2006 BB&T
Purchase -- $137.5 million May 25, 2008; $137.5 million 30-day LIBOR 6.58%
Facility March 5, 2019 + 1.25%
The Foothill Facility $ 2.0 million $ 28.0 million December 31, 2006; $ 30.0 million Prime + 0.25% 8.50%
December 31, 2008 (Min. 4.00%); to
to 9.50%
Prime + 1.25%
The GMAC $52.4 million $ 22.6 million September 30, 2008; $ 75.0 million Prime + 1.00% 9.25%
Communities September 30, 2009
Facility
Credit Facilities for Bluegreen Resorts' Receivables and Inventories
The GMAC Receivables Facility. 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 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. Interest
payments are due monthly. During the year ended December 31, 2006, we did not
pledge any vacation ownership receivables under the GMAC Receivables Facility.
The GMAC AD&C Facility. In September 2003, RFC also provided us with an
acquisition, development and construction revolving credit facility for
Bluegreen Resorts (the "GMAC AD&C Facility"). The borrowing period on the GMAC
AD&C Facility, as amended, expires on February 15, 2008, and outstanding
borrowings mature no later than August 15, 2013, 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.. Interest payments are due monthly.
During the year ended December 31, 2006, we borrowed $44.9 million under the
GMAC AD&C Facility to fund the development of VOIs at The Fountains and the
Carolina Grande resorts and to finance the acquisition of property in Las Vegas,
Nevada and Williamsburg, Virginia.
The 2006 BB&T Purchase Facility. In May 2006, we executed agreements for a
vacation ownership receivables purchase facility (the "2006 BB&T Purchase
Facility") with BB&T. While ownership of the receivables is transferred for
legal purposes, the transfer of the receivables under the facility are accounted
for as a financing transaction for financial accounting purposes. Accordingly,
the receivables will continue to be reflected as assets and the associated
obligations will be reflected as liabilities on our balance sheet.
47
The 2006 BB&T Purchase Facility utilizes an owner's trust structure, pursuant to
which we transfer receivables to Bluegreen Timeshare Finance Corporation I, our
wholly-owned, special purpose finance subsidiary ("BTFC I"), and BTFC I
subsequently transfers the receivables to an owner's trust without recourse to
us or BTFC I, except for breaches of certain customary representations and
warranties at the time of transfer. We did not enter into any guarantees in
connection with the BB&T Purchase Facility. The 2006 BB&T Purchase Facility has
detailed requirements with respect to the eligibility of receivables, and
fundings under the BB&T Purchase Facility are subject to certain conditions
precedent. Under the 2006 BB&T Purchase Facility, a variable purchase price of
approximately 85% of the principal balance of the receivables transferred,
subject to certain terms and conditions, is paid at closing in cash. The balance
of the purchase price is deferred until such time as BB&T and other liquidity
providers arranged by BB&T have in aggregate received a specified return (the
"Specified Return") and all servicing, custodial, agent and similar fees and
expenses have been paid. The Specified Return is equal to either the commercial
paper rate or LIBOR rate plus 1.25%, subject to use of alternate return rates in
certain circumstances. In addition, we will pay BB&T structuring and other fees
totaling $1.7 million over the term of the facility and we will act as servicer
under the 2006 BB&T Purchase Facility for a fee. The BB&T Purchase Facility
allows for transfers of notes receivable for a cumulative purchase price of up
to $137.5 million, on a revolving basis, through May 2008. There were no
outstanding amounts due under this facility as of December 31, 2006.
On September 21, 2006, BB&T Capital Markets, a division of Scott & Stringfellow,
Inc., served as initial purchaser and placement agent for a private offering and
sale of $139.2 million of Bluegreen Corporation vacation ownership
receivable-backed securities (the "2006 Term Securitization"). Approximately
$153.0 million in aggregate principal of vacation ownership receivables were
securitized in this transaction, including: (1) $75.7 million in aggregate
principal of receivables that were previously transferred under the 2006 BB&T
Purchase Facility; (2) $38.0 million of vacation ownership receivables owned by
us immediately prior to the 2006 Term Securitization: and, (3) an additional
$39.3 million in aggregate principal of our qualifying vacation ownership
receivables (the "2006 Pre-funded Receivables") that could be sold by us through
December 22, 2006. We recognized an aggregate gain of $20.6 million, of which
$18.1 million was classified as an increase to VOI sales in accordance with the
adoption of SFAS No. 152, and recorded a retained interest in the future cash
flows of the notes receivable securitized of $17.1 million in connection with
the 2006 Term Securitization. During 2006, we sold the $39.3 million in 2006
Pre-funded Receivables and the $35.7 million purchase price was disbursed to us
from the escrow account. The proceeds were used by us for general operating
purposes.
The Foothill Facility. We are in the process of renewing a $30.0 million
revolving credit facility with Wells Fargo Foothill, Inc. ("Foothill") primarily
used for borrowings collateralized by Bluegreen Communities receivables and
inventory, but under which we can also borrow up to $10.0 million of the
facility collateralized by the pledge of vacation ownership receivables. For
further details on this facility, see "Credit Facilities for Bluegreen
Communities' Receivables and Inventories" below.
Credit Facilities for Bluegreen Communities' Receivables and Inventories
The Foothill Facility. We are in documentation for the renewal of 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 (the "Foothill Facility"). The Foothill
Facility requires principal payments based on agreed-upon release prices as
homesites in the encumbered communities are sold and bears interest at the prime
lending rate plus 1.25% (9.5% at December 31, 2006). Interest payments are due
monthly. The interest rate charged on outstanding receivable borrowings under
the Foothill Facility, as amended, is the prime lending rate plus 0.25% (8.5% at
December 31, 2006) 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% (8.75% at December 31, 2006). All principal and
interest payments received on pledged receivables are applied to principal and
interest due under the Foothill Facility. There can be no assurances that we
will renew the Foothill Facility on favorable terms, if at all.
48
The GMAC Communities Facility. We have a revolving credit facility with RFC (the
"GMAC Communities Facility") for the purpose of financing our Bluegreen
Communities real estate acquisitions and development activities. 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 (Black Mountain, North Carolina); Lake
Ridge at Joe Pool Lake (Cedar Hill and Grand Prairie, Texas); Mystic Shores at
Canyon Lake (Spring Branch, Texas); Yellowstone Creek Ranch (Walsenburg,
Colorado); Havenwood at Hunter's Crossing (New Braunfels, Texas); The Bridges at
Preston Crossing (Grayson County, Texas); King Oaks (College Station, Texas) and
Vintage Oaks at the Vineyard (New Braunfels, Texas). 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. Principal payments are effected through agreed-upon
release prices paid to RFC, as homesites in the Secured Projects are sold.
Interest payments are due 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.
In February 2007, the Company acquired 350 acres near St. Simons Island,
Georgia, for $18.0 million for a property to be called Sanctuary River Club at
St. Andrews Sound. The Company borrowed $12.6 million under the GMAC Communities
Facility in connection with the acquisition of this property.
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 amortization periodically. When we provide financing to 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.
Trust Preferred Securities Offerings
We have formed statutory business trusts (collectively, the "Trusts") and each
issued trust preferred securities and invested the proceeds thereof in our
junior subordinated debentures. The Trusts are variable interest entities in
which we are not the primary beneficiary as defined by FASB Interpretation No.
46R. Accordingly, we do not consolidate the operations of the Trusts; instead,
the Trusts are accounted for under the equity method of accounting. In each of
these transactions, the applicable Trust issued trust preferred securities as
part of larger pooled trust securities offerings which were not registered under
the Securities Act of 1933. The applicable Trust then used the proceeds from
issuing the trust preferred securities to purchase an identical amount of junior
subordinated debentures from us. Interest on the junior subordinated debentures
and distributions on the trust preferred securities are payable quarterly in
arrears at the same interest rate. Distributions on the trust preferred
securities are cumulative and based upon the liquidation value of the trust
preferred security. The trust preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the junior subordinated
debentures at maturity or their earlier
49
redemption. The junior subordinated debentures are redeemable in whole or in
part at the Company's option at any time after five years from the issue date or
sooner following certain specified events. In addition, we made an initial
equity contribution to each Trust in exchange for its common securities, all of
which are owned by us, and those proceeds were also used to purchase an
identical amount of junior subordinated debentures from us. The terms of each
Trust's common securities are nearly identical to the trust preferred
securities.
We had the following junior subordinated debentures outstanding at December 31,
2006 (dollars in thousands):
Outstanding
Amount of Initial Fixed Beginning
Junior Equity Interest Variable Optional
Subordinated To Issue Rate Interest Rate Redemption Maturity
Trust Debentures Trust Date (1) (2) Date Date
----------------------------------------------------------------------------------------------------------
Bluegreen Statutory 3-month
Trust I $ 23,196 $ 696 3/15/05 9.160% LIBOR 3/30/10 3/30/35
+ 4.90%
Bluegreen Statutory 3-month
Trust II 25,774 774 5/04/05 9.158% LIBOR 7/30/10 7/30/35
+ 4.85%
Bluegreen Statutory 3-month
Trust III 10,310 310 5/10/05 9.193% LIBOR 7/30/10 7/30/35
+ 4.85%
Bluegreen Statutory 3-month
Trust IV 15,464 464 4/24/06 10.130% LIBOR 6/30/11 6/30/36
+ 4.85%
Bluegreen Statutory 3-month
Trust V 15,464 464 7/21/06 10.280% LIBOR 9/30/11 9/30/36
+ 4.85%
-----------------------
$ 90,208 $ 2,708
=======================
(1) Both the trust preferred securities and junior subordinated
debentures bear interest at a fixed interest rate from the issue
date through the beginning optional redemption date.
(2) Both the trust preferred securities and junior subordinated
debentures bear interest at a variable interest rate from the
beginning optional redemption date through the maturity date.
On February 26, 2007, a newly-formed wholly-owned statutory business trust,
Bluegreen Statutory Trust VI ("BST VI"), issued $20.0 million of trust preferred
securities. BST VI used the proceeds from issuing the trust preferred securities
to purchase an identical amount of junior subordinated debentures from us.
Interest on the junior subordinated debentures and distributions on the Trust
Preferred Securities will be payable quarterly in arrears at a fixed rate of
9.842% through April 2012, and thereafter at a floating rate of 4.80% over the
3-month LIBOR until the scheduled maturity date of April 30, 2037. Distributions
on the trust preferred securities will be cumulative and based upon the
liquidation value of the trust preferred security. The trust preferred
securities will be subject to mandatory redemption, in whole or in part, upon
repayment of the junior subordinated debentures at maturity or their earlier
redemption. The junior subordinated debentures are redeemable at any time after
five years from the issue date or sooner following certain specified events. In
addition, we contributed $619,000 to BST VI in exchange for its common
securities, all of which are owned by us, and those proceeds were also used to
purchase an identical amount of junior subordinated debentures from us. The
terms of BST VI's common securities are nearly identical to the trust preferred
securities. Proceeds of the offering will be used for general corporate purposes
and debt repayment.
50
We currently intend to seek to create similar trusts and to participate in other
pooled trust preferred securities transactions in the future as a source of
additional financing, subject to market conditions and other considerations.
Unsecured Credit Facility
On July 26, 2006, we executed agreements to renew our $15.0 million unsecured
line-of-credit with Wachovia Bank, N.A. Amounts borrowed under the line bear
interest at 30-day LIBOR plus 2.00% (7.33% at December 31, 2006). Interest is
due monthly and all outstanding amounts are due on June 30, 2007. We can only
borrow an amount under the line-of-credit which is less than the remaining
availability under our current, active vacation ownership receivables purchase
facilities 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
December 31, 2006, no borrowings were outstanding under the line. However,
during 2006, an aggregate of $565,000 of irrevocable letters of credit were
provided under this line-of-credit which were required in connection with the
obtaining of plats for one of our Bluegreen Communities projects. On December
31, 2006, $523,000 of these letters of credit expired and were not renewed. This
line-of-credit is an available source of short-term liquidity for us. During
2006, we borrowed and repaid $6.5 million under this line-of-credit.
Commitments
Our material commitments as of December 31, 2006, included the required payments
due on our receivable-backed debt, lines-of-credit and other notes 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 by period date, as of December 31, 2006 (in thousands):
Principal Payments Due by Period
----------------------------------------------------
Less than 1 -- 3 4 -- 5 After 5
Contractual Obligations 1 year Years Years Years Total
------------------------------- ------ ----- ----- ----- -----
Receivable-backed notes payable $ 17 $ 4,163 $ -- $ 16,870 $ 21,050
Lines-of-credit and notes payable 39,541 81,016 509 3,346 124,412
10.50% senior secured notes -- 55,000 -- -- 55,000
Jr. Subordinated debentures -- -- -- 90,208 90,208
Noncancelable operating leases 9,469 14,639 9,102 2,414 35,624
----------------------------------------------------
Total contractual obligations $ 49,027 $154,818 $ 9,611 $112,838 $326,294
======== ======== ======== ======== ========
The following table sets forth certain information regarding future interest
obligations on outstanding debt as of December 31, 2006 (in thousands):
Interest Payments Due by Period
----------------------------------------------------
Less than 1 -- 3 4 -- 5 After 5
Interest Obligations (1) 1 year Years Years Years Total
------------------------------- ------ ----- ----- ----- -----
Receivable-backed notes payable $ 1,949 $ 3,574 $ 3,148 $ 2,755 $ 11,426
Lines-of-credit and notes payable 9,861 12,413 539 4,733 27,546
10.50% senior secured notes 5,775 1,443 -- -- 7,218
Jr. Subordinated debentures 8,589 17,178 17,178 213,091 256,036
----------------------------------------------------
Total contractual obligations $ 26,174 $ 34,608 $ 20,865 $220,579 $302,226
======== ======== ======== ======== ========
51
(1) Assumes that interest on variable rate debt has assumed the interest rate
remains the same as the rate at December 31, 2006.
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 required on 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.
As noted above, during 2006 we had $565,000 in letters-of-credit outstanding,
the majority of which were issued under the unsecured line-of-credit with
Wachovia Bank, N.A. These letters-of-credit were required in connection with the
obtaining of governmental approval of plats for one of our Bluegreen Communities
projects. On December 31, 2006, $523,000 of these letters-of-credit expired.
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 $17.7 million as of December 31,
2006. We estimate that the total cash required to complete our Bluegreen
Communities projects in which sales have occurred to be approximately $77.5
million as of December 31, 2006. 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
facilities 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 believes acceptable. 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.
Most of our credit facilities, indentures, and other outstanding debt
instruments, and receivables purchase facilities 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; restrictions on the payment of
dividends, investments in joint ventures and other restricted payments;
limitations on the incurrence of liens and transactions with affiliates,
covenants concerning net worth, fixed charge coverage requirements,
debt-to-equity ratios and portfolio performance requirements; and events of
default or termination. No assurance can be given that we will be in compliance
with such covenants, 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.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BLUEGREEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, December 31,
2005 2006
---- ----
ASSETS
Cash and cash equivalents (including restricted cash of $18,321 and $21,476
at December 31, 2005 and 2006, respectively) ................................. $ 84,704 $ 71,148
Contracts receivable, net ...................................................... 27,473 23,856
Notes receivable (net of allowance of $10,869 and $13,499 at December 31,
2005 and 2006, respectively) ................................................. 127,783 144,251
Prepaid expenses ............................................................... 6,500 10,800
Other assets ................................................................... 17,193 27,465
Inventory, net ................................................................. 240,969 349,333
Retained interests in notes receivable sold .................................... 105,696 130,623
Property and equipment, net .................................................... 79,634 92,445
Goodwill ....................................................................... 4,291 4,291
---------- ----------
Total assets ............................................................... $ 694,243 $ 854,212
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable ............................................................... $ 11,071 $ 18,465
Accrued liabilities and other .................................................. 43,801 49,458
Deferred income ................................................................ 29,354 40,270
Deferred income taxes .......................................................... 75,404 87,624
Receivable-backed notes payable ................................................ 35,731 21,050
Lines-of-credit and notes payable .............................................. 61,428 124,412
10.50% senior secured notes payable ............................................ 55,000 55,000
Junior subordinated debentures ................................................. 59,280 90,208
---------- ----------
Total liabilities ............................................................ 371,069 486,487
Minority interest .............................................................. 9,508 14,702
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; 33,193 and 33,603 shares
issued at December 31, 2005 and 2006, respectively ........................... 333 336
Additional paid-in capital ..................................................... 169,684 175,164
Treasury stock, 2,756 common shares at both December 31, 2005 and 2006,
at cost ...................................................................... (12,885) (12,885)
Accumulated other comprehensive income, net of income taxes .................... 8,575 12,632
Retained earnings .............................................................. 147,959 177,776
---------- ----------
Total shareholders' equity .................................................. 313,666 353,023
---------- ----------
Total liabilities and shareholders' equity ................................ $ 694,243 $ 854,212
========== ==========
See accompanying notes to consolidated financial statements.
53
BLUEGREEN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2005 2006
---- ---- ----
(restated) (restated) (restated)
Revenues:
Gross sales of real estate .......................................... $ 502,408 $ 550,335 $ 622,635
Estimated uncollectible VOI notes receivable ........................ -- -- (59,489)
--------- --------- ---------
Sales of real estate ................................................ 502,408 550,335 563,146
Other resort and communities operations revenue ..................... 66,409 73,797 63,610
Interest income ..................................................... 35,939 34,798 40,765
Gain on sales of notes receivable ................................... 25,972 25,226 5,852
--------- --------- ---------
630,728 684,156 673,373
--------- --------- ---------
Cost and expenses:
Cost of real estate sales ........................................... 179,728 177,800 179,054
Cost of other resort and communities operations ..................... 70,785 77,317 53,193
Selling, general and administrative expenses ........................ 262,424 300,239 356,989
Interest expense .................................................... 18,425 14,474 18,785
Provision for loan losses ........................................... 24,434 27,587 --
Other expense, net .................................................. 1,666 6,207 2,861
--------- --------- ---------
557,462 603,624 610,882
--------- --------- ---------
Income before minority interest and provision for income taxes ....... 73,266 80,532 62,491
Minority interest in income of consolidated subsidiary ............... 4,065 4,839 7,319
--------- --------- ---------
Income before provision for income taxes and cumulative effect of
change in accounting principle ..................................... 69,201 75,693 55,172
Provision for income taxes ........................................... 26,642 29,142 20,861
--------- --------- ---------
Income before cumulative effect of change in accounting principle .... 42,559 46,551 34,311
Cumulative effect of change in accounting principle, net of tax ...... -- -- (5,678)
Minority interest in income of cumulative effect of change in
accounting principle ............................................... -- -- 1,184
--------- --------- ---------
Net income ........................................................... $ 42,559 $ 46,551 $ 29,817
========= ========= =========
Income before cumulative effect of change in accounting principle
per common share:
Basic .............................................................. $ 1.62 $ 1.53 $ 1.12
========= ========= =========
Diluted ............................................................ $ 1.43 $ 1.49 $ 1.10
========= ========= =========
Cumulative effect of change in accounting principle, net of tax and
net of minority interest in income of cumulative effect of change in
accounting principle per common share:
Basic .............................................................. $ -- $ -- $ (0.15)
========= ========= =========
Diluted ............................................................ $ -- $ -- $ (0.14)
========= ========= =========
Net income per common share:
Basic .............................................................. $ 1.62 $ 1.53 $ 0.98
========= ========= =========
Diluted ............................................................ $ 1.43 $ 1.49 $ 0.96
========= ========= =========
Weighted average number of common and common equivalent shares:
Basic .............................................................. 26,251 30,381 30,557
========= ========= =========
Diluted ............................................................ 30,677 31,245 31,097
========= ========= =========
See accompanying notes to consolidated financial statements.
54
BLUEGREEN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accumulated
Other
Comprehensive
Common Additional Treasury Income, Net
Shares Common Paid-in Stock at of Income Retained
Issued Stock Capital Cost Taxes Earnings Total
------ ----- ------- ---- ----- -------- -----
Balance at December 31, 2003 ................. 27,702 $ 277 $ 124,931 $ (12,885) $ 2,953 $ 58,849 $ 174,125
Net income ................................... -- -- -- -- -- 42,559 42,559
Net unrealized gains on retained interests in
notes receivable sold, net of income taxes
and reclassification adjustments. ........... -- -- -- -- 1,852 -- 1,852
----------
Comprehensive income ......................... 44,411
Shares issued upon exercise of stock
options ..................................... 1,150 12 6,582 -- -- -- 6,594
Income tax benefit from stock options
exercised ................................... -- -- 1,961 -- -- -- 1,961
Shares issued in connection with
conversion of 8.25% convertible
subordinated debentures ..................... 4,138 41 33,934 -- -- -- 33,975
------ ------ ---------- ---------- ---------- --------- ----------
Balance at December 31, 2004 ................. 32,990 330 167,408 (12,885) 4,805 101,408 261,066
Net income ................................... -- -- -- -- -- 46,551 46,551
Net unrealized gains on retained interests in
notes receivable sold, net of income taxes
and reclassification adjustments. ........... -- -- -- -- 3,770 -- 3,770
---------
Comprehensive income ......................... 50,321
Shares issued upon exercise of stock
options ..................................... 271 3 1,403 -- -- -- 1,406
Modification of equity awards and
vesting of restricted stock ................. 6 -- 327 -- -- -- 327
Income tax benefit from stock options
exercised ................................... -- -- 541 -- -- -- 541
Shares issued in connection with
conversion of 8.25% convertible
subordinated debentures ..................... 1 -- 5 -- -- -- 5
------ ------ ---------- ---------- ---------- --------- ----------
Balance at December 31, 2005 ................. 33,268 333 169,684 (12,885) 8,575 147,959 313,666
Net income ................................... -- -- -- -- -- 29,817 29,817
Net unrealized gains on retained interests in
notes receivable sold, net of income taxes
and reclassification adjustments. ........... -- -- -- -- 4,057 -- 4,057
----------
Comprehensive income ......................... 33,874
Shares issued upon exercise of stock
options ..................................... 312 3 2,642 -- -- -- 2,645
Stock option expense ......................... -- -- 2,103 -- -- -- 2,103
Modification of equity awards and
vesting of restricted stock ................. 23 -- 735 -- -- -- 735
------ ------ ---------- ---------- ---------- --------- ----------
Balance at December 31, 2006 ................. 33,603 $ 336 $ 175,164 $ (12,885) $ 12,632 $ 177,776 $ 353,023
====== ====== ========== ========== ========== ========= ==========
See accompanying notes to consolidated financial statements.
55
BLUEGREEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2005 2006
---- ---- ----
(restated) (restated) (restated)
Operating activities:
Net income ......................................................... $ 42,559 $ 46,551 $ 29,817
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in accounting principle, net ......... -- -- 5,678
Non-cash stock compensation expense .............................. -- 327 2,848
Minority interest in income of consolidated subsidiary ........... 4,065 4,839 6,135
Depreciation ..................................................... 9,769 12,332 14,376
Amortization ..................................................... 3,849 5,807 2,793
Gain on sales of notes receivable ................................ (25,972) (25,226) (44,700)
Loss on disposal of property and equipment ....................... 455 94 2,096
Provision for loan losses ........................................ 24,434 27,587 59,489
Provision for deferred income taxes .............................. 18,664 16,979 12,835
Interest accretion on retained interests in notes receivable sold (6,035) (9,310) (14,569)
Proceeds from sales of notes receivable .......................... 192,580 198,260 218,455
Changes in operating assets and liabilities:
Contracts receivable ............................................. (2,563) 612 3,854
Notes receivable ................................................. (170,282) (220,491) (283,305)
Prepaid expenses and other assets ................................ 565 2,120 (12,009)
Inventory ........................................................ 47,032 29,022 (8,273)
Accounts payable, accrued liabilities and other .................. 21,470 6,022 12,906
---------- ---------- ----------
Net cash provided by operating activities .......................... 160,590 95,525 8,426
---------- ---------- ----------
Investing activities:
Cash received from retained interests in notes receivable sold .... 8,688 11,016 30,032
Business acquisition .............................................. (825) (675) --
Investments in statutory business trusts .......................... -- (1,780) (928)
Purchases of property and equipment ............................... (18,409) (16,724) (24,736)
Proceeds from sales of property and equipment ..................... 8 22 93
---------- ---------- ----------
Net cash provided (used) by investing activities ................... (10,538) (8,141) 4,461
---------- ---------- ----------
Financing activities:
Proceeds from borrowings collateralized by notes receivable ....... 105,680 24,772 68,393
Payments on borrowings collateralized by notes receivable ......... (174,514) (64,714) (85,114)
Proceeds from borrowings under line-of-credit facilities and
notes payable .................................................... 60,657 26,382 56,670
Payments under line-of-credit facilities and notes payable ........ (100,479) (92,071) (94,586)
Payments on 10.50% senior secured notes ........................... -- (55,000) --
Payment of 8.25% subordinated convertible debentures .............. (273) -- --
Proceeds from issuance of junior subordinated debentures .......... -- 59,280 30,928
Payment of debt issuance costs .................................... (5,731) (3,300) (4,438)
Proceeds from exercise of employee and director stock options ..... 6,594 1,406 2,645
Distributions to minority interest ................................ -- -- (941)
---------- ---------- ----------
Net cash used by financing activities .............................. (108,066) (103,245) (26,443)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 41,986 (15,861) (13,556)
Cash and cash equivalents at beginning of period ................... 58,579 100,565 84,704
---------- ---------- ----------
Cash and cash equivalents at end of period ......................... 100,565 84,704 71,148
Restricted cash and cash equivalents at end of period .............. (21,423) (18,321) (21,476)
---------- ---------- ----------
Unrestricted cash and cash equivalents at end of period ............ $ 79,142 $ 66,383 $ 49,672
========== ========== ==========
56
BLUEGREEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2005 2006
---- ---- ----
Supplemental schedule of non-cash operating, investing and
financing activities:
Inventory acquired through foreclosure or deedback in lieu of
foreclosure ............................................... $ 10,926 $ 10,585 $ --
========= ========= =========
Inventory acquired through financing ........................ $ 21,276 $ 54,054 $ 95,698
========= ========= =========
Property and equipment acquired through financing ........... $ 2,637 $ 1,114 $ 4,640
========= ========= =========
Offset of Joint Venture distribution of operating proceeds to
minority interest against the Prepayment (see Note 4) ..... $ 2,704 $ 1,340 $ --
========= ========= =========
Retained interests in notes receivable sold ................. $ 32,816 $ 38,913 $ 33,967
========= ========= =========
Change in unrealized gains on retained interests in notes
receivable sold ........................................... $ 2,998 $ 6,130 $ 6,423
========= ========= =========
Conversion of 8.25% subordinated convertible debentures into
common stock .............................................. $ 34,098 $ 5 $ --
========= ========= =========
Income tax benefit from stock options exercised ............. $ 1,961 $ 541 $ --
========= ========= =========
Supplemental schedule of operating cash flow information:
Interest paid, net of amounts capitalized ................... $ 19,324 $ 15,955 $ 17,171
========= ========= =========
Income taxes paid ........................................... $ 6,055 $ 6,646 $ 10,064
========= ========= =========
See accompanying notes to consolidated financial statements.
57
BLUEGREEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Organization
We provide colorful places to live and play through our resorts and
residential communities businesses. Our resorts business ("Bluegreen Resorts")
acquires, develops, markets, sells and manages real estate-based vacation
ownership interests ("VOIs") in resorts generally located in popular,
high-volume, "drive-to" vacation destinations. VOIs in our resorts typically
entitle the buyer to use resort accommodations through an annual or biennial
allotment of "points" which represent their ownership and beneficial rights in
perpetuity in our Bluegreen Vacation Club (supported by an underlying deeded
vacation ownership interest held in trust for the buyer). Depending on the
extent of their ownership and beneficial rights, members in our Bluegreen
Vacation Club may stay in any of our participating resorts or take advantage of
other vacation options, including cruises and stays at approximately 3,700
resorts offered primarily by a third-party world-wide vacation ownership
exchange network. We are currently marketing and selling VOIs in 21 resorts
located in the United States and Aruba, 19 of which have active sales offices.
We also sell VOIs at seven off-site sales offices and on the campuses of two
resorts under development located in the United States. Our residential
communities business ("Bluegreen Communities") acquires, develops and subdivides
property and markets residential 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 year ended December 31, 2006, sales
recognized by Bluegreen Resorts comprised approximately 71% of our total sales
of real estate while sales recognized by Bluegreen Communities comprised
approximately 29% of our total sales of real estate. Our other resort and
communities operations revenues consist primarily of resort property management
services, resort title services, resort amenity operations, sales incentives
provided to buyers of VOIs, 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.
Fiscal Year
On October 14, 2002, our Board of Directors approved a change in our fiscal
year from a 52- or 53-week period ending on the Sunday nearest the last day of
March in each year to the calendar year ending on December 31, effective for the
nine months ended December 31, 2002.
Principles of Consolidation
Our 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. Additionally, we do not consolidate
our wholly-owned statutory business trusts (see Note 12) formed to issue trust
preferred securities as these entities are each variable interest entities in
which we are not the primary beneficiary as defined by Financial Accounting
Standards Board ("FASB") Interpretation No. 46R ("FIN No. 46R"). The statutory
business trusts are accounted for under the equity method of accounting. We have
eliminated all significant intercompany balances and transactions.
Restatement and Basis of Presentation
Subsequent to the issuance of our December 31, 2006 consolidated financial
statements, our management determined that certain information in the
consolidated statements of cash flows should be restated for all periods
presented to conform with Statement of Financial Accounting Standards ("SFAS")
No. 95, Statement of Cash Flows. We have restated the financial statements and
corresponding financial information to correctly reflect the classification of
borrowings collateralized by notes receivable as cash flows from financing
activities. We had previously reported these cash flows as operating activities
as the majority of Bluegreen Resorts' sales result in the origination of notes
receivable from its customers and 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 therefore had
classified such activities as operating activities. We will continue to include
the proceeds from sales of notes receivable as cash flows from operations,
consistent with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, and SFAS No. 152, Accounting
for Real Estate Time-Sharing Transactions.
58
Additionally, we have modified our Consolidated Statements of Income to
conform to the presentation required under SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions. Such presentation requires that estimated
uncollectible notes receivable generated from VOI sales (i.e., the provision for
loan losses) be shown on the face of the Consolidated Statements of Income as a
reduction to gross sales of real estate. We had previously provided such
information in the footnotes to the financial statements thereto.
Use of Estimates
U.S. generally accepted accounting principles require us to make estimates
and assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
We invest cash in excess of our immediate operating requirements in
short-term time deposits and money market instruments generally with original
maturities at the date of purchase of three months or less. We maintain cash and
cash equivalents with various financial institutions. These financial
institutions are located throughout the United States, Canada and Aruba. Our
policy is designed to limit exposure to any one institution. However, a
significant portion of our unrestricted cash is maintained with a single bank
and, accordingly, we are subject to credit risk. Periodic evaluations of the
relative credit standing of financial institutions maintaining our deposits are
performed to evaluate and mitigate, if necessary, credit risk.
Restricted cash consists primarily of customer deposits held in escrow
accounts and cash pledged to our various lenders in connection with our
receivable-backed notes payable credit arrangements.
Revenue Recognition and Contracts Receivable
In accordance with the requirements of Statement of Financial Accounting
Standards ("SFAS") No. 66, Accounting for Sales of Real Estate, as amended by
SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions ("SFAS No.
152"), we recognize revenue on VOI and homesite sales when a minimum of 10% of
the sales price has been received in cash (demonstrating the buyer's
commitment), the legal 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 related to the real estate sold. We believe that we use a reasonably
reliable methodology to estimate the collectibility of the receivables
representing the remainder of the sales price of real estate sold. See the
further discussion of our policies regarding the estimation of credit losses on
our notes receivable below. Should our estimates regarding the collectibility of
our receivables change adversely, we may have to defer the recognition of sales
and our results of operations could be negatively impacted. Upon the adoption of
SFAS No. 152 on January 1, 2006, the calculation of the adequacy of a buyer's
commitment for the sale of VOIs changed so that cash received towards the
purchase of our VOIs is reduced by the value of certain incentives provided to
the buyer at the time of sale. If after considering the value of the incentive
the 10% requirement is not met, the VOI sale, and the related cost and direct
selling expenses, are deferred until such time that sufficient cash is received
from the customer, generally through receipt of mortgage payments. Changes to
the quantity, type, or value of sales incentives that we provide to buyers of
our VOIs may result in additional VOI sales being deferred, and thus our results
of operations could be materially, adversely impacted.
In cases where all development has not been completed, we recognize
revenue in accordance with the percentage-of-completion method of accounting.
Should our estimates of the total anticipated cost of completing of our
Bluegreen Resorts' or Bluegreen Communities' projects increase, we may be
required to defer a greater amount of revenue or may be required to defer
revenue for a longer period of time, and thus our results of operations could be
materially, adversely impacted.
Contracts receivable consists of: (1) amounts receivable from customers on
recent sales of VOIs pending recording of the customers' notes receivable in our
loan servicing system; (2) receivables related to unclosed homesite sales; and,
(3) receivables from third-party escrow agents on recently closed homesite
sales. Contracts receivable are reflected net of an allowance for cancellations
of unclosed Bluegreen Communities' sales contracts, which totaled approximately
$0.3 million and $0.6 million at December 31, 2005 and 2006, respectively.
Contracts receivable are stated net of a reserve for loan losses of $0.9 million
and $0.5 million at December 31, 2005 and 2006, respectively.
Our other resort and communities operations revenues consist primarily of
sales and service fees from the activities listed below. The table provides a
brief description of the applicable revenue recognition policy:
59
Activity Revenue is recognized as:
Vacation ownership tour sales .................. Vacation ownership
tour sales
commissions are
earned per contract
terms with third
parties.
Resort title fees .............................. Escrow amounts are
released and title
documents are
completed.
Management fees ................................ Management services
are rendered.
Rental commissions ............................. Rental services are
provided.
Rental income .................................. Guests complete
stays at the
resorts. Effective
January 1, 2006,
rental income is
classified as a
reduction to "Cost
of other resort and
communities
operations".
Realty commissions ............................. Sales of
third-party-owned
real estate are
completed.
Golf course and ski hill daily fees ............ Services are
provided.
Mini-vacation package sales to third parties ... Mini-vacation
packages are
fulfilled (i.e.,
guests use mini-
vacation packages to
stay at a hotel,
take a cruise,
etc.). During 2006,
we transitioned our
mini-vacation
business so that
substantially all
mini-vacation tours
are used internally
at a Bluegreen sales
office.
Mini-vacation
packages used for
internal purposes
are deferred and
recognized as a
credit to marketing
expense.
Our cost of other resort and communities operations consists of the costs
associated with the various revenues described above as well as developer
subsidies and maintenance fees on our unsold VOIs.
Notes Receivable
Our notes receivable are carried at amortized cost less an allowance for
bad debts. Interest income is suspended and previously accrued but unpaid
interest income is reversed on all delinquent notes receivable when principal or
interest payments are more than three months contractually past due and not
resumed until such loans are less than three months past due. As of December 31,
2005 and 2006, $8.0 million and $10.2 million, respectively, of notes receivable
were more than three months contractually past due and, hence, were not accruing
interest income.
Prior to January 1, 2006, we estimated credit losses on our notes
receivable portfolios generated in connection with the sale of VOIs and
homesites in accordance with SFAS No. 5, Accounting for Contingencies, as our
notes receivable portfolios consisted of large groups of smaller-balance,
homogeneous loans. Consistent with Staff Accounting Bulletin No. 102, Selected
Loan Loss Allowance Methodology and Documentation Issues, we first segmented our
notes receivable by identifying risk characteristics that are common to groups
of loans and then estimated credit losses based on the risks associated with
these segments. Under this method, the amount of loss is reduced by the
estimated value of the defaulted inventory to be recovered. Although this policy
continues for notes receivable generated in connection with the sale of a
homesite, effective January 1, 2006, we changed our accounting for loan losses
for VOI notes receivable in accordance with SFAS No. 152. Under SFAS No. 152, we
estimate uncollectibles based on historical uncollectibles for similar VOI notes
receivable over the past 10 years (if available). We use a static pool analysis,
which tracks uncollectibles for each year's sales over the entire life of those
notes. We also consider whether the historical economic conditions are
comparable to current economic conditions. We currently group our notes
receivable in two pools for analytical purposes. Although our credit policies
are identical in all locations, the customer demographics and historical
uncollectibility have varied between these two pools. Additionally, under SFAS
No. 152 no consideration is given for future recoveries of defaulted inventory.
We review our reserve for loan losses on at least a quarterly basis.
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 5) or
through term securitizations, we evaluate whether or not such transfers should
be
60
accounted for as a sale pursuant to SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS No.
140") 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 both: (1)
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 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.
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.
Inventory
Our inventory consists of completed VOIs, VOIs under construction, land
held for future vacation ownership development and residential land acquired or
developed for sale. We carry our inventory at the lower of cost, including costs
of improvements and amenities incurred subsequent to acquisition, capitalized
interest, real estate taxes and other costs incurred during construction, or
estimated fair value, less cost to dispose. Through December 31, 2005, homesites
and VOIs reacquired upon default of the related receivable were considered held
for sale and were recorded at fair value less costs to sell. Although this
practice continues for homesites reacquired, the adoption of SFAS No. 152 on
January 1, 2006 changed our method of accounting for VOI inventory, including
future recoveries from defaults. Under SFAS No. 152, VOI inventory and cost of
sales is accounted for using the relative sales value method. Under the relative
sales value method, cost of sales is calculated as a percentage of net sales
using a cost-of-sales percentage--the ratio of total estimated development cost
to total estimated VOI revenue, including the estimated incremental revenue from
the resale of VOI inventory repossessed, generally as a result of the default of
the related receivable. Also, pursuant to SFAS No. 152, we do not relieve
inventory for VOI cost of sales related to anticipated credit losses. We
periodically evaluate the recovery of the carrying amount of our individual
resort and residential communities' properties under the guidelines of SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144").
Property and Equipment
Our property and equipment acquired is recorded at cost. We record
depreciation and amortization in a manner that recognizes the cost of our
depreciable assets in operations over their estimated useful lives using the
straight-line method. Leasehold improvements are amortized over the shorter of
the terms of the underlying leases or the estimated useful lives of the
improvements. Depreciation expense includes the amortization of assets recorded
under capital leases. We periodically evaluate the recovery of the carrying
amounts of our long-lived assets under the guidelines of SFAS No. 144.
Goodwill
Our goodwill primarily relates to a business combination whereupon Great
Vacation Destinations, Inc. ("GVD"), one of our wholly-owned subsidiaries,
acquired substantially all the assets and assumed certain liabilities of
TakeMeOnVacation, LLC, RVM Promotions, LLC, and RVM Vacations, LLC
(collectively, "TMOV") in 2002. We account for our goodwill under the provisions
of SFAS No. 142, Goodwill and Other Intangible Assets. This statement requires
that goodwill deemed to have indefinite lives not be amortized, but rather be
tested for impairment on an
61
annual basis. Our impairment analysis during the years ended December 31, 2004,
2005, and 2006 determined that no goodwill impairment existed.
Treasury Stock
We account for repurchases of our common stock using the cost method with
common stock in treasury classified in our consolidated balance sheets as a
reduction of shareholders' equity.
Advertising Expense
We expense advertising costs as incurred. Advertising expense was $89.4
million, $102.7 million and $123.0 million for the years ended December 31,
2004, 2005, and 2006, respectively. Advertising expense is included in selling,
general and administrative expenses in our consolidated statements of income.
Stock-Based Compensation
Effective January 1, 2006, we recognize stock-based compensation expense
under the provisions of SFAS No. 123 Accounting for Stock-based Compensation,
("SFAS No. 123") (revised 2004), Share-Based Payment, ("SFAS No. 123R") for our
share-based compensation plans. Prior to January 1, 2006, we accounted for
stock-based compensation under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, ("APB 25") and related interpretations and disclosure requirements
established by SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock
Based Compensation--Transition and Disclosure. Under APB 25, compensation
expense was generally not recorded in earnings for our stock-based options
granted by the Company.
We adopted SFAS No. 123R using the modified prospective method. Under this
transition method, for all stock -based awards granted prior to January 1, 2006
that were outstanding as of that date, compensation cost is recognized for the
unvested portion over the remaining requisite service period, using the
grant-date fair value measured under the original provisions of SFAS No. 123 for
pro forma disclosure purposes. Compensation cost is also recognized for any
awards issued, modified, repurchased, or canceled after January 1, 2006.
We utilized the Black-Scholes option pricing model for calculating the
fair value pro forma disclosures under SFAS No. 123 and continue to use this
model, which is an acceptable valuation approach under SFAS No. 123R. The
Black-Scholes option-pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, this model requires the input of subjective
assumptions, including the expected price volatility of the underlying stock.
Projected data related to the expected volatility and expected life of stock
options is based upon historical and other information. Changes in these
subjective assumptions can materially affect the fair value of the estimate, and
therefore, the existing valuation models do not provide a precise measure of the
fair value of our employee stock options.
SFAS No. 123R also requires us to estimate forfeitures in calculating the
expense relating to stock-based compensation as opposed to accounting for
forfeitures as they occur, which was allowed under SFAS No. 123. We adjusted for
this effect with respect to unvested options as of January 1, 2006 in the
stock-based compensation expense recognized, which is recorded within selling,
general and administrative expense on our consolidated statements of income.
This adjustment was not recorded as a cumulative effect adjustment because no
compensation cost was recognized prior to the adoption of SFAS No. 123R.
There were 668,000 stock options granted to our employees during the year
ended December 31, 2005. There were 141,346 stock options and 5,734 shares of
restricted common stock granted to certain of our non-employee directors during
the year ended December 31, 2005. There were 440,000 stock options granted to
our employees during the year ended December 31, 2006. There were 142,785 stock
options and 17,497 shares of restricted common stock granted to certain of our
non-employee directors during the year ended December 31, 2006. All stock
options were granted with an exercise price equal to the closing price of our
common stock on the date of grant.
The fair value for these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
62
Year Ended December 31,
----------------------------------
2004 2005 2006
---- ---- ----
Risk free investment rate ................ 2.1% 3.9% 5.0%
Dividend yield ........................... 0.0% 0.0% 0.0%
Volatility factor of expected market price 65.0% 61.0% 53.0%
Life of option ........................... 3.0 years 5.5 years 5.8 years
The Company uses historical data to estimate option exercise and employee
termination. The risk free investment rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. The Company uses the historical volatility of the Company's
traded stock to estimate the volatility factory of expected market price.
Total compensation costs related to stock-based compensation charged
against income during the year ended December 31, 2006 was $2.9 million. Total
stock-based compensation recorded in 2006 consists of $2.1 million related to
the expense of existing and newly granted stock options, $0.2 million related to
existing and newly granted restricted stock, and $0.6 million related to the
modification of existing stock option grants, which accelerated the vesting of
approximately 85,000 stock options for one employee. At the grant date, the
Company estimates the numbers of shares expected to vest and subsequently
adjusts compensation costs for the estimated rate of forfeitures at the option
grant date and on an annual basis. The Company uses historical data to estimate
option exercise and employee termination in determining the estimated forfeiture
rate. The estimated forfeiture rate applied as of the most recent option grant
date during 2006 was 9%. No compensation costs related to stock-based
compensation were charged against income during the years ended December 31,
2004 and 2005.
As of December 31, 2006, there were approximately $8.0 million of total
unrecognized compensation costs related to non-vested stock-based compensation
arrangements under our stock option plans. The costs are expected to be
recognized over a weighted-average period of 3.1 years. As of December 31, 2004,
2005, and 2006, the total fair value of shares vested during the years ended
December 31, 2004, 2005, and 2006 was $0.8 million, $2.3 million and $1.8
million, respectively. A summary of the status of the Company's non-vested
shares as of December 31, 2006, and changes during the year ended December 31,
2006, is as follows:
Weighted-Average
Number Grant-Date
Non-vested Shares of Shares Fair Value
----------------------------------------------- ----------- ----------------
(in 000's)
Non-vested at January 1, 2006 ................. 1,334 $ 11.10
Granted ....................................... 582 12.02
Vested ........................................ (127) 6.15
Forfeited ..................................... (206) 11.33
---------
Non-vested at December 31, 2006 ............... 1,583 $ 11.81
=========
SFAS No. 123R requires companies to continue to provide the pro forma
disclosures required by SFAS No. 123, as amended for all periods presented in
which share-based payments were accounted for under the intrinsic value method
of APB 25. The following table illustrates the pro forma effect on net income
and earnings per common share as if we had applied the fair-value recognition
provisions of SFAS No. 123 to all of our share-based compensation awards for
periods prior to the adoption of SFAS No. 123R (in thousands, except per share
data):
Year Ended December 31,
-------------------------
2004 2005
---- ----
Net income, as reported .......................... $ 42,559 $ 46,551
Add: Total stock-based compensation expense
included in the determination of reported net
income, net of related tax effects ............. -- 207
Deduct: Total stock-based compensation expense
determined under the fair value-based method for
all awards, net of related tax effects ......... (308) (1,493)
--------- ---------
Pro forma net income ............................. $ 42,251 $ 45,265
========= =========
Earnings per share, as reported:
Basic .......................................... $ 1.62 $ 1.53
Diluted ........................................ $ 1.43 $ 1.49
Pro forma earnings per share:
Basic .......................................... $ 1.61 $ 1.49
Diluted ........................................ $ 1.42 $ 1.45
63
Earnings Per Common Share
We compute basic earnings per common share 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 and unvested restricted shares
using the treasury stock method and during the year ended December 31, 2004
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. There were approximately 0.8
million stock options not included in diluted earnings per common share during
the years ended December 31, 2005 and 2006, as the effect would be
anti-dilutive. There were no anti-dilutive stock options during the year ended
December 31, 2004.
The following table sets forth our computation of basic and diluted
earnings per common share (in thousands, except per share data):
Year Ended December 31,
---------------------------
2004 2005 2006
---- ---- ----
Basic earnings per common share -- numerator:
Net income .................................................... $42,559 $46,551 $29,817
======= ======= =======
Diluted earnings per common share -- numerator:
Net income -- basic ........................................... $42,559 $46,551 $29,817
Effect of dilutive securities (net of income tax effects) ..... 1,357 -- --
------- ------- -------
Net income -- diluted ......................................... $43,916 $46,551 $29,817
======= ======= =======
Denominator:
Denominator for basic earnings per common
share-weighted-average shares ............................... 26,251 30,381 30,557
Effect of dilutive securities:
Stock options ................................................. 1,098 864 540
Convertible securities ........................................ 3,328 -- --
------- ------- -------
Dilutive potential common shares .............................. 4,426 864 540
------- ------- -------
Denominator for diluted earnings per common share-adjusted
weighted-average shares and assumed conversions ............. 30,677 31,245 31,097
======= ======= =======
Basic earnings per common share: ............................... $ 1.62 $ 1.53 $ 0.98
======= ======= =======
Diluted earnings per common share: ............................. $ 1.43 $ 1.49 $ 0.96
======= ======= =======
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, requires the change in net
unrealized gains or losses on our retained interests in notes receivable sold,
which are held as available-for-sale investments, to be included in other
comprehensive income. Comprehensive income is shown as a subtotal within our
consolidated statements of shareholders' equity for each period presented.
Recent Accounting Pronouncements
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, which amends SFAS No.
140. SFAS No. 156 changes SFAS No. 140 by requiring that Mortgage Servicing
Rights ("MSRs") be initially recognized at their fair value and by providing the
option to either: (1) carry MSRs at fair value with changes in fair value
recognized in earnings; or (2) continue recognizing periodic amortization
expense and assess the MSRs for impairment as originally required by SFAS No.
140. This option may be applied by class of servicing asset or liability. SFAS
No. 156 is effective for all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity's fiscal year
that begins after September 15, 2006, with early adoption permitted. The Company
adopted SFAS No. 156 on January 1, 2007. We do not expect that the adoption of
SFAS No. 156 will result in a material impact to our financial condition,
results of operations, cash flows or disclosures.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
64
recognition and measurement of a tax position taken or expected to be taken in a
tax return. This interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. The interpretation is effective for fiscal years
beginning after December 15, 2006. Although we have not completed our analysis
of the impact this Interpretation will have, we do not anticipate that the
adoption of FIN 48 will result in a material impact on our financial condition,
results of operations, cash flows or disclosures.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). SFAS No. 157 establishes a common definition for fair value
under United States generally accepted accounting principles guidance requiring
the use of fair value, establishes a framework for measuring fair value, and
expands disclosure about such fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 157
effective January 1, 2008, and are currently assessing the impact the statement
will have on our financial condition, results of operations, cash flows or
disclosures.
Reclassifications
We have made certain reclassifications of prior period amounts to conform
to the current period presentation.
2. Cumulative Effect of Change in Accounting Principle
Effective January 1, 2006, we adopted SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions ("SFAS No. 152"). This statement amends SFAS
No. 66, Accounting for Sales of Real Estate, and SFAS No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, in association with
the issuance of American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 04-2, Accounting for Real Estate Time-Sharing
Transactions. SFAS No. 152 was issued to address the diversity in practice
resulting from a lack of guidance specific to the timeshare industry. Among
other things, the new standard addresses the treatment of sales incentives
provided by a seller to a buyer to consummate a transaction, the calculation of
and presentation of uncollectible notes receivable, the recognition of changes
in inventory cost estimates, recovery or repossession of VOIs, selling and
marketing costs, operations during holding periods, developer subsidies to
property owners' associations and upgrade and reload transactions. Restatement
of previously reported financial statements is not permitted. Accordingly, as a
result of the adoption of SFAS No. 152, our financial statements for periods
beginning on or after January 1, 2006, are not comparable, in certain respects,
with those prepared for periods ended prior to January 1, 2006.
Many sellers of timeshare interests, including us, provide incentives to
customers in connection with the purchase of a VOI. Under SFAS No. 152, the
value of certain incentives and other similarly treated items are either
recorded as a reduction to VOI revenue or recorded in a separate revenue line
item within the statements of income, in our case other resort and communities
operations revenue. Furthermore, SFAS No. 152 requires that certain incentives
and other similarly treated items such as cash credits earned through our
Sampler Program be considered in calculating the buyer's down payment toward the
buyer's commitment, as defined in SFAS No. 152, in purchasing the VOI. Our
Sampler Program provides purchasers with an opportunity to utilize our vacation
ownership product during a one year trial period. In the event the Sampler
purchaser subsequently purchases a vacation ownership interest from us, a
portion of the amount paid for their Sampler Package is credited toward the down
payment on the subsequent purchase. Under SFAS No. 152, the credit given is
treated similarly to a sales incentive. If after considering the sales incentive
the required buyer's commitment amount, defined as 10% of sales value, is not
met, the VOI revenue and related cost of sales and direct selling costs are
deferred until the buyer's commitment test is satisfied, generally through the
receipt of required mortgage note payments from the buyer. The net deferred VOI
revenue and related costs are recorded as a component of deferred income in the
accompanying balance sheet as of December 31, 2006. Prior to the adoption of
SFAS No. 152, sales incentives were not recorded apart from VOI revenue and were
not considered in determining the customer down payment required in the buyer's
commitment in purchasing the VOIs.
SFAS No. 152 also amends the relative sales value method of recording VOI
cost of sales. Specifically, consideration is now given not only to the costs to
build or acquire a project and the total revenue expected to be earned on a
project, but also to the sales of recovered vacation ownership interests
reacquired on future cancelled or defaulted sales. The cost of VOI sales is
calculated by estimating these future costs and recoveries. Prior to the
adoption of SFAS No. 152, we did not include the recovery of VOIs in our
projected revenues in determining the related cost of the VOIs sold.
SFAS No. 152 changes the treatment of losses on vacation ownership notes
and contracts receivable and provides specific guidance on methods to estimate
losses. Specifically, SFAS No. 152 requires that the estimated losses on
originated mortgages exclude an estimate for the value of recoveries as the
recoveries are to be considered in inventory costing, as described above. In
addition, the standard requires a change in the classification of our provision
for loan losses for vacation ownership receivables that were historically
recorded as an expense, requiring that such amount be
65
reflected as a reduction of VOI sales. Furthermore, if we sell our vacation
ownership notes receivables in a transaction that qualifies for off-balance
sheet sales treatment under SFAS No. 140, the associated allowance for loan
losses related to the sold receivables is reversed and reflected as an increase
to VOI sales. Prior to the adoption of SFAS No. 152, the reversal of the
allowance on sold receivables was recorded as a component of the gain on sale.
Under SFAS No.152, rental operations, including the usage of our Sampler
Program, are accounted for as incidental operations whereby incremental costs in
excess of incremental revenue are charged to expense as incurred. Conversely,
incremental revenue in excess of incremental costs is recorded as a reduction to
VOI inventory. Incremental costs include costs that have been incurred by us
during the holding period of the unsold VOIs, such as developer subsidies and
maintenance fees. During 2006, all of our rental revenue and Sampler revenue
recognized was recorded as an off-set to cost of other resort and communities
operations revenue as such amounts were less than the incremental cost. Prior to
the adoption of SFAS No. 152, rental revenues were separately presented in the
consolidated statements of income as a component of other resort and communities
operations revenue and a portion of Sampler proceeds was deferred until the
buyer purchased a VOI or the Sampler usage period expired.
The adoption of SFAS No. 152 on January 1, 2006, resulted in a net charge
of $4.5 million, which is presented as a cumulative effect of change in
accounting principle, net of the related tax benefit and the charge related to
minority interest.
3. Joint Venture
On June 16, 2000, one of our wholly-owned subsidiaries entered into an
agreement with Big Cedar LLC ("Big Cedar"), an affiliate of Bass Pro, Inc.
("Bass Pro"), to form the Joint Venture, a vacation ownership development,
marketing and sales limited liability company. The Joint Venture is developing,
marketing and selling VOIs at The Bluegreen Wilderness Club at Big Cedar, a
324-unit, wilderness-themed resort adjacent to the Big Cedar Lodge, a luxury
hotel resort owned by Big Cedar, on the shores of Table Rock Lake in Ridgedale,
Missouri. During the year ended April 1, 2001, we made an initial cash capital
contribution to the Joint Venture of approximately $3.2 million, in exchange for
a 51% ownership interest in the Joint Venture. In exchange for a 49% interest in
the Joint Venture, Big Cedar has contributed approximately 46 acres of land with
a fair market value of $3.2 million to the Joint Venture. (See Note 4 for
further information regarding payment of profit distributions to Big Cedar.)
In addition to its 51% ownership interest, we also receive a quarterly
management fee from the Joint Venture equal to 3% of the Joint Venture's net
sales in exchange for our involvement in the day-to-day operations of the Joint
Venture. We also service the Joint Venture's notes receivable in exchange for a
servicing fee.
Based on our role as the day-to-day manager of the Joint Venture, its
majority control of the Joint Venture's Management Committee and our controlling
financial interest in the Joint Venture, the accounts of the Joint Venture are
consolidated in our financial statements.
Because the Joint Venture has a finite life (i.e., the Joint Venture can
only exist through the earlier of: i) December 31, 2050; ii) the sale or
disposition of all or substantially all of the assets of the Joint Venture; iii)
a decision to dissolve the Joint Venture by us and Big Cedar; or iv) certain
other events described in the Joint Venture agreement), the minority interest in
the Joint Venture meets the definition of a mandatorily redeemable
non-controlling interest as specified in SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
settlement value of this mandatorily redeemable non-controlling interest at
December 31, 2005 and 2006 was $9.8 million and $15.2 million respectively,
based on the sale or disposition of all or substantially all of the assets of
the Joint Venture as of those respective dates.
During the years ended December 31, 2004, 2005, and 2006, the Joint
Venture paid approximately $0.5 million, $0.6 million, and $0.5 million,
respectively, to Bass Pro and affiliates for construction management services
and furniture and fixtures in connection with the development of the Joint
Venture's vacation ownership resort and sales office. In addition, the Joint
Venture paid Big Cedar and affiliates approximately $1.8 million, $2.0 million,
and $2.9 million for gift certificates and hotel lodging during the year ended
December 31, 2004, 2005, and 2006, respectively, in connection with the Joint
Venture's marketing activities.
4. Marketing Agreement
On June 16, 2000, we entered into an exclusive, 10-year marketing
agreement with Bass Pro, a privately-held retailer of fishing, marine, hunting,
camping and sports gear. Bass Pro is an affiliate of Big Cedar (see Note 3).
Pursuant to the agreement, we have the right to market our VOIs at each of Bass
Pro's national retail locations (we are currently in 37 of Bass Pro's stores as
of December 31, 2006), in Bass Pro's catalogs and on its web site. We also have
access to
66
Bass Pro's customer lists. In exchange for these services, we compensate Bass
Pro based on the overall success of their marketing activities through one of
the Bass Pro marketing channels described above. The amount of compensation is
dependent on the level of additional marketing efforts required by us to convert
the prospect into a sale and a defined time frame for such marketing efforts. No
compensation was paid to Bass Pro on sales made by the Joint Venture.
On June 16, 2000, we prepaid $9.0 million to Bass Pro (the "Prepayment").
The Prepayment was fully amortized from compensation earned by Bass Pro and
distributions otherwise payable to Big Cedar from the earnings of the Joint
Venture as a member thereof through December 31, 2005. Additional compensation
and member distributions will be paid in cash to Bass Pro or Big Cedar. During
the years ended December 31, 2005 and 2006, respectively, the Joint Venture made
member distributions of $2.7 million and $1.9 million, respectively. Of the 2005
distribution, $1.3 million was payable to Big Cedar and used to pay down the
balance of the Prepayment. As of December 31, 2005, the Prepayment was fully
amortized.
In 2004, 2005 and 2006, we recognized marketing compensation expense to
Bass Pro of approximately $4.5 million, $5.2 million, and $6.4 million,
respectively. During the years ended December 31, 2004, 2005, and 2006, we paid
affiliates of Bass Pro approximately $85,000, $89,000, and $2.1 million,
respectively, for various services including tour costs, premiums and lead
generation.
5. Notes Receivable and Note Receivable Purchase Facilities
The table below sets forth additional information relative to our notes
receivable (in thousands).
As of December 31,
----------------------------
2005 2006
---- ----
Notes receivable secured by VOIs ................. $ 131,058 $ 150,649
Notes receivable secured by homesites ............ 7,408 6,915
Other notes receivable ........................... 186 186
---------- ----------
Notes receivable, gross .......................... 138,652 157,750
Reserve for loan losses .......................... (10,869) (13,499)
---------- ----------
Notes receivable, net ............................ $ 127,783 $ 144,251
========== ==========
The weighted-average interest rate on our notes receivable was 14.6% and
14.2% at December 31, 2005 and 2006, respectively. All of our vacation ownership
loans bear interest at fixed rates. The weighted average interest rate charged
on loans secured by VOIs was 14.8% and 14.3% at December 31, 2005 and 2006,
respectively. Approximately 80% of our notes receivable secured by homesites
bear interest at variable rates, while the balance bears interest at fixed
rates. The weighted average interest rate charged on loans secured by homesites
was 10.7% and 11.9% at December 31, 2005 and 2006, respectively.
Our vacation ownership loans are generally secured by property located in
Florida, Michigan, Missouri, Pennsylvania, South Carolina, Tennessee, Virginia,
Wisconsin and Aruba. The majority of Bluegreen Communities' notes receivable are
secured by homesites in Georgia, Texas and Virginia.
The table below sets forth the activity in our allowance for uncollectible
notes receivable for 2005 and 2006 (in thousands):
Year Ended
December 31,
---------------------------
2005 2006
---- ----
Balance, beginning of year ....................... $ 13,663 $ 10,869
Cumulative adjustment for cumulative effect of
change in accounting principle ................... -- 1,164
Provision for loan losses (1) .................... 27,587 59,489
Less: Allowance on sold receivables ............. (14,607) (38,848)
Less: Write-offs of uncollectible receivables .. . (15,774) (19,175)
---------- ----------
Balance, end of year ............................ $ 10,869 $ 13,499
========== ==========
(1) Effective January 1, 2006, SFAS No. 152 requires that the provision
for loan loss be recorded as reduction of VOI sales.
67
Installments due on our notes receivable during each of the five years
subsequent to December 31, 2005, and 2006, and thereafter are set forth below
(in thousands):
2005 2006
---- ----
Due in 1 year ........... $ 21,231 $ 28,912
Due in 2 years........... 9,684 10,280
Due in 3 years .......... 10,469 11,008
Due in 4 years........... 10,997 12,079
Due in 5 years .......... 11,888 13,693
Thereafter............... 74,383 81,778
--------- ---------
Total............... $ 138,652 $ 157,750
========= =========
Sales of Notes Receivable
Sales of notes receivable during the years ended December 31, 2004, 2005,
and 2006 were as follows (in millions):
Year Ended
December 31, 2004:
Aggregate Principal Initial Fair Value
Balance of Notes Purchase Gain of Retained
Facility Receivable Sold Price Recognized Interest
-------- --------------- ----- ---------- --------
2004 Term Securitization $ 172.1 $ 156.6 $ 21.1 $ 33.3
2004 GE Purchase Facility 43.4 38.6 4.9 6.1
------- ------- ------ ------
Total $ 215.5 $ 195.2 $ 26.0 $ 39.4
======= ======= ====== ======
Year Ended
December 31, 2005:
Aggregate Principal Initial Fair Value
Balance of Notes Purchase Gain of Retained
Facility Receivable Sold Price Recognized Interest
-------- --------------- ----- ---------- --------
2004 BB&T Purchase
Facility $ 211.9 $ 180.1 $ 25.0 $ 42.4
2005 Term Securitization 16.7 15.1 0.2 3.0
------- ------- ------ ------
Total $ 228.6 $ 195.2 $ 25.2 $ 45.4
======= ======= ====== ======
Year Ended
December 31, 2006:
Aggregate Principal Initial Fair Value
Balance of Notes Purchase Gain of Retained
Facility Receivable Sold Price Recognized Interest
-------- --------------- ----- ---------- --------
2005 Term Securitization $ 18.6 $ 16.7 $ 4.6 $ 3.3
2006-A GE Purchase Facility 72.0 64.8 11.1 7.9
2006 Term Securitization 153.0 137.0 29.0 22.8
------- ------- ------ ------
Total $ 243.6 $ 218.5 $ 44.7 $ 34.0
======= ======= ====== ======
As a result of adopting SFAS No. 152, during the year ended December 31,
2006, approximately $38.8 million of the gain was recorded as an increase to VOI
sales. The remaining gain of $5.9 million has been recorded as a gain on the
sales of notes receivable on the Statements of Income for the year ended
December 31, 2006.
The following assumptions were used to measure the initial fair value of
the retained interest in notes receivable sold or securitized for each of the
2004 transactions: prepayment rates which decrease from 17% to 13% per annum as
the portfolios mature; loss severity rate ranging from 40% to 73%; default rates
which decrease from 10% to 1% per annum as the portfolios mature; and discount
rates ranging from 9% to 14%.
68
The following assumptions were used to measure the initial fair value of
the retained interest in notes receivable sold or securitized for each of the
2005 transactions: prepayment rates which decrease from 17% to 9% per annum as
the portfolios mature; loss severity rate ranging from 35% to 45%; default rates
which decrease from 10% to 1% per annum as the portfolios mature; and discount
rates ranging from 9% to 12%.
The following assumptions were used to measure the initial fair value of
the retained interests in notes receivable sold or securitized for each of the
2006 transactions: Prepayment rates which decrease from 17% to 9% per annum as
the portfolios mature; loss severity rates ranging from 35% to 71%; default
rates which decrease from 11% to 1% per annum as the portfolios mature; and a
discount rate of 9%.
The following is a description of the facilities that were used to sell
notes receivable that qualified for sale recognition under the provisions of
SFAS 140.
2004 Term Securitization
On July 8, 2004, BB&T Capital Markets, a division of Scott & Stringfellow,
Inc. 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 secured
receivable-backed notes payable and $19.3 million in aggregate principal of
qualified vacation ownership 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 owner's trust (a qualified
special purpose entity) through our wholly-owned, special purpose finance
subsidiary, Bluegreen Receivables Finance Corporation VIII. The proceeds from
the 2004 Term Securitization were used to pay Resort Finance, LLC all amounts
then outstanding under their receivable-backed notes payable 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.
We also recognized an aggregate gain of $21.1 million and recorded a retained
interest in the future cash flows of the notes receivable securitized of $33.3
million in connection with the 2004 Term Securitization.
2004 GE Purchase Facility
On August 3, 2004, we executed agreements for a vacation ownership
receivables purchase facility (the "2004 GE Purchase Facility") with General
Electric Capital Corporation ("GE"). The 2004 GE Purchase Facility utilized an
owner's trust structure, pursuant to which we sold receivables to Bluegreen
Receivables Finance Corporation VII, our wholly-owned, special purpose finance
subsidiary ("BRFC VII"), and BRFC VII sold 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 2004 GE
Purchase Facility. The 2004 GE Purchase Facility had detailed requirements with
respect to the eligibility of receivables for purchase, and fundings under the
2004 GE Purchase Facility were subject to certain conditions precedent. Under
the 2004 GE Purchase Facility, a variable purchase price of approximately 89.5%
of the principal balance of the receivables sold (79.5% in the case of
receivables originated in Aruba), subject to adjustment under certain terms and
conditions, was paid at closing in cash. The balance of the purchase price was
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 2004 GE Purchase
Facility agreements) plus 3.50%, subject to use of 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 2004 GE
Purchase Facility for a fee. The 2004 GE Purchase Facility includes various
conditions to purchase, covenants, trigger events and other provisions customary
for a transaction of this type. In March 2006, we executed agreements for a new
$125.0 million vacation ownership receivables facility with GE (see "2006 GE
Purchase Facility" below) to replace the 2004 GE Purchase Facility.
2004 BB&T Purchase Facility
On December 31, 2004, we executed agreements for a vacation ownership
receivables purchase facility (the "2004 BB&T Purchase Facility") with Branch
Banking and Trust Company ("BB&T"). The 2004 BB&T Purchase Facility utilized an
owner's trust structure, pursuant to which we sold receivables to Bluegreen
Receivables Finance Corporation IX, our wholly-owned, special purpose finance
subsidiary ("BRFC IX"), and BRFC IX sold the receivables to an owner's trust (a
qualified special purpose entity) without recourse to us or BRFC IX except for
breaches of certain customary representations and warranties at the time of
sale. We did not enter into any guarantees in connection with
69
the BB&T Purchase Facility. The 2004 BB&T Purchase Facility had detailed
requirements with respect to the eligibility of receivables for purchase; and,
fundings under the BB&T Purchase Facility were subject to certain conditions
precedent. Under the 2004 BB&T Purchase Facility, a variable purchase price of
approximately 85.0% of the principal balance of the receivables sold, subject to
certain terms and conditions, was paid at closing in cash. The balance of the
purchase price was deferred until such time as BB&T had received a specified
return and all servicing, custodial, agent and similar fees and expenses had
been paid. The specified return was equal to the commercial paper rate or London
Interbank Offered Rate ("LIBOR"), as applicable, plus an additional return of
1.15%, subject to use of alternate return rates in certain circumstances. In
addition, we paid BB&T structuring and other fees totaling $1.1 million in
December 2004, which was expensed over the funding period of the 2004 BB&T
Purchase Facility. We acted as servicer under the 2004 BB&T Purchase Facility
for a fee. The BB&T Purchase Facility expired on December 30, 2005.
2005 Term Securitization
On December 28, 2005, BB&T Capital Markets, a division of Scott &
Stringfellow, Inc., consummated a $203.8 million private offering and sale of
vacation ownership receivable-backed securities (the "2005 Term
Securitization"). The $191.1 million in aggregate principal of vacation
ownership receivables offered and sold in the 2005 Term Securitization were
previously sold to BRFC IX. The proceeds of the 2005 Term Securitization were
used to pay BB&T all amounts outstanding under the 2004 BB&T Purchase Facility,
pay fees associated with the transaction to third-parties, deposit initial
amounts in a required cash reserve account and the escrow accounts for the
Pre-funded Receivables (see below) and provide net cash proceeds of $1.1 million
to us.
In addition, the 2005 Term Securitization allowed for an additional $35.3
million in aggregate principal of our qualifying vacation ownership receivables
(the "Pre-funded Receivables") that could be sold by us through March 28, 2006
to Bluegreen Receivables Finance Corporation X, our wholly-owned, special
purpose finance subsidiary ("BRFC X"), which would then sell the Pre-funded
Receivables to BXG Receivables Note Trust 2005-A ("2005-A"), a qualified special
purpose entity, without recourse to us or BRFC X, except for breaches of certain
representations and warranties at the time of sale. The proceeds of $31.8
million (at an advance rate of 90%) as payment for the Pre-funded Receivables
were deposited into an escrow account by the Indenture Trustee of the 2005 Term
Securitization until such receivables were actually sold by us to BRFC X. During
2005, we sold $16.7 million in Pre-funded Receivables to BRFC X and the $15.1
million purchase price was disbursed to us from the escrow account. During 2006,
the Company sold the remaining $18.6 million in pre-funded receivables to BRFC X
and the $16.7 purchase price was disbursed to us from the escrow account.
2006 GE Purchase Facility
In March 2006, we executed agreements for a vacation ownership receivables
purchase facility (the "2006 GE Purchase Facility") with General Electric Real
Estate ("GE"). The GE Purchase Facility utilizes an owner's trust structure,
pursuant to which we sell receivables to Bluegreen Receivables Finance
Corporation XI, our wholly-owned, special purpose finance subsidiary ("BRFC
XI"), and BRFC XI sells the receivables to an owner's trust (a qualified special
purpose entity) without recourse to us or BRFC XI 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 2006 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 the2006 GE Purchase Facility, a
variable purchase price of approximately 90% of the principal balance of the
receivables sold, subject to adjustment under 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 is entitled to receive a return equal to the applicable Swap Rate
(which is essentially a published interest swap arrangement rate as defined in
the 2006 GE Purchase Facility agreements) plus 2.35%, subject to use of
alternate return rates in certain circumstances. In addition, we paid GE a
structuring fee of approximately $437,500 in March 2006. Subject to the terms of
the agreements, we will act as servicer under the 2006 GE Purchase Facility for
a fee.
The 2006 GE Purchase Facility allows for sales of notes receivable for a
cumulative purchase price of up to $125.0 million through March 2008. During
2006, the Company sold $72.0 million in vacation ownership receivables for an
aggregate purchase price of $64.8 million under the GE Purchase Facility.
2006 Term Securitization
On September 21, 2006, BB&T Capital Markets, served as initial purchaser
and placement agent for a private offering and sale of $139.2 million of our
vacation ownership receivable-backed securities (the "2006 Term
70
Securitization"). Approximately $153.0 million in aggregate principal of
vacation ownership receivables were securitized in this transaction, including:
(1) $75.7 million in aggregate principal of receivables that were previously
transferred under an existing vacation ownership receivables purchase facility
in which BB&T serves as Agent (see 2006 BB&T Purchase Facility below); (2) $38.0
million of vacation ownership receivables owned by us immediately prior to the
2006 Term Securitization and 3) an additional $39.3 million in aggregate
principal of our qualifying vacation ownership receivables (the "2006 Pre-funded
Receivables") that could be sold by us through December 22, 2006. Bluegreen
Receivables Finance Corporation XII, our wholly-owned special purpose finance
subsidiary ("BRFC XII") would then sell the 2006 Pre-funded Receivables to BXG
Receivables Note Trust 2006-B, an owner's trust (a qualified special purpose
entity), without recourse to us or BRFC XII, except for breaches of certain
representations and warranties at the time of sale. The expected proceeds of
$35.7 million (at an advance rate of 91%) as payment for the 2006 Pre-funded
Receivables were originally deposited into an escrow account by the indenture
trustee of the 2006 Term Securitization. During 2006, the Company sold $39.3
million in 2006 Pre-funded Receivables to BRFC XII and the $35.7 million
purchase price was disbursed to us from the escrow account. The proceeds were
used by us for general operating purposes.
6. Retained Interests in Notes Receivable Sold
Retained Interests in Notes Receivable Sold
Our retained interests in notes receivable sold, which are classified as
available-for-sale investments, and their associated unrealized gains are set
forth below (in thousands).
Gross
Amortized Unrealized
As of December 31, 2005: Cost Gain Fair Value
------------------------ --------- ---------- ----------
2002 Term Securitization ................. $ 18,491 $ -- $ 18,491
2004 Term Securitization (see Note 5) .... 33,371 3,373 36,744
2004 GE Purchase Facility (see Note 5) ... 6,284 500 6,784
2005 Term Securitization (see Note 5) .... 33,606 10,071 43,677
--------- --------- ---------
Total .............................. $ 91,752 $ 13,944 $ 105,696
========= ========= =========
Gross
Amortized Unrealized
As of December 31, 2006: Cost Gain Fair Value
------------------------ --------- ---------- ----------
2002 Term Securitization ................. $ 12,643 $ 472 $ 13,115
2004 Term Securitization (see Note 5) .... 17,784 2,785 20,569
2004 GE Purchase Facility (see Note 5) ... 6,695 56 6,751
2005 Term Securitization (see Note 5) .... 42,469 8,291 50,760
2006 GE Purchase Facility (see Note 5) ... 7,405 1,264 8,669
2006 Term Securitization (see Note 5) .... 23,253 7,506 30,759
--------- --------- ---------
Total .............................. $ 110,249 $ 20,374 $ 130,623
========= ========= =========
As of December 31, 2005 and 2006 there were no gross unrealized losses in
our retained interest in notes receivable sold.
The contractual maturities of our retained interest in notes receivable
sold as of December 31, 2006, based on the final maturity dates of the
underlying notes receivable, range from five to ten years.
Amortized
Cost Fair Value
--------- ----------
After one year but within five........ $ -- $ --
After five years but within ten....... 110,249 130,623
--------- ---------
Total ........................... $ 110,249 $ 130,623
========= =========
The following assumptions were used to measure the fair value of the above
retained interests as of December 31, 2005: prepayment rates which decrease from
20% to 9% per annum as the portfolios mature; loss severity rates ranging from
30% to 73%; default rates which decrease from 10% to 1% per annum as the
portfolios mature; and discount rates ranging from 8% to 9%.
71
The following assumptions were used to measure the fair value of the above
retained interests as of December 31, 2006: prepayment rates which decrease from
27% to 6% per annum as the portfolios mature; loss severity rates ranging from
30% to 71%; default rates which decrease from 11% to 1% per annum as the
portfolios mature; and discount rates ranging from 8% to 9%.
The following table shows the hypothetical fair value of our retained
interests in notes receivable sold based on a 10% and a 20% adverse change in
each of the assumptions used to measure the fair value of those retained
interests (dollars in thousands):
Hypothetical Fair Value at December 31, 2006
--------------------------------------------
Adverse 2004 GE 2006 GE
Change 2002 Term 2004 Term Purchase 2005 Term Purchase 2006 Term
Percentage Securitization Securitization Facility Securitization Facility Securitization
---------- -------------- -------------- -------- -------------- -------- --------------
Prepayment rate: 10% $ 12,961 $ 20,195 $ 6,712 $ 49,814 $ 8,545 $ 30,194
20% 12,812 19,836 6,674 48,925 8,427 29,655
Loss severity rate: 10% 12,884 19,977 6,513 49,621 7,936 29,860
20% 12,653 19,384 6,275 48,481 7,206 28,961
Default rate: 10% 12,869 19,916 6,434 49,541 7,765 29,552
20% 12,626 19,274 6,125 48,340 6,883 28,367
Discount rate: 10% 12,882 20,222 6,594 49,998 8,360 30,023
20% 12,657 19,886 6,443 49,261 8,065 29,315
The table below summarizes certain cash flows received from and (paid to)
our qualifying special purpose finance subsidiaries (in thousands):
For the Year Ended December 31,
-----------------------------------
2004 2005 2006
---- ---- ----
Proceeds from new sales of receivables ....................... $ 192,580 $ 198,260 $ 218,455
Collections on previously sold receivables ................... (65,123) (104,863) (145,096)
Servicing fees received ...................................... 2,931 4,969 6,955
Purchases of foreclosed assets ............................... -- (631) (1,122)
Resales of foreclosed assets ................................. (16,886) (30,573) (40,566)
Remarketing fees received .................................... 8,707 16,793 23,163
Cash received on retained interests in notes receivable sold.. 8,688 11,016 30,032
Cash paid to fund required reserve accounts .................. (3,469) (6,445) (13,495)
Purchase of upgraded accounts ................................ -- (2,443) (17,447)
Quantitative information about the portfolios of vacation ownership notes
receivable previously sold without recourse in which we hold the above retained
interests is as follows (in thousands):
As of Year Ended
December 31, 2006 December 31, 2006
------------------------- -----------------
Principal
Total Amount
Principal of Loans Credit
Amount of More than 60 Losses, Net
Loans Days Past Due of Recoveries
--------- ------------- -------------
2002 Term Securitization ...................................... $ 45,889 $ 1,308 $ 1,899
2004 Term Securitization ...................................... 82,968 2,138 4,261
2004 GE Purchase Facility ..................................... 26,390 426 --
2005 Term Securitization ...................................... 176,357 5,250 6,281
2006 Term Securitization ...................................... 143,645 3,191 --
2006 GE Purchase Facility ..................................... 65,286 1,052 --
72
The net unrealized gain on our retained interests in notes receivable
sold, which is presented as a separate component of our shareholders' equity net
of income taxes, was approximately $8.6 million and $12.6 million as of December
31, 2005 and 2006, respectively.
During the years ended December 31, 2004, 2005, and 2006, we recorded an
other-than-temporary decrease of approximately $1.2 million, $539,000 and
$39,000, respectively, in the fair value of our retained interest associated
with the 2002 Term Securitization, based on higher than projected default rates
in the portfolio of receivables securitized. This charge has been netted against
interest income on our consolidated statements of income.
7. Inventory
Our net inventory holdings, summarized by division, are set forth below
(in thousands).
As of December 31,
---------------------------
2005 2006
---- ----
Bluegreen Resorts ...................... $ 173,338 $ 233,290
Bluegreen Communities .................. 67,631 116,043
---------- ----------
$ 240,969 $ 349,333
========== ==========
Bluegreen Resorts inventory as of December 31, 2005, consisted of land
inventory of $19.2 million, $54.2 million of construction-in-progress and $99.9
million of completed vacation ownership units. Bluegreen Resorts inventory as of
December 31, 2006, consisted of land inventory of $46.6 million, $85.4 million
of construction-in-progress and $101.3 million of completed vacation ownership
units.
Interest capitalized during the years ended December 31, 2004, 2005, and
2006 totaled $7.9 million, $10.0 million, and $12.1 million, respectively. The
interest expense reflected in our consolidated statements of income is net of
capitalized interest.
8. Property and Equipment
The table below sets forth the property and equipment held by us (in
thousands).
December 31,
----------------------
Useful Life 2005 2006
----------- ---- ----
Office equipment, furniture and fixtures ................... 3-14 years $ 50,720 $ 58,795
Golf course land, land improvements, buildings and equipment 7-39 years 32,497 33,684
Land, buildings and building improvements .................. 3-31 years 25,902 35,254
Leasehold improvements ..................................... 2-14 years 12,041 16,846
Aircraft ................................................... 5 years 1,415 1,415
Vehicles and equipment ..................................... 3-5 years 1,129 1,044
--------- ---------
123,704 147,038
Accumulated depreciation and amortization of leasehold
improvements .............................................. (44,070) (54,593)
--------- ---------
Total ................................................. $ 79,634 $ 92,445
========= =========
9. Receivable-Backed Notes Payable
2006 BB&T Purchase Facility. In May 2006, we executed agreements for a
vacation ownership receivables purchase facility (the "2006 BB&T Purchase
Facility") with BB&T. While ownership of the receivables is transferred for
legal purposes, the transfer of the receivables under the facility are accounted
for as a financing transaction for financial accounting purposes. Accordingly,
the receivables continue to be reflected as assets and the associated
obligations are reflected as liabilities on our balance sheet. The BB&T Purchase
Facility utilizes an owner's trust structure, pursuant to which we transfer
receivables to Bluegreen Timeshare Finance Corporation I, our wholly-owned,
special purpose finance subsidiary ("BTFC I"), and BTFC I subsequently transfers
the receivables to an owner's trust without recourse to us or BTFC I, except for
breaches of certain customary representations and warranties at the time of
transfer. We did not enter into any guarantees in connection with the BB&T
Purchase Facility. The 2006 BB&T Purchase Facility has detailed requirements
with respect to the eligibility of receivables, and fundings under the BB&T
Purchase Facility are subject to certain conditions precedent. Under the 2006
BB&T Purchase Facility, a variable purchase price of approximately 85% of the
principal balance of the receivables transferred, subject to certain terms and
73
conditions, is paid at closing in cash. The balance of the purchase price is
deferred until such time as BB&T and other liquidity providers arranged by BB&T
have in aggregate received a specified return (the "Specified Return") and all
servicing, custodial, agent and similar fees and expenses have been paid. The
Specified Return is equal to either the commercial paper rate or LIBOR rate plus
1.25%, subject to use of alternate return rates in certain circumstances. In
addition, we will pay BB&T structuring and other fees totaling $1.7 million over
the term of the facility and we will act as servicer under the 2006 BB&T
Purchase Facility for a fee. The BB&T Purchase Facility allows for transfers of
notes receivable for a cumulative purchase price of up to $137.5 million, on a
revolving basis, through May 2008. During 2006, we borrowed $68.4 million under
the 2006 BB&T Purchase Facility. All amounts borrowed under this facility had
been repaid as of December 31, 2006, through principal and interest payments
received on transferred receivables and the 2006 Term Securitization described
above. As such, there were no outstanding amounts due under this facility as of
December 31, 2006 and the remaining availability under the BB&T Purchase
Facility was $137.5 million.
The GMAC Receivables Facility. 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, as amended, expires on February 15, 2008, and outstanding borrowings
mature no later than February 15, 2015. 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 4.00% (9.33% at December 31,
2006). During the year ended December 31, 2006, we did not pledge any vacation
ownership receivables under the GMAC Receivables Facility. As of December 31,
2005 and 2006, $25.4 million and $16.9 million, respectively, were outstanding
under the GMAC Receivables Facility.
The Foothill Facility. We are in documentation for the renewal of the
advance period under 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 up to $10.0 million of the total facility available for the
pledge of Bluegreen Resorts' receivables (the "Foothill Facility"). The Foothill
Facility requires principal payments based on agreed-upon release prices as
sales of homesites in the encumbered communities are closed and bears interest
at the prime lending rate plus 1.25% (9.5% December 31, 2006). Interest payments
are due monthly. The interest rate charged on outstanding receivable borrowings
under the Foothill Facility, as amended, is the prime lending rate plus 0.25%
(8.5% at December 31, 2006) 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% (8.75% at December 31, 2006). All principal
and interest payments received on pledged receivables are applied to principal
and interest due under the Foothill Facility. At December 31, 2006, the
outstanding principal balance under the facility was $2.0 million, approximately
$1.4 million of which relates to Bluegreen Communities' receivables borrowings
and approximately $0.6 million of which relate to Bluegreen Resorts' receivables
borrowings under the Foothill Facility. There was $3.2 million outstanding as of
December 31, 2005. Outstanding indebtedness collateralized by receivables is due
December 31, 2008.
The Textron 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. The borrowing period for vacation ownership receivables loans under the
Textron Facility expired on March 1, 2006, and outstanding vacation ownership
receivables borrowings mature no later than March 31, 2009. Receivable-backed
borrowings under the Textron Facility bear interest at the prime lending rate
plus 1.00% (9.25% at December 31, 2006), subject to a 6.00% minimum interest
rate. During the year ended December 31, 2005, we borrowed $10.5 million
collateralized by $11.6 million of vacation ownership receivables. As of
December 31, 2006, $2.8 million was outstanding under the Textron Facility, all
of which was receivable-backed debt.
The Resort Finance Facility. 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 "RFL Facility") originally executed between
ING and us in April 2002. On September 30, 2004, we executed an extension of the
RFL Facility to allow for borrowings on notes receivable for a cumulative
advance amount of up to $100.0 million on a revolving basis through September
29, 2005. On September 29, 2005, we executed an extension of the RFL Facility to
December 29, 2005.
The RFL Facility utilized an owner's trust structure, pursuant to which we
pledged receivables to Bluegreen Receivables Finance Corporation V, one of our
wholly-owned, special purpose finance subsidiaries ("BRFC V"), and
74
BRFC V pledged the receivables to an owner's 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 funding. We did not enter into any
guarantees in connection with the RFL Facility. Under the RFL Facility, a
variable advance rate of 85.00% of the principal balance of the receivables
pledged, subject to certain customary terms and conditions, was paid in cash at
funding. The balance of advance was deferred until such time as RFL had received
a specified return and all servicing, custodial, agent and similar fees and
expenses have been paid. RFL earned a return equal to LIBOR plus an additional
return ranging from 2.00% to 3.25% (based on the amount outstanding under the
RFL Facility) from October 8, 2003 through September 30, 2004, and earned a
return equal to LIBOR plus 3.25% through December 29, 2005, subject to the use
of alternate return rates in certain circumstances. In addition, RFL received a
0.25% annual facility fee. Notes receivable financed under the RFL Facility
qualified as legal sales but were treated as borrowings in our consolidated
financial statements in compliance with SFAS No. 140.
On December 28, 2005, in connection with the 2005 Term Securitization (See
Note 5) we paid off $15.8 million of receivable-backed notes payable was paid
off and $17.5 million of aggregate principal balance of notes receivable
previously pledged under RFL Facility was sold. Our ability to borrow under the
RFL Facility expired on December 29, 2005.
At December 31, 2006, $24.3 million in notes receivable secured our $21.1
million in receivable-backed notes payable.
10. Lines-of-Credit and Notes Payable
We have outstanding borrowings with various financial institutions and
other lenders, which have been used to finance the acquisition and development
of our inventory and to fund operations. Financial data related to our borrowing
facilities is set forth below (in thousands).
December 31, December 31,
2005 2006
---- ----
Lines-of-credit secured by inventory and golf courses with a carrying value
of $155.3 million at December 31, 2006. Interest rates range from 8.13% to
9.09% at December 31, 2005 and 9.25% to 9.83% at December 31, 2006.
Maturities range from October 2007 to September 2009 ............................... $ 35,255 $ 90,974
Notes and mortgage notes secured by certain inventory, property, equipment
and investments with an aggregate carrying value of $59.3 million at December
31, 2006. Interest rates ranged from 4.75% to 8.13% at December 31, 2005 to
4.75% to 9.50% at December 31, 2006. Maturities range from on demand to May 2026 ... 24,057 32,736
Lease obligations secured by the underlying assets with an aggregate carrying
value of $0.7 million at December 31, 2006. Imputed interest rates ranging
from 3.29% to 14.20% at December 31, 2005 and from 3.29% to 14.20% at
December 31, 2006. Maturities range from March 2007 to October 2010 ............... 2,116 702
--------- ---------
Total ........................................................................... $ 61,428 $ 124,412
========= =========
The table below sets forth the contractual minimum principal payments
required on our lines-of-credit and notes payable and capital lease obligations
for each year subsequent to December 31, 2006. Such minimum contractual payments
may differ from actual payments due to the effect of principal payments required
on a homesite or VOI release basis for certain of the above obligations (in
thousands).
2007............ $ 39,541
2008............ 8,583
2009............ 72,433
2010............ 278
2011............ 231
Thereafter...... 3,346
---------
Total......... $ 124,412
=========
The following is a discussion of our significant credit facilities and
significant new borrowings during the year ended December 31, 2006:
The GMAC AD&C Facility. In September 2003, RFC also provided us with an
acquisition, development and construction revolving credit facility for
Bluegreen Resorts (the "GMAC AD&C Facility"). The borrowing period on
75
the GMAC AD&C Facility, as amended, expires on February 15, 2008, and
outstanding borrowings mature no later than August 15, 2013, 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. Interest payments are due
monthly. During the year ended December 31, 2006, we borrowed $53.4 million
under the GMAC AD&C Facility to fund the development of VOIs at The Fountains
and the Carolina Grande resorts and to finance the acquisition of property in
Las Vegas, Nevada and Williamsburg, Virginia. As of December 31, 2006 and 2005,
$38.6 million and $33.1 million, respectively, were outstanding under the GMAC
AD&C Facility.
The RFL A&D Facility. In January 2005, we entered into a revolving credit
facility with RFL (the "RFL A&D Facility"). Until its expiration in January
2007, we could use the proceeds from the RFL A&D Facility to finance the
acquisition and development of vacation ownership resorts. We were required to
pay a commitment fee equal to 1.00% of the $50.0 million facility amount, which
is paid at the time of each borrowing under the RFL A&D Facility as 1.00% of
each borrowing with the balance being paid on the unutilized facility amount on
January 10, 2007. In addition, we were required to pay a program fee equal to
0.125% of the $50.0 million facility amount per annum, payable monthly. The RFL
A&D Facility documents included customary conditions to funding, acceleration
provisions and certain financial affirmative and negative covenants. There were
no outstanding amounts due under this facility as of December 31, 2006 and $9.5
million outstanding as of December 31, 2005.
The GMAC Communities Facility. We have a revolving credit facility with
RFC (the "GMAC Communities Facility") for the purpose of financing our Bluegreen
Communities real estate acquisitions and development activities. 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 (Black Mountain, North Carolina); Lake
Ridge at Joe Pool Lake (Cedar Hill and Grand Prairie, Texas); Mystic Shores at
Canyon Lake (Spring Branch, Texas); Yellowstone Creek Ranch (Walsenburg,
Colorado); Havenwood at Hunter's Crossing (New Braunfels, Texas); The Bridges at
Preston Crossing (Grayson County, Texas); King Oaks (College Station, Texas) and
Vintage Oaks at the Vineyard (New Braunfels, Texas). 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. Principal payments are effected through agreed-upon
release prices paid to RFC, as homesites in the Secured Projects are sold.
Interest payments are due 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. The total
borrowings under this facility during the year ended December 31, 2006 was $88.1
million. As of December 31, 2006 and 2005, $52.3 million and $16.5 million,
respectively, was outstanding under the GMAC Communities Facility.
The Wachovia Line-of-Credit. On July 26, 2006, we executed agreements to
renew our $15.0 million unsecured line-of-credit with Wachovia Bank, N.A.
Amounts borrowed under the line bear interest at 30-day LIBOR plus 2.00% (7.33%
at December 31, 2006). Interest is due monthly and all outstanding amounts are
due on June 30, 2007. We can only borrow an amount under the line-of-credit
which is less than the remaining availability under our current, active vacation
ownership receivables purchase facilities 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. This line-of-credit is an available source of
short-term liquidity for us. During 2006, we borrowed and repaid $6.5 million
under this line-of-credit and as of December 31, 2006, there were no borrowings
outstanding under the line. However, during 2006, an aggregate of $523,000 of
irrevocable letters of credit, which expired on December 31, 2006, were provided
under this line-of-credit. As such, no outstanding amounts were due under this
facility as of December 31, 2005 and 2006.
11. Senior Secured Notes Payable
On April 1, 1998, we consummated a private placement offering (the
"Offering") of $110.0 million in aggregate principal amount of 10.50% senior
secured notes due April 1, 2008 (the "Notes"). On June 27, 2005, we used the
proceeds from our junior subordinated debentures to redeem $55.0 million in
aggregate principal amount of the Notes at a redemption price of 101.75% plus
accrued and unpaid interest through June 26, 2005 of approximately $1.4 million.
Interest on the Notes is payable semiannually on April 1 and October 1 of each
year. The Notes became redeemable at our option, in whole or in part, in cash,
on April 1, 2003 and annually thereafter, together with accrued and unpaid
interest, if any, to the date of redemption at the following redemption prices:
2003 -- 105.25%; 2004 -- 103.50%; 2005 -- 101.75% and 2006 and thereafter --
100.00%. As of December 31, 2005 and 2006, the Notes totaled $55.0 million.
76
The Notes are our senior obligations and rank pari passu in right of
payment with all of our existing and future senior indebtedness and rank senior
in right of payment to all of our existing and future subordinated obligations.
None of the assets of Bluegreen Corporation secures its 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 thereon. The Notes
are unconditionally guaranteed, jointly and severally, by each of our
subsidiaries (the "Subsidiary Guarantors"), with the exception of the Joint
Venture, 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 covers the full amount of the Notes and each of the Subsidiary
Guarantors is 100% owned, directly or indirectly, by us. The Note guarantees are
senior obligations of each Subsidiary Guarantor and rank pari passu in right of
payment with all existing and future senior indebtedness of each such Subsidiary
Guarantor and senior in right of payment to all existing and future subordinated
indebtedness of each such Subsidiary Guarantor. The Note guarantees of certain
Subsidiary Guarantors are secured by a first mortgage (subject to customary
exceptions) or similar instrument (each, a "Mortgage") on certain Bluegreen
Communities properties of such Subsidiary Guarantors (the "Pledged Properties").
Absent the occurrence and the continuance of an event of default, the Notes
trustee is required to release its lien on the Pledged Properties as property is
sold and the Trustee does not have a lien on the proceeds of any such sale. As
of December 31, 2006, the Pledged Properties had an aggregate net carrying value
of approximately $932,000. The Notes' indenture includes certain negative
covenants including restrictions on the incurrence of debt and liens and on
payments of cash dividends.
Supplemental financial information for Bluegreen Corporation, our combined
Non-Guarantor Subsidiaries and our combined Subsidiary Guarantors is presented
below.
77
CONDENSED CONSOLIDATING BALANCE SHEETS
(dollars in thousands)
December 31, 2005
------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
ASSETS
Cash and cash equivalents .................... $ 55,708 $ 15,443 $ 13,553 $ -- $ 84,704
Contracts receivable, net .................... -- 1,801 25,672 -- 27,473
Intercompany receivable ...................... 92,641 -- -- (92,641) --
Notes receivable, net ........................ -- 48,294 79,489 -- 127,783
Inventory, net ............................... -- 17,857 223,112 -- 240,969
Retained interests in notes receivable sold .. -- 105,696 -- -- 105,696
Property and equipment, net .................. 14,569 1,330 63,735 -- 79,634
Investments in subsidiaries .................. 265,023 -- 3,230 (268,253) --
Other assets ................................. 4,028 4,666 19,290 -- 27,984
--------- --------- --------- ---------- ---------
Total assets .......................... $ 431,969 $ 195,087 $ 428,081 $ (360,894) $ 694,243
========= ========= ========= ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and
other ...................................... $ 20,214 $ 15,077 $ 48,935 $ -- $ 84,226
Intercompany payable ........................ -- 4,563 88,078 (92,641) --
Deferred income taxes ....................... (21,798) 41,824 55,378 -- 75,404
Lines-of-credit and notes payable ........... 5,607 27,064 64,488 -- 97,159
10.50% senior secured notes payable ......... 55,000 -- -- -- 55,000
Junior subordinated debentures .............. 59,280 -- -- -- 59,280
--------- --------- --------- ---------- ---------
Total liabilities ......................... 118,303 88,528 256,879 (92,641) 371,069
Minority interest ........................... -- -- -- 9,508 9,508
Total shareholders' equity .................. 313,666 106,559 171,202 (277,761) 313,666
--------- --------- --------- ---------- ---------
Total liabilities and shareholders' equity $ 431,969 $ 195,087 $ 428,081 $ (360,894) $ 694,243
========= ========= ========= ========== =========
78
December 31, 2006
------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
ASSETS
Cash and cash equivalents ....................... $ 36,316 $ 17,002 $ 17,830 $ -- $ 71,148
Contracts receivable, net ....................... -- 1,222 22,634 -- 23,856
Intercompany receivable ......................... 159,488 -- -- (159,488) --
Notes receivable, net ........................... -- 57,845 86,406 -- 144,251
Inventory, net .................................. -- 17,967 331,366 -- 349,333
Retained interests in notes receivable sold ..... -- 130,623 -- -- 130,623
Property and equipment, net ..................... 16,110 933 75,402 -- 92,445
Investments in subsidiaries ..................... 296,593 -- 3,230 (299,823) --
Other assets .................................... 7,860 4,582 30,114 -- 42,556
---------- ---------- ---------- ----------- ----------
Total assets ............................. $ 516,367 $ 230,174 $ 566,982 $ (459,311) $ 854,212
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and
other ......................................... $ 33,303 $ 20,717 $ 54,173 $ -- $ 108,193
Intercompany payable ........................... -- 2,458 157,030 (159,488) --
Deferred income taxes .......................... (19,813) 47,864 59,573 -- 87,624
Lines-of-credit and notes payable .............. 4,646 18,914 121,902 -- 145,462
10.50% senior secured notes payable ............ 55,000 -- -- -- 55,000
Junior subordinated debentures ................. 90,208 -- -- -- 90,208
---------- ---------- ---------- ----------- ----------
Total liabilities ............................ 163,344 89,953 392,678 (159,488) 486,487
Minority interest .............................. -- -- -- 14,702 14,702
Total shareholders' equity ..................... 353,023 140,221 174,304 (314,525) 353,023
---------- ---------- ---------- ----------- ----------
Total liabilities and shareholders' equity $ 516,367 $ 230,174 $ 566,982 $ (459,311) $ 854,212
========== ========== ========== =========== ==========
79
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(dollars in thousands)
Year Ended December 31, 2004
------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
REVENUES
Sales of real estate .......................... $ -- $ 48,572 $ 453,836 $ -- $ 502,408
Other resort and communities operations
revenue ...................................... -- 6,740 59,669 -- 66,409
Management fees ............................... 53,664 -- -- (53,664) --
Equity income from subsidiaries ............... 39,598 -- -- (39,598) --
Interest income ............................... 339 23,346 12,254 -- 35,939
Gain on sales of notes receivable ............. -- 25,972 -- -- 25,972
---------- ---------- ---------- ----------- ----------
93,601 104,630 525,759 (93,262) 630,728
COSTS AND EXPENSES
Cost of real estate sales ..................... -- 13,702 166,026 -- 179,728
Cost of other resort and communities operations -- 4,574 66,211 -- 70,785
Management fees ............................... -- 1,088 52,576 (53,664) --
Selling, general and administrative expenses .. 40,615 22,814 198,995 -- 262,424
Interest expense .............................. 8,452 4,994 4,979 -- 18,425
Provision for loan losses ..................... -- 18,474 5,960 -- 24,434
Other expense ................................. 121 1,068 477 -- 1,666
---------- ---------- ---------- ----------- ----------
49,188 66,714 495,224 (53,664) 557,462
---------- ---------- ---------- ----------- ----------
Income before minority interest and provision
for income taxes ............................ 44,413 37,916 30,535 (39,598) 73,226
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 4,065 4,065
---------- ---------- ---------- ----------- ----------
Income before provision for income taxes ...... 44,413 37,916 30,535 (43,663) 69,201
Provision for income taxes .................... 1,854 13,032 11,756 -- 26,642
---------- ---------- ---------- ----------- ----------
Net income .................................... $ 42,559 $ 24,884 $ 18,779 $ (43,663) $ 42,559
========== ========== ========== =========== ==========
80
Year Ended December 31, 2005
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
REVENUES
Sales of real estate .......................... $ -- $ 55,007 $ 495,328 $ -- $ 550,335
Other resort and communities operations
revenue ...................................... -- 13,236 60,561 -- 73,797
Management fees ............................... 58,360 -- -- (58,360) --
Equity income from subsidiaries ............... 52,045 -- -- (52,045) --
Interest income ............................... 1,379 17,294 16,125 -- 34,798
Gain on sales of notes receivable ............. -- 25,226 -- -- 25,226
---------- ---------- ---------- ----------- ----------
111,784 110,763 572,014 (110,405) 684,156
COSTS AND EXPENSES
Cost of real estate sales ..................... -- 15,955 161,845 -- 177,800
Cost of other resort and communities
operations .................................. -- 5,056 72,261 -- 77,317
Management fees ............................... -- 1,158 57,202 (58,360) --
Selling, general and administrative expenses .. 61,934 27,297 211,008 -- 300,239
Interest expense .............................. 4,446 2,875 7,153 -- 14,474
Provision for loan losses ..................... -- 1,416 26,171 -- 27,587
Other expense ................................. 1,967 3,117 1,123 -- 6,207
---------- ---------- ---------- ----------- ----------
68,347 56,874 536,763 (58,360) 603,624
---------- ---------- ---------- ----------- ----------
Income before minority interest and provision
for income taxes ............................ 43,437 53,889 35,251 (52,045) 80,532
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 4,839 4,839
---------- ---------- ---------- ----------- ----------
Income before provision for income taxes ...... 43,437 53,889 35,251 (56,884) 75,693
(Benefit) provision for income taxes .......... (3,114) 19,502 12,754 -- 29,142
---------- ---------- ---------- ----------- ----------
Net income (loss) ............................. $ 46,551 $ 34,387 $ 22,497 $ (56,884) $ 46,551
========== ========== ========== =========== ==========
81
Year Ended December 31, 2006
-----------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
REVENUES
Sales of real estate ........................... $ -- $ 58,568 $ 504,578 $ -- $ 563,146
Other resort and communities operations
revenue ....................................... -- 14,198 49,412 -- 63,610
Management fees ................................ 57,667 -- -- (57,667) --
Equity income from subsidiaries ................ 26,572 -- -- (26,572) --
Interest income ................................ 1,768 24,753 14,244 -- 40,765
Gain on sales of notes receivable .............. -- 5,852 -- -- 5,852
---------- ----------- ---------- ----------- -----------
86,007 103,371 568,234 (84,239) 673,373
COSTS AND EXPENSES
Cost of real estate sales ...................... -- 16,134 162,920 -- 179,054
Cost of other resort and communities
operations .................................... -- 4,913 48,280 -- 53,193
Management fees ................................ -- 844 56,823 (57,667) --
Selling, general and administrative expenses ... 48,158 29,953 278,878 -- 356,989
Interest expense ............................... 4,853 4,106 9,826 -- 18,785
Other expense .................................. 1,194 1,193 474 -- 2,861
---------- ----------- ---------- ----------- -----------
54,205 57,143 557,201 (57,667) 610,882
---------- ----------- ---------- ----------- -----------
Income before minority interest and provision
for income taxes ............................. 31,802 46,228 11,033 (26,572) 62,491
Minority interest in income of consolidated
subsidiary ................................... -- -- -- 7,319 7,319
---------- ----------- ---------- ----------- -----------
Income before provision for income
taxes ........................................ 31,802 46,228 11,033 (33,891) 55,172
Provision for income taxes ..................... 1,985 14,681 4,195 -- 20,861
---------- ----------- ---------- ----------- -----------
Income before cumulative effect of change in
accounting principle ......................... 29,817 31,547 6,838 (33,891) 34,311
Cumulative effect of change in accounting
principle, net of tax ........................ -- (1,942) (3,736) -- (5,678)
Minority interest in income of cumulative effect
of change in accounting principle ............ -- -- -- 1,184 1,184
---------- ----------- ---------- ----------- -----------
Net income .................................... $ 29,817 $ 29,605 $ 3,102 $ (32,707) $ 29,817
========== =========== ========== =========== ===========
82
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31, 2004
----------------------------
(restated)
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------ ---------- ------------
Operating activities:
Net cash provided by operating activities .................. $ 41,212 $ 85,300 $ 34,078 $ 160,590
----------- ------------- ---------- ------------
Investing activities:
Cash received from retained interests in notes receivable
sold ..................................................... -- 8,688 -- 8,688
Business acquisition ....................................... -- -- (825) (825)
Purchases of property and equipment ........................ (5,380) (643) (12,386) (18,409)
Proceeds from sales of property and equipment .............. -- -- 8 8
----------- ------------- ---------- ------------
Net cash (used) provided by investing activities ............ (5,380) 8,045 (13,203) (10,538)
----------- ------------- ---------- ------------
Financing activities:
Proceeds from borrowings collateralized by notes receivable -- 88,760 16,920 105,680
Payments on borrowings collateralized by notes receivable .. -- (167,694) (6,820) (174,514)
Proceeds from borrowings under line-of-credit facilities and
notes payable ............................................. -- 3,179 57,478 60,657
Payments under line-of-credit facilities and notes payable . (1,769) (8,525) (90,185) (100,479)
Payment of 8.25% subordinated convertible debentures ....... (273) -- -- (273)
Payment of debt issuance costs ............................. -- (3,920) (1,811) (5,731)
Proceeds from exercise of employee and director stock
options ................................................... 6,594 -- -- 6,594
----------- ------------- ---------- ------------
Net cash provided (used) by financing activities ............ 4,552 (88,200) (24,418) (108,066)
----------- ------------- ---------- ------------
Net increase (decrease) in cash and cash equivalents ........ 40,384 5,145 (3,543) 41,986
Cash and cash equivalents at beginning of year .............. 29,872 13,648 15,059 58,579
----------- ------------- ---------- ------------
Cash and cash equivalents at end of year .................... 70,256 18,793 11,516 100,565
Restricted cash and cash equivalents at end of year ......... (173) (9,509) (11,741) (21,423)
----------- ------------- ---------- ------------
Unrestricted cash and cash equivalents at end of year ....... $ 70,083 $ 9,284 $ (225) $ 79,142
=========== ============= ========== ============
83
Year Ended December 31, 2005
----------------------------------------------------------
(restated)
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------ ---------- ------------
Operating activities:
Net cash (used) provided by operating activities ............ $ (10,409) $ 12,777 $ 93,157 $ 95,525
----------- ------------- ---------- ------------
Investing activities:
Cash received from retained interests in notes receivable
sold ...................................................... -- 11,016 -- 11,016
Investment in statutory business trust ..................... (1,780) -- -- (1,780)
Installment payments on business acquisition ............... -- -- (675) (675)
Purchases of property and equipment ........................ (5,112) (216) (11,396) (16,724)
Proceeds from sales of property and equipment .............. -- -- 22 22
----------- ------------- ---------- ------------
Net cash (used) provided by investing activities ............ (6,892) 10,800 (12,049) (8,141)
----------- ------------- ---------- ------------
Financing activities:
Proceeds from borrowings collateralized by notes receivable -- 11,966 12,806 24,772
Payments on borrowings collateralized by notes receivable .. -- (37,743) (26,971) (64,714)
Proceeds from borrowings under line-of-credit facilities and
notes payable ............................................ -- -- 26,382 26,382
Payments under line-of-credit facilities and notes payable . (1,071) (1,113) (89,887) (92,071)
Payments on 10.50% senior secured notes payable ............ (55,000) -- -- (55,000)
Proceeds from issuance of junior subordinated debentures. .. 59,280 -- -- 59,280
Payment of debt issuance costs ............................. (1,862) (37) (1,401) (3,300)
Proceeds from exercise of employee and director stock
options ................................................... 1,406 -- -- 1,406
----------- ------------- ---------- ------------
Net cash provided (used) by financing activities ............ 2,753 (26,927) (79,071) (103,245)
----------- ------------- ---------- ------------
Net (decrease) increase in cash and cash equivalents ........ (14,548) (3,350) 2,037 (15,861)
Cash and cash equivalents at beginning of period ............ 70,256 18,793 11,516 100,565
----------- ------------- ---------- ------------
Cash and cash equivalents at end of period .................. 55,708 15,443 13,553 84,704
Restricted cash and cash equivalents at end of period ....... (173) (6,709) (11,439) (18,321)
----------- ------------- ---------- ------------
Unrestricted cash and cash equivalents at end of period ..... $ 55,535 $ 8,734 $ 2,114 $ 66,383
=========== ============= ========== ============
84
Year Ended December 31, 2006
----------------------------------------------------------
(restated)
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------ ---------- ------------
Operating activities:
Net cash (used) provided by operating activities ............ $ (41,538) $ (13,051) $ 63,015 $ 8,426
---------- ---------- ---------- ---------
Investing activities:
Cash received from retained interests in notes receivable
sold ..................................................... -- 30,032 -- 30,032
Investments in statutory business trusts ................... (928) -- -- (928)
Purchases of property and equipment ........................ (7,181) (68) (17,488) (24,736)
Proceeds from sales of property and equipment .............. -- -- 93 93
---------- ---------- ---------- ---------
Net cash (used) provided by investing activities ............ (8,109) 29,964 (17,395) 4,461
---------- ---------- ---------- ---------
Financing activities:
Proceeds from borrowings collateralized by notes receivable -- 68,393 -- 68,393
Payments on borrowings collateralized by notes receivable .. -- (81,303) (3,811) (85,114)
Proceeds from borrowings under line-of-credit facilities
and notes payable ........................................ 6,500 -- 50,170 56,670
Payments under line-of-credit facilities and notes payable (7,824) (193) (86,569) (94,586)
Proceeds from issuance of junior subordinated debentures. .. 30,928 -- -- 30,928
Payment of debt issuance costs ............................. (1,054) (2,251) (1,133) (4,438)
Proceeds from exercise of employee and director stock
options .................................................. 2,645 -- -- 2,645
Distributions to minority interest ......................... (941) -- -- (941)
---------- ---------- ---------- ---------
Net cash provided (used) by financing activities ............ 30,254 (15,354) (41,343) (26,443)
---------- ---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents ........ (19,392) 1,559 4,277 (13,556)
Cash and cash equivalents at beginning of period ............ 55,708 15,443 13,553 84,704
---------- ---------- ---------- ---------
Cash and cash equivalents at end of period .................. 36,316 17,002 17,830 71,148
Restricted cash and cash equivalents at end of period ....... (173) (8,478) (12,825) (21,476)
---------- ---------- ---------- ---------
Unrestricted cash and cash equivalents at end of period ..... $ 36,143 $ 8,524 $ 5,005 $ 49,672
========== ========== ========== =========
85
12. Junior Subordinated Debentures
Trust Preferred Securities Offerings
We have formed statutory business trusts (collectively, the "Trusts") and
each issued trust preferred securities and invested the proceeds thereof in our
junior subordinated debentures. The Trusts are variable interest entities in
which we are not the primary beneficiary as defined by FIN No. 46R. Accordingly,
we do not consolidate the operations of the Trusts; instead, the Trusts are
accounted for under the equity method of accounting. In each of these
transactions, the applicable Trust issued trust preferred securities is part of
a larger pooled trust securities offering which was not registered under the
Securities Act of 1933. The applicable Trust then used the proceeds from issuing
the trust preferred securities to purchase an identical amount of junior
subordinated debentures from us. Interest on the junior subordinated debentures
and distributions on the trust preferred securities are payable quarterly in
arrears at the same interest rate. Distributions on the trust preferred
securities are cumulative and based upon the liquidation value of the trust
preferred security. The trust preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the junior subordinated
debentures at maturity or their earlier redemption. The junior subordinated
debentures are redeemable in whole or in part at the Company's option at any
time after five years from the issue date or sooner following certain specified
events. In addition, we made an initial equity contribution to each Trust in
exchange for its common securities, all of which are owned by us, and those
proceeds were also used to purchase an identical amount of junior subordinated
debentures from us. The terms of each Trust's common securities are nearly
identical to the trust preferred securities.
We had the following junior subordinated debentures outstanding at December
31, 2006 (dollars in thousands):
Outstanding
Amount of Fixed Variable Beginning
Junior Initial Interest Interest Optional
Subordinated Equity Issue Rate Rate Redemption Maturity
Trust Debentures To Trust Date (1) (2) Date Date
-------------------------------------------------------------------------------------------------------------
Bluegreen Statutory 3-month LIBOR
Trust I $ 23,196 $ 696 3/15/05 9.160% + 4.90% 3/30/10 3/30/35
Bluegreen Statutory 3-month LIBOR
Trust II 25,774 774 5/04/05 9.158% + 4.85% 7/30/10 7/30/35
Bluegreen Statutory 3-month LIBOR
Trust III 10,310 310 5/10/05 9.193% + 4.85% 7/30/10 7/30/35
Bluegreen Statutory 3-month LIBOR
Trust IV 15,464 464 4/24/06 10.130% + 4.85% 6/30/11 6/30/36
Bluegreen Statutory 3-month LIBOR
Trust V 15,464 464 7/21/06 10.280% + 4.85% 9/30/11 9/30/36
-------------------------
$ 90,208 $ 2,708
=========================
(1) Both the trust preferred securities and junior subordinated debentures
bear interest at a fixed interest rate from the issue date through the
beginning optional redemption date.
(2) Both the trust preferred securities and junior subordinated debentures
bear interest at a variable interest rate from the beginning optional
redemption date through the maturity date.
See Note 20 for a discussion on the issuance of $20.6 million of junior
subordinated debentures that was completed in February 2007.
13. Fair Value of Financial Instruments
In estimating the fair values of our financial instruments, we used the
following methods and assumptions:
Cash and cash equivalents: The amounts reported in our consolidated
balance sheets for cash and cash equivalents approximate fair value.
Contracts receivable: The amounts reported in our consolidated balance
sheets for contracts receivable approximate fair value. Contracts receivable are
non-interest bearing and generally convert into cash or an interest-bearing
mortgage note receivable within thirty days.
86
Notes receivable: The amounts reported in our consolidated balance sheets
for notes receivable approximate fair value based on discounted future cash
flows using current rates at which similar loans with similar maturities would
be made to borrowers with similar credit risk.
Retained interests in notes receivable sold: Retained interests in notes
receivable sold are carried at fair value based on discounted cash flow
analyses.
Lines-of-credit, notes payable, receivable-backed notes payable and junior
subordinated debentures: The amounts reported in our consolidated balance sheets
approximate their fair value for indebtedness that provides for variable
interest rates. The fair value of our fixed-rate indebtedness was estimated
using discounted cash flow analyses, based on our current incremental borrowing
rates for similar types of borrowing arrangements.
10.50% senior secured notes payable and junior subordinated debentures:
The fair values of our senior secured notes payable and junior subordinated
debentures were based on the discounted value of contractual cash flows at a
market discount rate or market price quotes from the over-the-counter bond
market.
December 31, 2005 December 31, 2006
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
Cash and cash equivalents ..................... $ 84,704 $ 84,704 $ 71,148 $ 71,148
Contracts receivable, net .................... 27,473 27,473 23,856 23,856
Notes receivable, net 127,783 127,783 144,251 144,251
Retained interests in notes receivable sold .. 105,696 105,696 130,623 130,623
Lines-of-credit, notes payable, and receivable-
backed notes payable ....................... 97,159 97,159 145,462 145,462
10.50% senior secured notes payable .......... 55,000 55,000 55,000 55,275
Junior subordinated debentures ............... 59,280 57,309 90,208 82,141
14. Common Stock and Stock Option Plans
Shareholders' Rights Plan
On July 27, 2006, the Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of the Company's
common stock. The Board of Directors authorized the adoption of the Rights
Agreement to protect shareholders from coercive or otherwise unfair takeover
tactics. In general terms, the Rights impose a significant penalty upon any
person or group which acquires beneficial ownership of 15% or more of the
Company's outstanding common stock without the prior approval of the Board of
Directors. The Company, its subsidiaries, employee benefit plans of the Company
or any of its subsidiaries, and any entity holding common stock for or pursuant
to the terms of any such employee benefit plan will be accepted, as will Levitt
Corporation, its affiliates, successors and assigns.
On October 16, 2006, in connection with the settlement of litigation then
pending before the United States District Court for the Southern District of
Florida between the Company, as plaintiff, David A. Siegel, David A. Siegel
Revocable Trust, and Central Florida Investments, Inc., as defendants
(collectively, the "Siegel Shareholders"), and the directors of the Company, as
counter-defendants, the Rights Agreement was amended pursuant to a Stipulation
and Order (the "Stipulation") to extend the period in which the Siegel
Shareholders may divest their shares of the Company's common stock to avoid the
impact of the Rights Agreement. Pursuant to the terms of the Stipulation, the
Siegel Shareholders are required to divest their ownership of 5,383,554 shares
of the Company's common stock within one year, and to divest their ownership of
their remaining shares of the Company's common stock within two years. However,
if the Siegel Shareholders breach any provision of the Stipulation, the
Company's Board of Directors may terminate the period for divestiture.
Stock Option Plans
Under our employee stock option plans, options can be granted with various
vesting periods. All options granted to employees on or prior to December 31,
2002 vest ratably over a five-year period from the date of grant (20% per year).
Options granted to employees subsequent to December 31, 2002 vest 100% on the
five-year anniversary of the date of grant. Our options are granted at exercise
prices that either equal or exceed the quoted market price of our common stock
at the respective dates of grant. All of our options expire ten years from the
date of grant.
87
All options granted to non-employee directors (the "Outside Directors") on
or prior to December 31, 2002 vested ratably over a three-year period while
options granted after December 31, 2002 vest either immediately upon grant or on
the five-year anniversary of the date of grant. All Outside Director stock
options were nonqualified and expire ten years from the date of grant, subject
to alternative expiration dates under certain circumstances. Due to a "change in
control" provision in the Outside Directors' stock option agreements, all
outstanding Outside Directors options as of April 10, 2002 immediately vested
when Levitt Corporation ("Levitt") (NYSE: LEV) acquired an aggregate of
approximately 8.0 million shares of our outstanding common stock from certain
real estate funds associated with Morgan Stanley Dean Witter and Company and
Grace Brothers, Ltd. in private transactions. As a result of these purchases and
the December 2003 transfer of BankAtlantic Bancorp, Inc.'s ownership interest in
our common stock to Levitt in connection with its spin-off, Levitt beneficially
owned approximately 31% of our outstanding common stock as of December 31, 2006.
We granted 668,000 and 440,000 stock options in 2005 and 2006,
respectively, to our employees from our 2005 Stock Incentive Plan. Additionally,
we granted 141,346 and 142,785 stock options in 2005 and 2006, respectively, to
certain Outside Directors from our 2005 Stock Incentive Plan (See Note 1 of the
Notes to Consolidated Financial Statements for further discussion of stock
options granted).
A summary of our stock option activity related to all of our prior and
current stock option plans is presented below (in thousands, except per share
data).
Number Weighted
of Average Number of
Shares Outstanding Exercise Price Shares
Reserved Options Per Share Exercisable
-------- ------- --------- -----------
Balance at January 1, 2005 ................. 2,426 1,645 $ 5.30 845
Approval of 2005 Stock Incentive Plan .... 2,000 -- --
Cancellation of 1995 Stock Incentive
Plan ..................................... (781) -- --
Granted .................................. -- 809 $ 18.30
Forfeited ................................ (168) (168) $ 4.23
Exercised ................................ (276) (276) $ 5.06
----- -----
Balance at December 31, 2005 .............. 3,201 2,010 $ 10.65 665
Granted .................................. -- 582 $ 12.02
Forfeited ................................ (86) (216) $ 11.20
Exercised ................................ (312) (312) $ 8.48
----- -----
Balance at December 31, 2006 .............. 2,803 2,064 $ 11.31 481
===== =====
--------
The weighted average exercise price of shares exercisable as of December
31, 2006 was $9.65 and the weighted average remaining contractual term of these
shares was 6.2 years. The aggregate intrinsic value of our stock options
outstanding and exercisable was $3.1 million and $1.5 million, respectively, as
of December 31, 2006. The total intrinsic value of our stock options exercised
during the years ended December 31, 2004, 2005, and 2006 was $0.9 million, $2.9
million and $1.4 million, respectively. The weighted-average exercise prices and
weighted-average remaining contractual lives of our outstanding stock options at
December 31, 2006 (grouped by range of exercise prices) were:
88
Weighted-
Average Weighted-
Remaining Weighted- Average
Number Number of Contractual Average Exercise Price
of Options Vested Options Term Exercise Price (Vested Only)
---------- -------------- ---- -------------- -------------
(In 000's) (In 000's) (In years)
$2.11-$3.48 ...... 542 137 5.8 $ 3.42 $ 3.15
$3.50-$11.43 ..... 303 203 5.4 $ 7.45 $ 8.18
$12.07 ........... 490 -- 9.6 $ 12.07 --
$16.03-$17.44 .... 41 41 8.6 $ 17.27 $ 17.27
$18.36 ........... 688 100 8.6 $ 18.36 $ 18.36
----- ---
2,064 481 7.6
===== ===
Common Stock Reserved For Future Issuance
As of December 31, 2006, common stock reserved for future issuance was
comprised of shares issuable (in thousands):
Upon exercise of stock options under our employee
stock option plan (1) ............................. 2,608
Upon exercise of outside director stock options
under our director stock option plan .............. 65
-----
2,673
=====
(1) Stock options were granted to Outside Directors under our Employee
Stock Option Plan during 2005 and 2006.
15. Commitments and Contingencies
At December 31, 2006, the estimated cost to complete development work in
subdivisions or resorts from which homesites or VOIs have been sold totaled
$95.2 million. Development is estimated to be completed within the next three
years and thereafter as follows: 2007 -- $52.0 million, 2008 - $28.9 million,
2009 and beyond - $14.3 million.
In 2006 we entered into a separation agreement with our former CEO George
Donovan. Under the terms of this agreement, Mr. Donovan will be paid a total of
$3 million over a seven year period in exchange for his services to be available
on a when and if needed basis. The Company recorded an expense of $2.6 million
in 2006, which represents the present value of the seven year agreement.
Rent expense for the years ended December 31, 2004, 2005, and 2006 totaled
approximately $6.3 million, $8.5 million and $11.6 million, respectively.
Lease commitments under these noncancelable operating leases for each of
the five years subsequent to December 31, 2006, and thereafter are as follows
(in thousands):
2007....................................... $ 9,469
2008....................................... 8,223
2009....................................... 6,416
2010....................................... 5,591
2011....................................... 3,511
Thereafter................................. 2,414
--------
Total future minimum lease payments...... $ 35,624
========
During 2006 we had approximately $565,000 in outstanding commitments under
stand-by letters of credit with banks, primarily related to obtaining
governmental approval of plats for one our Bluegreen Communities projects, of
which $523,000 expired on December 31, 2006.
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. Unless otherwise described below,
we believe that these claims are routine litigation incidental to our business.
89
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 was
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 offset 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 and recognized an expense of $1.5 million, after the impact of
offsets from certain third parties, from this settlement during the year ended
December 31, 2004.
In 2005, the State of Tennessee Audit Division (the "Division") audited
our Resorts Division for the period from December 1, 2001 through December 31,
2004. On September 23, 2006, the Division issued a notice of assessment for
$656,605 of accommodations tax based on the use of Bluegreen Vacation Club
accommodations by Bluegreen Vacation Club members who became members through the
purchase of non-Tennessee property. We believe the attempt to impose such a tax
is contrary to Tennessee law, and we intend to vigorously oppose such assessment
by the Division. While the timeshare industry has been successful in challenging
the imposition of sales taxes on the use of accommodations by timeshare owners,
there is no assurance that the Company will be successful in contesting the
current assessment.
Bluegreen Southwest One, L.P., ("Southwest"), a subsidiary of Bluegreen
Corporation, is the developer of the Mountain Lakes subdivision in Texas. In
Lesley, et al v. Bluegreen Southwest One, L.P. acting through its General
Partner Bluegreen Southwest Land, Inc., et al, Cause No. 28006 District Court of
the 266th Judicial District, Erath County, Texas, plaintiffs filed a declaratory
action against Southwest in which they seek to develop mineral interests in the
Mountain Lakes subdivision. Plaintiffs' claims are based on property law,
contract and tort theories. The property owners association has filed a cross
complaint against Bluegreen, Southwest and individual directors of the property
owners association related to the mineral rights and related to certain
amenities in the subdivision as described in the following paragraph. The court
has confirmed the seniority of the mineral interests of the plaintiffs and has
held that restrictions against drilling within the subdivision are not
enforceable. Bluegreen is evaluating whether to appeal the court's ruling and is
unable to predict the ultimate resolution of the litigation. However, Bluegreen
does not believe that it has material exposure to the property owners
association based on its cross claim relating to the mineral rights other than
then the potential claim for legal fees incurred by the property owners
association, which are not believed to be material. Separately one of the lakes
that is an amenity in the Mountain Lakes development has not filled to the
expected level. Owners of homesites within the subdivision have asserted claims
against Bluegreen regarding such failure as part of the litigation referenced
above. Southwest has investigated the causes of the failure of the lake to fill
and currently estimates that the cost of correcting the condition will be
approximately $3,000,000 and as such has been accrued as of December 31, 2006.
Additional claims may be pursued against us in the future, but it is not
possible at this time to estimate the likelihood of loss or amount of potential
exposure with respect to any such matters.
On October 16, 2006, in connection with the litigation in the United
States District Court for the Southern District of Florida between us, as
plaintiff, the Siegel Shareholders , as defendants , and our directors, as
counter-defendants (the "Litigation"), the parties entered into a stipulation
(the "Stipulation") resolving the Litigation and releasing all related claims.
Among other items, the Stipulation provides that in the event any matter
recommended for shareholder approval by the Board of Directors and submitted for
a vote of our shareholders relates to a merger or a sale of all or substantially
all of our assets, the Siegel Shareholders shall have the right to require us to
purchase any of our common shares still then owned by the Siegel Shareholders at
$11.99 per share, by delivery at least 10 business days prior to the scheduled
vote on the contemplated transaction of an irrevocable written notice to us
specifying the number of shares to be sold. Closing of the acquisition of the
shares shall be subject to consummation of the proposed transaction and shall
occur no later than 120 days following the consummation of the transaction.
We filed suit against the general contractor with regard to alleged
construction defects at our Shore Crest Vacation Villas resort in South
Carolina. Whether the matter is settled by litigation or by negotiation it is
possible that we may
90
need to participate financially in some way to correct the construction
deficiencies. We can not predict the extent of the financial obligation that we
may incur.
16. Income Taxes
Our provision for income taxes consists of the following (in thousands):
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2005 2006
---- ---- ----
Federal:
Current ....................................... $ 6,378 $ 9,418 $ 7,397
Deferred ...................................... 16,967 15,600 11,913
--------- --------- ---------
23,345 25,018 19,310
--------- --------- ---------
State and other:
Current ....................................... 1,600 2,745 629
Deferred ...................................... 1,697 1,379 922
--------- --------- ---------
3,297 4,124 1,551
--------- --------- ---------
Total ...................................... $ 26,642 $ 29,142 $ 20,861
========= ========= =========
The reasons for the difference between our provision for income taxes and
the amount that results from applying the federal statutory tax rate to income
before provision for income taxes and cumulative effect are as follows (in
thousands):
December 31, December 31, December 31,
2004 2005 2006
---- ---- ----
Income tax expense at statutory rate ............ $ 23,345 $ 25,018 $ 19,310
Effect of state taxes, net of federal tax
benefit ....................................... 3,297 4,124 1,551
--------- --------- ---------
$ 26,642 $ 29,142 $ 20,861
========= ========= =========
Our deferred income taxes consist of the following components (in
thousands):
December 31, December 31,
2005 2006
---- ----
Deferred federal and state tax liabilities (assets):
Installment sales treatment of notes ...................... $ 150,146 $ 196,687
Deferred federal and state loss carryforwards/AMT credits . (89,035) (120,609)
Book over tax carrying value of retained interests in notes
receivable sold ........................................ 9,526 15,565
Book reserves for loan losses and inventory ............... (7,613) (7,758)
Tax over book depreciation ................................ 6,119 5,780
Unrealized gains on retained interests in notes receivable
sold (see Note 6) ..................................... 5,368 7,742
Deferral of VOI sales under SFAS No. 152 .................. -- (7,181)
Other ..................................................... 893 (2,602)
---------- ----------
Deferred income taxes ....................................... $ 75,404 $ 87,624
========== ==========
Total deferred federal and state tax liabilities ............ $ 174,055 $ 229,085
Total deferred federal and state tax assets ................. (98,651) (141,461)
---------- ----------
Deferred income taxes ....................................... $ 75,404 $ 87,624
========== ==========
We have available federal net operating loss carryforwards of $201 million,
which expire beginning in 2021 through 2026, and alternative minimum tax credit
carryforwards of $31 million, which never expire. Additionally, we have
available state operating loss carryforwards of $443 million, which expire
beginning in 2008 through 2026 and Florida alternative minimum tax credit
carryforwards of $1.9 million, which never expire. The income tax benefits from
our state operating loss carryforwards are net of a valuation allowance of $2.8
million.
91
IRS Code Section 382 addresses limitations on the use of net operating
loss carry forwards following a change in ownership, as defined in Section 382.
We do not believe that any such ownership change occurred during 2006. If our
interpretation were found to be incorrect, there would be significant
limitations placed on these carry forwards which would result in an increase in
the Company's tax liability and a reduction of its net income.
17. Employee Retirement Savings Plan and Other Employee Matters
Our Employee Retirement Plan is an IRC code section 401(k) Retirement
Savings Plan (the "Plan"). All employees at least 21 years of age with one year
of employment with us are eligible to participate in the Plan. The Plan, as
amended, provides an annual discretionary matching contribution and a fixed-rate
matching contribution equal to 50% of the first 3% of a participant's
contribution with an annual limit of $1,000 per participant. During the years
ended December 31, 2004, 2005, and 2006, we recognized expenses totaling
approximately $554,000, $620,000 and $720,000, respectively,
Our employees in Aruba, which comprise approximately 1% of our total
workforce, are subject to the terms of a collective bargaining agreement.
18. Business Segments
We have two reportable business segments. Bluegreen Resorts develops,
markets and sells VOIs in our resorts, primarily through the Bluegreen Vacation
Club, 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. Our reportable
segments are business units that offer different products. The reportable
segments are each managed separately because they sell distinct products with
different development, marketing and selling methods.
We evaluate the performance and allocate resources to each business
segment based on its respective field operating profit. Field operating profit
is operating profit prior to the allocation of corporate overhead, interest
income, gain on sales of notes receivable (prior to 2006), other income,
provision for loan losses (prior to 2006), interest expense, income taxes,
minority interest and cumulative effect of change in accounting principle.
Inventory is the only asset that we evaluate on a segment basis -- all other
assets are only evaluated on a consolidated basis. The accounting policies of
the reportable segments are the same as those described in the summary of
significant accounting policies in Note 1 to the Consolidated Financial
Statements.
Required disclosures for our business segments are as follows (in
thousands):
Bluegreen Bluegreen
Resorts Communities Totals
------- ----------- ------
As of and for the year ended December 31, 2004:
Sales of real estate ............................. $ 310,608 $ 191,800 $ 502,408
Other resort and communities operations revenue .. 59,007 7,402 66,409
Depreciation expense ............................. 5,138 1,788 6,926
Field operating profit ........................... 50,876 37,722 88,598
Inventory ........................................ 126,377 78,975 205,352
As of and for the year ended December 31, 2005:
Sales of real estate ............................. $ 358,240 $ 192,095 $ 550,335
Other resort and communities operations revenue .. 64,276 9,521 73,797
Depreciation expense ............................. 7,161 1,684 8,845
Field operating profit ........................... 59,578 47,227 106,805
Inventory ........................................ 173,338 67,631 240,969
As of and for the year ended December 31, 2006:
Sales of real estate ............................. $ 399,105 $ 164,041 $ 563,146
Other resort and communities operations revenue .. 51,688 11,922 63,610
Depreciation expense ............................. 8,322 1,641 9,963
Field operating profit ........................... 53,937 35,824 89,761
Inventory ........................................ 233,290 116,043 349,333
92
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):
Year Ended December 31,
------------------------------------
2004 2005 2006
---- ---- ----
Field operating profit for reportable segments ............. $ 88,598 $ 106,805 $ 89,761
Interest income ............................................ 35,939 34,798 40,765
Gain on sales of notes receivable .......................... 25,972 25,226 5,852
Other expense, net ......................................... (1,666) (6,207) (2,861)
Corporate general and administrative expenses .............. (32,718) (38,029) (52,241)
Interest expense ........................................... (18,425) (14,474) (18,785)
Provision for loan losses .................................. (24,434) (27,587) --
-------- --------- --------
Consolidated income before minority interest and
provision for income taxes ................................ $ 73,266 $ 80,532 $ 62,491
======== ========= ========
Depreciation expense for our reportable segments reconciled to our
consolidated depreciation expense is as follows (in thousands):
Year Ended December 31,
-----------------------------------
2004 2005 2006
---- ---- ----
Depreciation expense for reportable segments ............... $ 6,926 $ 8,845 $ 9,963
Depreciation expense for corporate fixed assets ............ 2,843 3,487 4,413
--------- --------- ---------
Consolidated depreciation expense .......................... $ 9,769 $ 12,332 $ 14,376
========= ========= =========
Assets for our reportable segments reconciled to our consolidated assets
(in thousands):
December 31,
-------------------------
2005 2006
---- ----
Inventory for reportable segments ........................... $ 240,969 $ 349,333
Assets not allocated to reportable segments ................. 453,274 504,879
--------- ---------
Total assets ................................................ $ 694,243 $ 854,212
========= =========
Geographic Information
Sales of real estate by geographic area are as follows (in thousands):
Year Ended December 31,
-----------------------------------
2004 2005 2006
--------- --------- ---------
United States .............................................. $ 491,948 $ 539,131 $ 554,904
Aruba ...................................................... 10,460 11,204 8,242
--------- --------- ---------
Consolidated totals ........................................ $ 502,408 $ 550,335 $ 563,146
========= ========= =========
Inventory by geographic area is as follows (in thousands):
December 31,
-------------------------
2005 2006
---- ----
United States ............................................... $ 235,340 $ 344,817
Aruba ....................................................... 5,619 4,516
Canada ...................................................... 10 --
--------- ---------
Consolidated totals ......................................... $ 240,969 $ 349,333
========= =========
93
19. Quarterly Financial Information (Unaudited)
A summary of the quarterly financial information for the years ended
December 31, 2005 and 2006 is presented below (in thousands, except for per
share information).
Three Months Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
2005 2005 2005 2005
--------- --------- ------------- ------------
Sales of real estate ..................................... $ 104,021 $ 159,328 $ 166,657 $ 120,329
Gross profit ............................................. 71,134 108,219 113,718 79,464
Net income ............................................... 6,400 14,910 18,332 6,910
Net income per common share:
Basic ............................................... $ 0.21 $ 0.49 $ 0.60 $ 0.23
Diluted ............................................. $ 0.20 $ 0.48 $ 0.59 $ 0.22
Three Months Ended
-----------------------------------------------------
March 31, June 30, September 30, December 31,
2006 2006 2006 2006
--------- -------- ------------- ------------
Sales of real estate ...................................... $ 121,760 $ 141,947 $ 172,549 $ 126,890
Gross profit .............................................. 76,538 92,925 125,822 88,807
Income before cumulative effect of change in accounting
principle .............................................. 4,031 6,580 $ 21,907 1,793
Cumulative effect of change in accounting principle, net
of tax and minority interest ........................... (4,494) -- -- --
Net income (loss) ......................................... $ (463) $ 6,580 $ 21,907 $ 1,793
Income before cumulative effect of change in accounting
principle per common share:
Basic .................................................. $ 0.13 $ 0.22 $ 0.72 $ 0.06
Diluted ................................................ $ 0.13 $ 0.21 $ 0.71 $ 0.06
Net (loss) income per common share:
Basic .................................................. $ (0.02) $ 0.22 $ 0.72 $ 0.06
Diluted ................................................ $ (0.01) $ 0.21 $ 0.71 $ 0.06
20. Subsequent Events
In January 2007, we sold $22.3 million in vacation ownership receivables
under the 2006 GE Purchase Facility and received $20.1 million in cash proceeds.
In March 2007, we sold $16.0 million of vacation ownership receivables under the
same facility and received $14.4 million in cash proceeds.
In February 2007, we acquired 350 acres near St. Simons Island, Georgia,
for $18.0 million for a property to be called Sanctuary River Club at St.
Andrews Sound. The Company borrowed $12.6 million under the GMAC Communities
Facility (see Note 10 for further information on the GMAC Communities Facility)
in connection with the acquisition of this property.
In February 2007, we formed a new statutory trust ("BST VI"), which issued
$20.0 million of trust preferred securities. BST VI used the proceeds from
issuing the trust preferred securities to purchase an identical amount of junior
subordinated debentures from us. Interest on the junior subordinated debentures
and distributions on the trust preferred securities will be payable quarterly in
arrears at a fixed rate of 9.842% through April 2012, and thereafter at a
floating rate of 4.80% over the 3-month LIBOR until the scheduled maturity date
of April 30, 2037. Distributions on the trust preferred securities will be
cumulative and based upon the liquidation value of the trust preferred security.
The trust preferred securities will be subject to mandatory redemption, in whole
or in part, upon repayment of the junior subordinated debentures at maturity or
their earlier redemption. The junior subordinated debentures are redeemable at
any time after five years from the issue date or sooner following certain
specified events. In addition, we contributed $619,000 to BST VI in exchange for
its common securities, all of which are owned by us, and those proceeds were
also used to purchase an identical amount of junior subordinated debentures from
us. The terms of BST VI's common securities are nearly identical to the trust
preferred securities.
94
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Bluegreen Corporation
We have audited the accompanying consolidated balance sheets of Bluegreen
Corporation (the Company) as of December 31, 2005 and 2006, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of three years in the period ended December 31, 2006. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bluegreen
Corporation at December 31, 2005 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted SFAS No. 123(R), Share-Based Payment, applying the modified prospective
method at the beginning of 2006. As discussed in Note 2, the Company has also
adopted SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions in
2006.
As more fully described in Note 1 to the consolidated financial statements, the
accompanying consolidated statement of income of the year ended December 31,
2006 and the consolidated statements of cash flows for each of the three fiscal
years in the period ended December 31, 2006 have been restated.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Bluegreen
Corporation's internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 14, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Miami, Florida
March 14, 2007,
except for Note 1, as to which the date is
June 29, 2007
95
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Bluegreen Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Bluegreen
Corporation (the Company) maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Bluegreen
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Bluegreen Corporation maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Bluegreen Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Bluegreen Corporation as of December 31, 2005 and December 31, 2006, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2006 of Bluegreen
Corporation and our report dated March 14, 2007, except for Note 1, as to which
the date is June 29, 2007, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
Miami, Florida
March 14, 2007
96
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Principal Executive Officer and Principal Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2006.
Our management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2006 has been audited by Ernst & Young
LLP, the independent registered public accounting firm that audited our
financial statements included in this Annual Report on Form 10-K, as stated in
their report which immediately follows this report.
JOHN M. MALONEY, JR., President and Chief Executive Officer
ANTHONY M. PULEO, Senior Vice President, Chief Financial Officer and Treasurer
97
Item 9A. CONTROLS AND PROCEDURES.
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 errors 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.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the design and operation of our "disclosure controls and
procedures", as such term is defined under Rule 13a-15(e) promulgated under the
Exchange Act as of December 31, 2006. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of December 31, 2006.
As described in Note 1 to our consolidated financial statements, we have
restated our Consolidated Statements of Cash Flows included in this Form 10-K/A
to conform our presentation to the requirements of SFAS No. 95, Statement of
Cash Flows to correctly reflect the classification of borrowings collateralized
by notes receivable as cash flows from financing activities. We had previously
reported these cash flows as operating activities as the majority of Bluegreen
Resorts' sales result in the origination of notes receivable from its customers
and 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 therefore had classified such
activities as operating activities with appropriate disclosure of this
treatment. Additionally, we have modified our Consolidated Statements of Income
to conform to the presentation required under SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions. Such presentation requires that estimated
uncollectible revenues from VOI sales (i.e., the provision for loan losses) be
shown on the face of the Consolidated Statements of Income as a reduction to
gross sales of real estate. We had previously provided such information in the
footnotes to the financial statements thereto.
Our management, including our Chief Executive Officer and Chief Financial
Officer, has re-evaluated our disclosure controls and procedures as of the end
of the period covered by this report to determine whether the restatement
changes our prior conclusion, and has determined that it does not change our
conclusion that as of December 31, 2006, our disclosure controls and procedures
were effective to ensure that the information included in the reports that we
file or submit under the Securities Exchange Act is recorded, processed,
summarized and reported on a timely basis. The restatement did not affect our
previously reported consolidated financial position or results of operations and
was 1) a change in classification within the Consolidated Statements of Cash
Flows and 2) a modification of the presentation of our Consolidated Statement of
Income for the year ended December 31, 2006.
Changes in Internal Control Over Financial Reporting
None.
Management's Report on Internal Control Over Financial Reporting
Management's report and the Report of Independent Registered Public Accounting
Firm on internal control over financial reporting are set forth in Part II, Item
8 - Financial Statements and Supplementary Data of this report.
98
Chief Executive Officer and Chief Financial Officer Certifications
Appearing as Exhibits 31.1 and 31.2 to this Annual 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 Annual 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.
99
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) and (a)(2) List of Financial Statements and Schedules.
1. The following list of our Financial Statements and Notes thereto and the
report of independent registered public accounting firm relating thereto,
are included in Item 8.
Consolidated Balance Sheets as of December 31, 2005 and December 31, 2006.
Consolidated Statements of Income for the years ended December 31, 2004,
2005 and 2006.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2004, 2005 and 2006.
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2005 and 2006.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm.
2. All financial statement schedules are omitted because they are not
applicable, are not present in amounts sufficient to require submission of
the schedules or the required information is presented in the Consolidated
Financial Statements or related notes.
(a)(3) List of Exhibits.
The exhibits which are filed with this Annual Report on Form 10-K/A or are set
forth in the Exhibit Index which appears at pages 52 hereof and are incorporated
herein by reference.
(b) Exhibits.
See (a)(3) above.
(c) Financial Statement Schedules.
All financial statement schedules are omitted because they are not applicable,
are not present in amounts sufficient to require submission of the schedules or
the required information is presented in the Consolidated Financial Statements
or related notes.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: July 2, 2007 By:/s/ JOHN M. MALONEY, JR.
-------------------------------------------------
John M. Maloney, Jr.,
President and Chief Executive Officer
Date: July 2, 2007 By:/s/ ANTHONY M. PULEO
-------------------------------------------------
Anthony M. Puleo,
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: July 2, 2007 By:/s/ RAYMOND S. LOPEZ
-------------------------------------------------
Raymond S. Lopez,
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
101
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 2nd day of July, 2007.
Signature Title
--------- -----
/s/ JOHN M. MALONEY, JR President, Chief Executive Officer
----------------------------
John M. Maloney, Jr.
/s/ ANTHONY M. PULEO Senior Vice President, Chief Financial Officer
---------------------------- and Treasurer
Anthony M. Puleo (Principal Financial Officer)
/s/ RAYMOND S. LOPEZ Vice President and Chief Accounting Officer
----------------------------
Raymond S. Lopez (Principal Accounting Officer)
/s/ ALAN B. LEVAN Chairman of the Board of Directors
----------------------------
Alan B. Levan
/s/ JOHN E. ABDO Vice Chairman of the Board of Directors
----------------------------
John E. Abdo
/s/ NORMAN H. BECKER Director
----------------------------
Norman H. Becker
/s/ LAWRENCE CIRILLO Director
----------------------------
Lawrence Cirillo
/s/ ROBERT F. DWORS Director
----------------------------
Robert F. Dwors
/s/ SCOTT W. HOLLOWAY Director
----------------------------
Scott W. Holloway
/s/ JOHN LAGUARDIA Director
----------------------------
John Laguardia
/s/ MARK A. NERENHAUSEN Director
----------------------------
Mark A. Nerenhausen
/s/ J. LARRY RUTHERFORD Director
----------------------------
J. Larry Rutherford
/s/ ARNOLD SEVELL Director
----------------------------
Arnold Sevell
102
EXHIBIT INDEX
23.1 - Consent of Independent Registered Public Accounting Firm.
31.1 - Certification of John M. Maloney, Jr., President and Chief Executive
Officer, pursuant to Securities Exchange Act Rules 13a-15(c) and
15d-15(c), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 - Certification of Anthony M. Puleo, Senior Vice President, Chief
Financial Officer and Treasurer, pursuant to Securities Exchange Act
Rules 13a-15(c) and 15d-15(c), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 - Certification of John M. Maloney, Jr., President and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 - Certification of Anthony M. Puleo, Senior Vice President, Chief
Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
103