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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| - Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly period ended September 30, 2004
or
|_| - Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-19292
BLUEGREEN CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 03-0300793
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4960 Conference Way North, Suite 100, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
(561) 912-8000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of November 12, 2004, there were 29,096,963 shares of Common Stock,
$.01 par value per share, issued, 2,755,300 treasury shares and 26,341,663
shares outstanding.
BLUEGREEN CORPORATION
Index to Quarterly Report on Form 10-Q
Part I - Financial Information
Item 1. Financial Statements (Unaudited) Page
----
Condensed Consolidated Balance Sheets at December 31, 2003
and September 30, 2004 ................................... 3
Condensed Consolidated Statements of Income - Three Months
Ended September 30, 2003 and 2004 ........................ 4
Condensed Consolidated Statements of Income - Nine Months
Ended September 30, 2003 and 2004 ........................ 5
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2003 and 2004 ................. 6
Notes to Condensed Consolidated Financial Statements ........... 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ....................... 19
Item 4. Controls and Procedures ........................................ 36
Part II - Other Information
Item 1. Legal Proceedings .............................................. 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .... 37
Item 6. Exhibits ....................................................... 37
Signatures ................................................................ 37
Note: The terms "Bluegreen" "Bluegreen Communities" and "Bluegreen Vacation
Club" are trademarks registered in the U.S. Patent and Trademark office
("USPTO") by Bluegreen Corporation. The term "World Golf Village" is registered
in the USPTO by World Golf Foundation, Inc.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, September 30,
2003 2004
------------ -------------
(Note) (Unaudited)
ASSETS
Cash and cash equivalents (including restricted cash of approximately $14,156
and $19,533 at December 31, 2003 and September 30, 2004, respectively) ....... $ 53,647 $ 86,237
Contracts receivable, net ....................................................... 25,522 43,631
Notes receivable, net ........................................................... 94,194 120,598
Prepaid expenses ................................................................ 9,925 11,005
Other assets .................................................................... 19,711 21,348
Inventory, net .................................................................. 219,890 197,924
Retained interests in notes receivable sold ..................................... 60,975 67,678
Property and equipment, net ..................................................... 63,430 70,790
Intangible assets ............................................................... 3,728 4,807
--------- ---------
Total assets .......................................................... $ 551,022 $ 624,018
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable ................................................................ $ 6,983 $ 8,701
Accrued liabilities and other ................................................... 32,791 48,670
Deferred income ................................................................. 18,646 26,384
Deferred income taxes ........................................................... 43,924 62,271
Receivable-backed notes payable ................................................. 24,921 32,408
Lines-of-credit and notes payable ............................................... 87,858 74,329
10.50% senior secured notes payable ............................................. 110,000 110,000
8.25% convertible subordinated debentures ....................................... 34,371 27,590
--------- ---------
Total liabilities ............................................................ 359,494 390,353
Minority interest ............................................................... 4,648 7,340
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 1,000 shares authorized; none issued ........... -- --
Common stock, $.01 par value, 90,000 shares authorized; 27,702 and 29,079
shares issued at December 31, 2003 and September 30, 2004, respectively ...... 277 291
Additional paid-in capital ...................................................... 124,931 135,035
Treasury stock, 2,755 common shares at both December 31, 2003 and
September 30, 2004, at cost .................................................. (12,885) (12,885)
Accumulated other comprehensive income, net of income taxes ..................... 1,830 1,047
Retained earnings ............................................................... 72,727 102,837
--------- ---------
Total shareholders' equity ................................................. 186,880 226,325
--------- ---------
Total liabilities and shareholders' equity ............................ $ 551,022 $ 624,018
========= =========
Note: The condensed consolidated balance sheet at December 31, 2003 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.
See accompanying notes to condensed consolidated financial statements.
3
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
September 30, September 30,
2003 2004
------------- -------------
Revenues:
Sales of real estate ......................................... $108,941 $161,898
Other resort and communities operations revenue .............. 14,549 19,662
Interest income .............................................. 4,441 5,743
Gain on sales of notes receivable ............................ 476 3,333
-------- --------
128,407 190,636
Costs and expenses:
Cost of real estate sales .................................... 31,033 58,787
Cost of other resort and communities operations .............. 14,830 20,198
Selling, general and administrative expenses ................. 58,791 78,339
Interest expense ............................................. 3,650 3,242
Provision for loan losses .................................... 2,300 2,603
Other expense ................................................ 515 591
-------- --------
111,119 163,760
-------- --------
Income before minority interest and provision for income taxes .. 17,288 26,876
Minority interest in income of consolidated subsidiary .......... 699 360
-------- --------
Income before provision for income taxes ........................ 16,589 26,516
Provision for income taxes ...................................... 6,387 10,209
-------- --------
Net income ...................................................... $ 10,202 $ 16,307
======== ========
Income per common share:
Basic ....................................................... $ 0.41 $ 0.62
======== ========
Diluted ..................................................... $ 0.36 $ 0.54
======== ========
Weighted average number of common and common
equivalent shares:
Basic ....................................................... 24,634 26,298
======== ========
Diluted ..................................................... 29,377 30,646
======== ========
See accompanying notes to condensed consolidated financial statements.
4
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Nine Months Ended
September 30, September 30,
2003 2004
------------- -------------
Revenues:
Sales of real estate ......................................... $256,749 $376,403
Other resort and communities operations revenue .............. 42,592 52,376
Interest income .............................................. 12,308 15,484
Gain on sales of notes receivable ............................ 3,360 6,929
Other income ................................................. 608 --
-------- --------
315,617 451,192
Costs and expenses:
Cost of real estate sales .................................... 76,366 131,853
Cost of other resort and communities operations .............. 44,122 53,396
Selling, general and administrative expenses ................. 147,933 195,895
Interest expense ............................................. 9,626 11,339
Provision for loan losses .................................... 5,525 6,502
Other expense ................................................ -- 556
-------- --------
283,572 399,541
-------- --------
Income before minority interest and provision for income taxes .. 32,045 51,651
Minority interest in income of consolidated subsidiary .......... 1,875 2,692
-------- --------
Income before provision for income taxes ........................ 30,170 48,959
Provision for income taxes ...................................... 11,615 18,849
-------- --------
Net income ...................................................... $ 18,555 $ 30,110
======== ========
Income per common share:
Basic ....................................................... $ 0.75 $ 1.16
======== ========
Diluted ..................................................... $ 0.68 $ 1.02
======== ========
Weighted average number of common and common
equivalent shares:
Basic ....................................................... 24,604 25,858
======== ========
Diluted ..................................................... 29,089 30,563
======== ========
See accompanying notes to condensed consolidated financial statements.
5
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30, September 30,
2003 2004
------------- -------------
Operating activities:
Net income .............................................................. $ 18,555 $ 30,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in income of consolidated subsidiary ............. 1,875 2,692
Depreciation and amortization ...................................... 10,403 10,521
Gain on sales of notes receivable .................................. (3,360) (6,929)
(Gain) loss on sale of property and equipment ...................... (212) 384
Provision for loan losses .......................................... 5,525 6,502
Provision for deferred income taxes ................................ 11,615 18,849
Interest accretion on retained interests in notes receivable sold .. (3,564) (3,988)
Proceeds from sales of notes receivable ............................ 49,650 92,730
Proceeds from borrowings collateralized by notes receivable ........ 22,086 16,365
Payments on borrowings collateralized by notes receivable .......... (4,970) (8,840)
Change in operating assets and liabilities:
Contracts receivable ................................................. (17,722) (18,109)
Notes receivable ..................................................... (115,197) (140,407)
Inventory ............................................................ 11,232 34,177
Other assets ......................................................... (3,186) (2,780)
Accounts payable, accrued liabilities and other ...................... 22,626 24,126
--------- ---------
Net cash provided by operating activities .................................. 5,356 55,403
--------- ---------
Investing activities:
Purchases of property and equipment ..................................... (7,527) (14,676)
Sales of property and equipment ......................................... 1,080 8
Installment payments on business acquisition (see Note 2) ............... -- (575)
Cash received from retained interests in notes receivable sold .......... 5,948 11,231
--------- ---------
Net cash used by investing activities ...................................... (499) (4,012)
--------- ---------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and other
notes payable ......................................................... 32,000 57,640
Payments under line-of-credit facilities and other notes payable ........ (33,830) (75,778)
Payment of debt issuance costs .......................................... (1,642) (3,219)
Proceeds from exercise of stock options ................................. 537 2,556
--------- ---------
Net cash used by financing activities ...................................... (2,935) (18,801)
--------- ---------
Net increase in cash and cash equivalents .................................. 1,922 32,590
Cash and cash equivalents at beginning of period ........................... 34,276 53,647
--------- ---------
Cash and cash equivalents at end of period ................................. 36,198 86,237
Restricted cash and cash equivalents at end of period ...................... (16,416) (19,533)
--------- ---------
Unrestricted cash and cash equivalents at end of period .................... $ 19,782 $ 66,704
========= =========
6
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
(Unaudited)
Nine Months Ended
September 30, September 30,
2003 2004
------------- -------------
Supplemental schedule of non-cash operating, investing
and financing activities:
Inventory acquired through financing ............................ $43,488 $ 4,440
======= =======
Inventory acquired through foreclosure or deedback in lieu of
foreclosure .................................................. $ 4,967 $ 7,440
======= =======
Income tax benefit from stock options exercised ................. $ -- $ 613
======= =======
Property and equipment acquired through financing ............... $ 2,250 $ 169
======= =======
Retained interests in notes receivable sold ..................... $11,682 $19,094
======= =======
Net change in unrealized losses in retained interests in notes
receivable sold .............................................. $ 2,158 $ 1,224
======= =======
Settlement of business acquisition purchase price (see Note 2) .. $ -- $ 925
======= =======
Conversion of 8.25% convertible subordinated debentures ......... $ -- $ 6,781
======= =======
See accompanying notes to condensed consolidated financial statements.
7
BLUEGREEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
1. Organization and Significant Accounting Policies
We have prepared the accompanying unaudited condensed consolidated
financial statements in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
The financial information furnished herein reflects all adjustments
consisting of normal recurring accruals that, in our opinion, are necessary for
a fair presentation of the results for the interim periods. The results of
operations for the nine months ended September 30, 2004 are not necessarily
indicative of the results to be expected for the year ending December 31, 2004.
For further information, refer to our audited consolidated financial statements
for the year ended December 31, 2003, which are included in our Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on March 29, 2004.
We have historically experienced seasonal fluctuations in our gross
revenues and net earnings, with the majority of our gross revenues and net
earnings historically occurring in the quarters ending in June and September
each year. Other material fluctuations in operating results may occur due to the
timing of development and the requirement that we use the
percentage-of-completion method of accounting. Under this method of income
recognition, income is recognized as work progresses. Measures of progress are
based on the relationship of costs incurred to date to expected total costs.
Organization
We are a leading provider of vacation and residential lifestyle choices
through our resorts and residential communities businesses. Our resorts business
("Bluegreen(R) Resorts") acquires, develops and markets vacation ownership
interests ("VOIs") in resorts generally located in popular, high-volume,
"drive-to" vacation destinations. VOIs in any of our resorts entitle the buyer
to an annual allotment of "points" in perpetuity (supported by an underlying
deeded vacation ownership interest being held in trust for the buyer) in our
Bluegreen Vacation Club(R). Members in our Bluegreen Vacation Club may use their
points to stay in any of our participating resorts or for other vacation
options, including cruises and stays at approximately 3,700 resorts offered by a
third-party, worldwide vacation ownership exchange network. We are currently
marketing and selling VOIs in 16 resorts located in the United States and Aruba
as well as at four off-site sales offices located in the United States. Our
residential communities business ("Bluegreen Communities(R)") acquires, develops
and subdivides property and markets residential land homesites, the majority of
which are sold directly to retail customers who seek to build a home in a high
quality residential setting, in some cases on properties featuring a golf course
and other related amenities. During the nine months ended September 30, 2004,
sales generated by Bluegreen Resorts comprised approximately 63% of our total
sales of real estate while sales generated by Bluegreen Communities comprised
approximately 37% of our total sales of real estate. Our other resort and
communities operations revenues consist primarily of mini-vacation package
sales, vacation ownership tour sales, resort property management services,
resort title services, resort amenity operations, rental brokerage services,
realty operations and daily-fee golf course operations. We also generate
significant interest income by providing financing to individual purchasers of
VOIs and, to a lesser extent, homesites sold by Bluegreen Communities.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of
all of our wholly-owned subsidiaries and entities in which we hold a controlling
financial interest. The only non-wholly owned subsidiary that we consolidate is
Bluegreen/Big Cedar Vacations LLC (the "Joint Venture"), as we hold a 51% equity
interest in the Joint Venture, have an active role as the day-to-day manager of
the Joint Venture's activities and have majority voting control of the Joint
Venture's management committee. We have eliminated all significant intercompany
balances and transactions.
Use of Estimates
Accounting principles generally accepted in the United States require us
to make estimates and assumptions that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
8
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share is computed in the same manner as basic earnings per share, but
also gives effect to all dilutive stock options using the treasury stock method
and includes an adjustment, if dilutive, to both net income and shares
outstanding as if our 8.25% convertible subordinated debentures were converted
into common stock at the beginning of the periods presented. We have excluded
approximately 1.2 million anti-dilutive stock options from our computation of
earnings per common share for the three- and nine-months ended September 30,
2003. There were no anti-dilutive stock options during the three and nine months
ended September 30, 2004.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
----------------------------------------------------------
Basic earnings per share - numerator:
Net income ................................. $10,202 $16,307 $18,555 $30,110
==========================================================
Diluted earnings per share - numerator:
Net income - basic ......................... $10,202 $16,307 $18,555 $30,110
Effect of dilutive securities, net of
income taxes ............................ 441 353 1,308 1,109
----------------------------------------------------------
Net income - diluted ....................... $10,643 $16,660 $19,863 $31,219
==========================================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares ................. 24,634 26,298 24,604 25,858
Effect of dilutive securities:
Stock options ........................... 572 990 314 1,053
Convertible securities .................. 4,171 3,358 4,171 3,652
----------------------------------------------------------
Dilutive potential common shares .............. 4,743 4,348 4,485 4,705
----------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions ..................... 29,377 30,646 29,089 30,563
==========================================================
Basic earnings per common share ............... $ 0.41 $ 0.62 $ 0.75 $ 1.16
==========================================================
Diluted earnings per common share ............. $ 0.36 $ 0.54 $ 0.68 $ 1.02
==========================================================
Retained Interest in Notes Receivable Sold
When we sell our notes receivable either pursuant to our vacation
ownership receivables purchase facilities (more fully described in Note 3) or
term securitizations, we evaluate whether or not such transfers should be
accounted for as a sale pursuant to Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" and related interpretations. The evaluation
of sale treatment under SFAS No. 140 involves legal assessments of the
transactions, which include determining whether the transferred assets have been
isolated from us (i.e., put presumptively beyond our reach and our creditors,
even in bankruptcy or other receivership), determining whether each transferee
has the right to pledge or exchange the assets it received, and ensuring that we
do not maintain effective control over the transferred assets through either an
agreement that (1) both entitles and obligates us to repurchase or redeem the
assets before their maturity or (2) provides us with the ability to unilaterally
cause the holder to return the assets (other than through a cleanup call).
In connection with such transactions, we retain subordinated tranches,
rights to excess interest spread and servicing rights, all of which are retained
interests in the notes receivable sold. Gain or loss on the sale of the
receivables depends in part on the allocation of the previous carrying amount of
the financial assets involved in the transfer between the assets sold and the
retained interests based on their relative fair value at the date of transfer.
We consider our retained interests in notes receivable sold as
available-for-sale investments and, accordingly, carry them at fair value in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Accordingly, unrealized holding gains or losses on our
retained interests in notes receivable sold are included in our shareholders'
equity, net of income taxes. Declines in fair value that are determined to be
other than temporary are charged to operations.
9
We measure the fair value of the retained interests in the notes
receivable sold initially and periodically based on the present value of future
expected cash flows estimated using our best estimates of the key assumptions -
prepayment rates, loss severity rates, default rates and discount rates
commensurate with the risks involved. We revalue our retained interests in notes
receivable sold on a quarterly basis.
Interest on the retained interests in notes receivable sold is accreted
using the effective yield method.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", encourages, but does not require companies to record compensation
cost for employee stock options at fair value. We have elected to continue to
account for our employee stock options using the intrinsic value method pursuant
to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, compensation cost for our
employee stock options is measured as the excess, if any, of the quoted market
price of our stock at the date of the grant over the exercise price of the
option.
Pro forma information regarding net income and earnings per share as if we
had accounted for the grants of stock options to our employees under the fair
value method of SFAS No. 123 is presented below. There were 40,000 stock options
granted to our non-employee directors during the nine months ended September 30,
2004. The fair value of the stock options granted during the nine months ended
September 30, 2003 and 2004 was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk free investment rate of 2.80% and 2.12%; dividend yield of 0%
and 0%; a volatility factor of the expected market price of our common stock of
0.631 and 0.650; and a weighted average life of the options of 6.0 years and 3.0
years, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying SFAS No. 123 for the purpose of providing pro forma disclosures are not
likely to be representative of the effects on reported pro forma net income for
future years, due to the impact of the staggered vesting periods of our stock
option grants. Our pro forma information is as follows (in thousands, except per
share data).
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Net income, as reported .................... $ 10,202 $ 16,307 $ 18,555 $ 30,110
Pro forma stock-based employee
compensation cost, net of income taxes ... (81) (60) (320) (257)
---------- ---------- ---------- ----------
Pro forma net income ....................... $ 10,121 $ 16,247 $ 18,235 $ 29,853
========== ========== ========== ==========
Earnings per share, as reported:
Basic .................................... $ 0.41 $ 0.62 $ 0.75 $ 1.16
Diluted .................................. $ 0.36 $ 0.54 $ 0.68 $ 1.02
Pro forma earnings per share:
Basic .................................... $ 0.41 $ 0.62 $ 0.74 $ 1.15
Diluted .................................. $ 0.36 $ 0.54 $ 0.67 $ 1.01
During the nine months ended September 30, 2004, optionees under our employee
and director stock option plans exercised stock options resulting in the
issuance of an aggregate 555,000 shares of our common stock and proceeds of $2.6
million.
Other Comprehensive Income
Other comprehensive income on our condensed consolidated balance sheets is
comprised of net unrealized gains on retained interests in notes receivable
sold, which are held as available-for-sale investments. The following table
discloses the components of our comprehensive income for the periods presented
(in thousands):
10
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Net income ...................................... $ 10,202 $ 16,307 $ 18,555 $ 30,110
Net unrealized (losses) gains on retained
interests in notes receivable sold, net of
income taxes ................................. 551 (935) 1,327 (783)
-------- -------- -------- --------
Total comprehensive income ...................... $ 10,753 $ 15,372 $ 19,882 $ 29,327
======== ======== ======== ========
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (the "FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51" ("FIN 46"). FIN 46 addresses the consolidation of
variable interest entities. FIN 46 expands the criteria for consideration in
determining whether a variable interest entity should be consolidated by a
business entity, and requires existing unconsolidated variable interest entities
(which include, but are not limited to, certain special purpose entities) to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. This interpretation's consolidation
provisions applied immediately to variable interests in variable interest
entities created after January 31, 2003. Pursuant to a subsequent FASB revision
in December 2003, variable interest entities that were created before February
1, 2003 and were not reported as consolidated in accordance with FIN 46
previously were required to be reported as consolidated in the first interim or
annual period ended after March 15, 2004. The adoption of FIN 46 did not have a
material impact on our financial position or results of operations as of and for
the nine months ended September 30, 2004.
In February 2003, the FASB released for public comment an exposure draft
of an American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP"), "Accounting for Real Estate Time-Sharing Transactions" and a
proposed FASB Statement, "Accounting for Real Estate Time-Sharing
Transactions--an amendment of FASB Statements No. 66 and No. 67." The proposed
SOP and related FASB Statement, if cleared by the FASB, would have provided
accounting guidance for vacation ownership interest transactions, including: a
framework for sales and revenue recognition, the accounting for cost of sales
and inventory, credit losses and changes in estimates. In January 2004, the FASB
recommended that the proposed SOP not include any revenue recognition guidance
based on changes in revenue recognition practices that had occurred since this
project was initially started, the FASB's revenue recognition project and the
potential for requiring preparers to change their revenue recognition practices
twice in a short time frame and the rules-based nature of the revenue
recognition requirements of the proposed SOP. In August 2004, the SOP, revised
by the FASB's recommendations, received clearance from the FASB. The FASB also
approved the issuance of a final Statement that will amend FASB Statement No.
67, "Accounting for Costs and Initial Rental Operations of Real Estate
Projects," to state that the guidance for (a) incidental operations and (b)
costs incurred to sell real estate projects do not apply to real estate
timesharing transactions. The FASB also decided that the final Statement should
also amend FASB Statement No. 66, "Accounting for Sales of Real Estate," to
include a footnote that refers to the interpretive guidance in the SOP for
timesharing transactions. The FASB is expected to vote on the final Statement in
the fourth quarter of 2004, the issuance of which is expected to coincide with
the issuance of the final SOP. We have not yet completely evaluated the impact
of the SOP on our financial position or results of operations, however, we do
not believe that the SOP will have a material impact on us.
Reclassifications
We have made certain reclassifications of prior period amounts to conform
to the current period presentation. Most significantly, we previously carried
amounts held in bank accounts on behalf of the purchasers of our vacation
ownership notes receivable on our balance sheet as restricted cash with a
corresponding liability included under the caption "accrued liabilities and
other." While we retain the servicing rights on the vacation ownership notes
receivable sold, these cash accounts operate in the name of third-parties e.g.,
the facility trustees or the note purchasers. We have therefore reduced both
"restricted cash" and "accrued liabilities and other" for the aggregate carrying
amount of this cash in all periods presented, which as of December 31, 2003 was
$19.4 million.
2. Acquisition
On October 2, 2002, Great Vacation Destinations, Inc. ("GVD"), one of our
wholly-owned subsidiaries, with no prior operations, acquired substantially all
of the assets and assumed certain liabilities of TakeMeOnVacation, LLC, RVM
Promotions, LLC and RVM Vacations, LLC (collectively, "TMOV") for $2.8 million
in cash, $500,000 of which was paid on March 31, 2003. The acquisition agreement
provided for the payment of additional consideration of up to $12.5 million
through December 31, 2007 upon GVD meeting certain earnings targets (the "Earn
Out Provisions").
11
On June 1, 2004, we executed an amendment to the acquisition agreement
with the former owners of TMOV whereby in exchange for agreeing to pay $1.5
million, the former owners of TMOV agreed to release us from any obligation to
pay amounts under the Earn Out Provisions. The $1.5 million, which is payable in
quarterly installments over an 18 month period commencing on May 30, 2004, was
recorded as goodwill.
3. Sales of Notes Receivable
On October 8, 2003, Resort Finance, LLC ("RFL") acquired and assumed the
rights, obligations and commitments of ING Capital, LLC ("ING") as initial
purchaser in an existing vacation ownership receivables purchase facility (the
"Purchase Facility") originally executed between ING and us in April 2002.. In
connection with its assumption of the Purchase Facility and subsequent
amendments, RFL increased the size of the Purchase Facility to $150.0 million
and extended the term of the Purchase Facility on a revolving basis through
September 30, 2004. On September 30, 2004, we executed an extension of the
Purchase Facility to allow for sales of notes receivable for a cumulative
purchase price of up to $100.0 million on a revolving basis through September
29, 2005.
The Purchase Facility utilizes an owner's trust structure, pursuant to
which we sell receivables to Bluegreen Receivables Finance Corporation V, one of
our wholly-owned, special purpose finance subsidiaries (the "Finance
Subsidiary"), and the Finance Subsidiary sells the receivables to an owner's
trust (a qualified special purpose entity) without recourse to us or the Finance
Subsidiary except for breaches of certain representations and warranties at the
time of sale. We did not enter into any guarantees in connection with the
Purchase Facility. The Purchase Facility has detailed requirements with respect
to the eligibility of receivables for purchase, and fundings under the Purchase
Facility are subject to certain customary conditions precedent. Under the
Purchase Facility, a variable purchase price of 85.00% of the principal balance
of the receivables sold, subject to certain customary terms and conditions, is
paid at closing in cash. The balance of the purchase price is deferred until
such time as the Initial Purchaser has received a specified return and all
servicing, custodial, agent and similar fees and expenses have been paid. The
Initial Purchaser earned a return equal to the London Interbank Offered Rate
("LIBOR") plus 1.00% through April 15, 2003, LIBOR plus 1.25% through October 7,
2003, LIBOR plus an additional return ranging from 2.00% to 3.25% (based on the
amount outstanding under the Purchase Facility) from October 8, 2003 through
September 30, 2004, and will earn LIBOR plus 3.25% through September 29, 2005,
subject to the use of alternate return rates in certain circumstances. In
addition, the Initial Purchaser received or will receive a 0.25% annual facility
fee through April 15, 2003 and from October 8, 2003 through September 29, 2005.
RFL's obligation to purchase under the Purchase Facility may terminate
upon the occurrence of specified events. These specified events, some of which
are subject to materiality qualifiers and cure periods, include, without
limitation, (1) a breach by us of the representations or warranties in the
Purchase Facility agreements, (2) a failure by us to perform the covenants in
the Purchase Facility agreements, including, without limitation, a failure by us
to pay principal or interest due to RFL, (3) the commencement of a bankruptcy
proceeding or the like against us, (4) a material adverse change to us since
December 31, 2001, (5) the amount borrowed under the Purchase Facility exceeding
the borrowing base, (6) significant delinquencies or defaults on the receivables
sold, (7) a payment default by us under any other borrowing arrangement of $5
million or more (a "Significant Arrangement"), or an event of default under any
indenture, facility or agreement that results in a default under any Significant
Arrangement, (8) a default or breach under any other agreement beyond the
applicable grace period if such default or breach (a) involves the failure to
make a payment in excess of 5% of our tangible net worth or (b) causes, or
permits the holder of indebtedness to cause, an amount in excess of 5% of our
tangible net worth to become due, (9) our tangible net worth not equaling at
least $110.0 million plus 50% of net income and 100% of the proceeds from new
equity financing following the first closing under the Purchase Facility, (10)
our ratio of debt to tangible net worth exceeding 6 to 1, or (11) our failure to
perform our servicing obligations.
We act as servicer under the Purchase Facility for a fee. The Purchase
Facility agreements include various conditions to purchase, covenants, trigger
events and other provisions customary for a transaction of this type.
During the six months ended June 30, 2004, we sold $60.7 million of
aggregate principal balance of notes receivable under the Purchase Facility for
a cumulative purchase price of $51.6 million.
On July 8, 2004, BB&T Capital Markets, a division of Scott & Stringfellow,
Inc. ("BB&T"), consummated a $156.6 million private offering and sale of
vacation ownership receivable-backed securities on our behalf (the "2004 Term
Securitization"). The $172.1 million in aggregate principal of vacation
ownership receivables offered and sold in the 2004 Term Securitization included
$152.8 million in aggregate principal of qualified receivables that were
previously sold under the Purchase Facility and $19.3 million in aggregate
principal of qualified vacation ownership receivables (the "Pre-funded
Receivables") that, as permitted in the 2004 Term Securitization, were
subsequently sold without recourse (except for breaches of certain
representations and warranties at the time of sale) in two separate tranches on
August 13, 2004 and August 24, 2004 to an owners' trust (a qualified special
purpose entity) through our wholly-owned, special purpose finance
12
subsidiary, Bluegreen Receivables Finance Corporation VIII. The proceeds from
the 2004 Term Securitization were used to pay RFL all amounts outstanding under
the Purchase Facility, pay fees associated with the transaction to third-parties
and deposit initial amounts in a required cash reserve account. We received net
cash proceeds of $19.1 million, certain VOIs with a carrying value of $331,000
that were being held in the Purchase Facility in connection with previously
defaulted receivables, certain vacation ownership notes receivable with a net
realizable value of $4.2 million that were previously held in the Purchase
Facility that did not qualify for the 2004 Term Securitization and a retained
interest in the future cash flows from the 2004 Term Securitization of $33.0
million. We also recognized an aggregate gain of $2.6 million in connection with
the 2004 Term Securitization.
On September 29, 2004, we sold $25.9 million in aggregate principal of
vacation ownership receivables under the Purchase Facility for a cumulative
purchase price of $22.0 million. As a result of this sale, we recognized a gain
of $701,000 and recorded retained interests in notes receivable sold and
servicing assets of $4.4 million and $268,000, respectively. As a result of this
sale and the 2004 Term Securitization, the remaining availability under the
Purchase Facility was $78.0 million at September 30, 2004, subject to the
eligibility requirements and certain conditions precedent.
The following assumptions were used to measure the initial fair value of
the retained interests in notes receivable sold or securitized during the nine
months ended September 30, 2004: Prepayment rates ranging from 17% to 13% per
annum as the portfolios mature; loss severity rates ranging 40% to 45%; default
rates ranging from 10% to 1% per annum as the portfolios mature; and discount
rates ranging from 9% to 14%.
4. Lines of Credit and Notes Payable
On July 9, 2004, we borrowed $4.4 million from the Central Carolina Bank.
The proceeds from the borrowing were used to acquire 800 acres of land in
Chatham County, North Carolina for the purpose of developing a golf course
community to be known as Chapel Ridge. The total purchase price of the land was
$5.5 million. The borrowing, which is secured by the land, requires monthly
interest-only payments at the prime lending rate plus 0.5% per annum, principal
repayments through agreed-upon release prices as homesites are sold at Chapel
Ridge and becomes due in its entirety on July 9, 2007. As of September 30, 2004,
$3.9 million of this borrowing was outstanding.
From July through September 2004, we borrowed an aggregate $7.2 million
for construction expenditures at The Fountains(TM) resort in Orlando, Florida
pursuant to an existing $75.0 million acquisition, development and construction
revolving credit facility with Residential Funding Corporation ("RFC"), an
affiliate of GMAC (the "GMAC AD&C Facility"). The borrowing period on the GMAC
AD&C Facility expires on February 10, 2005, and outstanding borrowings mature no
later than February 10, 2009, although specific draws typically are due four
years from the borrowing date. Principal will be repaid through agreed-upon
release prices as vacation ownership interests are sold at the financed resorts,
subject to minimum required amortization. Indebtedness under the facility bears
interest at LIBOR plus 4.75%. Interest payments are due monthly. The outstanding
balance under this revolving facility was $24.6 million at September 30, 2004.
On August 26, 2004, we borrowed $9.6 million under an existing acquisition
and development loan with Wachovia Bank, N.A. (the "Wachovia Loan"). The
Wachovia Loan is collateralized by the real property homesites (and personal
property related thereto) at our Sanctuary Cove(TM) at St. Andrews Sound
residential land community in Brunswick, Georgia. Principal payments on the
Wachovia Loan are effected through agreed-upon release prices paid to Wachovia
Bank, N.A., as homesites at Sanctuary Cove at St. Andrews Sound are sold,
subject to minimum quarterly amortization commencing on November 12, 2004. The
Wachovia Loan bears interest at LIBOR plus 2.00%, subject to increase in the
event of a default, as defined in the Wachovia Loan documents. Interest payments
are due monthly. The Wachovia Loan matures on October 12, 2006, however we can
extend the maturity of the Wachovia Loan until November 12, 2008, subject to
certain customary extension terms and conditions. The outstanding balance under
the Wachovia Loan was $8.4 million at September 30, 2004.
On October 29, 2004, we borrowed $10.0 million under an existing
acquisition and development loan with Wells Fargo Foothill, Inc. (the "Foothill
Loan"). The Foothill Loan is collateralized by the real property homesites (and
personal property related thereto) at our Traditions of Braselton(TM) golf
course community in Braselton, Georgia. The Foothill Loan requires principal
payments based on agreed-upon release prices as homesites are sold and bears
interest at the prime lending rate plus 1.25%, payable monthly. Outstanding
indebtedness related to the Foothill Loan is due on March 10, 2006.
5. Senior Secured Notes Payable
On April 1, 1998, we consummated a private placement offering of $110.0
million in aggregate principal amount of 10.5% senior secured notes due April 1,
2008 (the "Notes"). None of the assets of Bluegreen Corporation secure our
obligations under the Notes, and the Notes are effectively subordinated to our
secured indebtedness to any third party to the extent of assets serving as
security therefor. The Notes are unconditionally guaranteed, jointly and
severally, by each of our
13
subsidiaries (the "Subsidiary Guarantors"), with the exception of Bluegreen/Big
Cedar Vacations, LLC, Bluegreen Properties N.V., Resort Title Agency, Inc., any
special purpose finance subsidiary, any subsidiary which is formed and continues
to operate for the limited purpose of holding a real estate license and acting
as a broker, and certain other subsidiaries which have individually less than
$50,000 of assets (collectively, "Non-Guarantor Subsidiaries"). Each of the note
guarantees cover the full amount of the Notes and each of the Subsidiary
Guarantors is 100% owned, directly or indirectly, by us. Supplemental financial
information for Bluegreen Corporation, its combined Non-Guarantor Subsidiaries
and its combined Subsidiary Guarantors follows:
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
December 31, 2003
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents .......................... $ 29,872 $ 8,716 $ 15,059 $ -- $ 53,647
Contracts receivable, net .......................... -- 1,075 24,447 -- 25,522
Intercompany receivable ............................ 100,191 -- -- (100,191) --
Notes receivable, net .............................. 847 19,232 74,115 -- 94,194
Other assets ....................................... 6,229 3,372 23,763 -- 33,364
Inventory, net ..................................... -- 22,225 197,665 -- 219,890
Retained interests in notes receivable sold ........ -- 60,975 -- -- 60,975
Investments in subsidiaries ........................ 185,162 -- 3,230 (188,392) --
Property and equipment, net ........................ 11,936 1,900 49,594 -- 63,430
--------- --------- --------- --------- ---------
Total assets ................................ $ 334,237 $ 117,495 $ 387,873 $(288,583) $ 551,022
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other .. $ 13,266 $ 9,874 $ 35,280 $ -- $ 58,420
Intercompany payable ............................. -- 1,127 99,064 (100,191) --
Deferred income taxes ............................ (19,954) 29,314 34,564 -- 43,924
Lines-of-credit and notes payable ................ 5,026 22,759 84,994 -- 112,779
10.50% senior secured notes payable .............. 110,000 -- -- -- 110,000
8.25% convertible subordinated debentures ........ 34,371 -- -- -- 34,371
--------- --------- --------- --------- ---------
Total liabilities ........................... 142,709 63,074 253,902 (100,191) 359,494
Minority interest ................................ -- -- -- 4,648 4,648
Total shareholders' equity ....................... 191,528 54,421 133,971 (193,040) 186,880
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity .. $ 334,237 $ 117,495 $ 387,873 $(288,583) $ 551,022
========= ========= ========= ========= =========
September 30, 2004
(Unaudited)
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents .......................... $ 50,908 $ 19,977 $ 15,352 $ -- $ 86,237
Contracts receivable, net .......................... -- 2,072 41,559 -- 43,631
Intercompany receivable ............................ 84,620 -- -- (84,620) --
Notes receivable, net .............................. -- 28,758 91,840 -- 120,598
Other assets ....................................... 5,909 3,819 27,432 -- 37,160
Inventory, net ..................................... -- 20,902 177,022 -- 197,924
Retained interests in notes receivable sold ........ -- 67,678 -- -- 67,678
Investments in subsidiaries ........................ 215,418 -- 3,230 (218,648) --
Property and equipment, net ........................ 14,046 2,110 54,634 -- 70,790
--------- --------- --------- --------- ---------
Total assets ................................ $ 370,901 $ 145,316 $ 411,069 $(303,268) $ 624,018
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other .. $ 14,886 $ 17,366 $ 51,503 $ -- $ 83,755
Intercompany payable ............................. -- 3,314 81,306 (84,620) --
Deferred income taxes ............................ (18,851) 35,353 45,769 -- 62,271
Lines-of-credit and notes payable ................ 3,611 22,504 80,622 -- 106,737
10.50% senior secured notes payable .............. 110,000 -- -- -- 110,000
8.25% convertible subordinated debentures ........ 27,590 -- -- -- 27,590
--------- --------- --------- --------- ---------
Total liabilities ........................... 137,236 78,537 259,200 (84,620) 390,353
Minority interest ................................ -- -- -- 7,340 7,340
Total shareholders' equity ....................... 233,665 66,779 151,869 (225,988) 226,325
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity .. $ 370,901 $ 145,316 $ 411,069 $(303,268) $ 624,018
========= ========= ========= ========= =========
14
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended September 30, 2003
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 9,857 $ 99,084 $ -- $ 108,941
Other resort and communities operations revenue .. -- 1,416 13,133 -- 14,549
Management fees .................................. 11,803 -- -- (11,803) --
Equity income from subsidiaries .................. 9,132 -- -- (9,132) --
Interest income .................................. 64 1,542 2,835 -- 4,441
Gain on sales of notes receivable ................ -- 476 -- -- 476
--------- --------- --------- --------- ---------
20,999 13,291 115,052 (20,935) 128,407
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 2,566 28,467 -- 31,033
Cost of other resort and communities operations .. -- 799 14,031 -- 14,830
Management fees .................................. -- 298 11,505 (11,803) --
Selling, general and administrative expenses ..... 7,471 5,473 45,847 -- 58,791
Interest expense ................................. 2,647 169 834 -- 3,650
Provision for loan losses ........................ -- 303 1,997 -- 2,300
Other expense .................................... 10 358 147 -- 515
--------- --------- --------- --------- ---------
10,128 9,966 102,828 (11,803) 111,119
--------- --------- --------- --------- ---------
Income before minority interest and provision
for income taxes ............................ 10,871 3,325 12,224 (9,132) 17,288
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 699 699
--------- --------- --------- --------- ---------
Income before provision for income taxes ......... 10,871 3,325 12,224 (9,831) 16,589
Provision for income taxes ....................... 669 1,011 4,707 -- 6,387
--------- --------- --------- --------- ---------
Net income ....................................... $ 10,202 $ 2,314 $ 7,517 $ (9,831) $ 10,202
========= ========= ========= ========= =========
Three Months Ended September 30, 2004
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 11,040 $ 150,858 $ -- $ 161,898
Other resort and communities operations revenue .. -- 2,359 17,303 -- 19,662
Management fees .................................. 17,508 -- -- (17,508) --
Equity income from subsidiaries .................. 14,223 -- -- (14,223) --
Interest income .................................. 70 1,777 3,896 -- 5,743
Gain on sales of notes receivable ................ -- 3,333 -- -- 3,333
--------- --------- --------- --------- ---------
31,801 18,509 172,057 (31,731) 190,636
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 3,602 55,185 -- 58,787
Cost of other resort and communities operations .. -- 1,423 18,775 -- 20,198
Management fees .................................. -- 302 17,206 (17,508) --
Selling, general and administrative expenses ..... 12,856 5,905 59,578 -- 78,339
Interest expense ................................. 1,293 376 1,573 -- 3,242
Provision for loan losses ........................ -- 410 2,193 -- 2,603
Other expense .................................... 38 38 515 -- 591
--------- --------- --------- --------- ---------
14,187 12,056 155,025 (17,508) 163,760
--------- --------- --------- --------- ---------
Income before minority interest and provision
for income taxes ............................ 17,614 6,453 17,032 (14,223) 26,876
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 360 360
--------- --------- --------- --------- ---------
Income before provision for income taxes ......... 17,614 6,453 17,032 (14,583) 26,516
Provision for income taxes ....................... 1,307 2,361 6,541 -- (10,209)
--------- --------- --------- --------- ---------
Net income ....................................... $ 16,307 $ 4,092 $ 10,491 $ (14,583) $ 16,307
========= ========= ========= ========= =========
15
Nine Months Ended September 30, 2003
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 26,227 $ 230,522 $ -- $ 256,749
Other resort and communities operations revenue .. -- 4,319 38,273 -- 42,592
Management fees .................................. 28,370 -- -- (28,370) --
Equity income from subsidiaries .................. 18,732 -- -- (18,732) --
Interest income .................................. 228 5,314 6,766 -- 12,308
Gain on sales of notes receivable ................ -- 3,360 -- -- 3,360
Other income (expense) ........................... 50 (534) 1,092 -- 608
--------- --------- --------- --------- ---------
47,380 38,686 276,653 (47,102) 315,617
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 7,011 69,355 -- 76,366
Cost of other resort and communities operations .. -- 2,271 41,851 -- 44,122
Management fees .................................. -- 814 27,556 (28,370) --
Selling, general and administrative expenses ..... 22,066 14,387 111,480 -- 147,933
Interest expense ................................. 6,870 434 2,322 -- 9,626
Provision for loan losses ........................ -- 834 4,691 -- 5,525
--------- --------- --------- --------- ---------
28,936 25,751 257,255 (28,370) 283,572
--------- --------- --------- --------- ---------
Income before minority interest and provision
(benefit) for income taxes .................. 18,444 12,935 19,398 (18,732) 32,045
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 1,875 1,875
--------- --------- --------- --------- ---------
Income before provision (benefit) for income
taxes ....................................... 18,444 12,935 19,398 (20,607) 30,170
Provision (benefit) for income taxes ............. (111) 4,258 7,468 -- 11,615
--------- --------- --------- --------- ---------
Net income ....................................... $ 18,555 $ 8,677 $ 11,930 $ (20,607) $ 18,555
========= ========= ========= ========= =========
Nine Months Ended September 30, 2004
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................. $ -- $ 32,711 $ 343,692 $ -- $ 376,403
Other resort and communities operations revenue .. -- 6,673 45,703 -- 52,376
Management fees .................................. 40,599 -- -- (40,599) --
Equity income from subsidiaries .................. 28,347 -- -- (28,347) --
Interest income .................................. 227 6,450 8,807 -- 15,484
Gain on sales of notes receivable ................ -- 6,929 -- -- 6,929
--------- --------- --------- --------- ---------
69,173 52,763 398,202 (68,946) 451,192
COSTS AND EXPENSES
Cost of real estate sales ........................ -- 8,704 123,149 -- 131,853
Cost of other resort and communities operations .. -- 3,942 49,454 -- 53,396
Management fees .................................. -- 779 39,820 (40,599) --
Selling, general and administrative expenses ..... 31,294 17,390 147,211 -- 195,895
Interest expense ................................. 6,287 1,064 3,988 -- 11,339
Provision for loan losses ........................ -- 848 5,654 -- 6,502
Other expense (income) ........................... 378 354 (176) -- 556
--------- --------- --------- --------- ---------
37,959 33,081 369,100 (40,599) 399,541
--------- --------- --------- --------- ---------
Income before minority interest and provision
for income taxes ............................ 31,214 19,682 29,102 (28,347) 51,651
Minority interest in income of consolidated
subsidiary .................................. -- -- -- 2,692 2,692
--------- --------- --------- --------- ---------
Income before provision for income taxes ......... 31,214 19,682 29,102 (31,039) 48,959
Provision for income taxes ....................... 1,104 6,541 11,204 -- 18,849
--------- --------- --------- --------- ---------
Net income ....................................... $ 30,110 $ 13,141 $ 17,898 $ (31,039) $ 30,110
========= ========= ========= ========= =========
16
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30, 2003
--------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------- ---------- ------------
Operating activities:
Net cash provided (used) by operating activities .................. $ (5,857) $ (4,198) $ 15,411 $ 5,356
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment ............................. (2,104) (336) (5,087) (7,527)
Sales of property and equipment ................................. 854 -- 226 1,080
Cash received from retained interests in notes receivable sold .. -- 5,948 -- 5,948
-------- -------- -------- --------
Net cash provided (used) by investing activities .................. (1,250) 5,612 (4,861) (499)
-------- -------- -------- --------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and
notes payable ................................................ 7,000 -- 25,000 32,000
Payments under line-of-credit facilities and notes payable ...... (7,528) -- (26,302) (33,830)
Payment of debt issuance costs .................................. (273) (985) (384) (1,642)
Proceeds from exercise of stock options ......................... 537 -- -- 537
-------- -------- -------- --------
Net cash used by financing activities ............................. (264) (985) (1,686) (2,935)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. (7,371) 429 8,864 1,922
Cash and cash equivalents at beginning of period .................. 22,373 5,322 6,581 34,276
-------- -------- -------- --------
Cash and cash equivalents at end of period ........................ 15,002 5,751 15,445 36,198
Restricted cash and cash equivalents at end of period ............. (173) (1,803) (14,440) (16,416)
-------- -------- -------- --------
Unrestricted cash and cash equivalents at end of period ........... $ 14,829 $ 3,948 $ 1,005 $ 19,782
======== ======== ======== ========
Nine Months Ended September 30, 2004
--------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------- ---------- ------------
Operating activities:
Net cash provided by operating activities ......................... $ 27,003 $ 5,212 $ 23,188 $ 55,403
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment ............................. (4,365) (607) (9,704) (14,676)
Sales of property and equipment ................................. -- -- 8 8
Installment payments on business acquisition .................... -- -- (575) (575)
Cash received from retained interests in notes receivable sold .. -- 11,231 -- 11,231
-------- -------- -------- --------
Net cash provided (used) by investing activities .................. (4,365) 10,624 (10,271) (4,012)
-------- -------- -------- --------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and
notes payable ................................................ -- 3,179 54,461 57,640
Payments under line-of-credit facilities and notes payable ...... (1,480) (7,733) (66,565) (75,778)
Payment of debt issuance costs .................................. (2,678) (21) (520) (3,219)
Proceeds from exercise of stock options ......................... 2,556 -- -- 2,556
-------- -------- -------- --------
Net cash used by financing activities ............................. (1,602) (4,575) (12,624) (18,801)
-------- -------- -------- --------
Net increase in cash and cash equivalents ......................... 21,036 11,261 293 32,590
Cash and cash equivalents at beginning of period .................. 29,872 8,716 15,059 53,647
-------- -------- -------- --------
Cash and cash equivalents at end of period ........................ 50,908 19,977 15,352 86,237
Restricted cash and cash equivalents at end of period ............. (173) (5,432) (13,928) (19,533)
-------- -------- -------- --------
Unrestricted cash and cash equivalents at end of period ........... $ 50,735 $ 14,545 $ 1,424 $ 66,704
======== ======== ======== ========
6. Convertible Subordinated Debentures
During the nine months ended September 30, 2004, $6.8 million of our 8.25%
Convertible Subordinated Debentures (the "Debentures") were voluntarily
converted by the holders of the Debentures at a conversion price of $8.24 per
share. Such conversions resulted in the issuance of 822,860 shares of our common
stock.
7. Contingencies
On August 21, 2000, we received a notice of Field Audit Action (the "First
Notice") from the State of Wisconsin Department of Revenue (the "DOR") alleging
that two corporations purchased by us had failed to collect and remit sales and
use taxes totaling $1.9 million to the State of Wisconsin prior to the purchase
during the period from January 1, 1994 through September 30, 1997. On May 24,
2003, we received a second Notice of Field Audit Action (the "Second Notice")
from DOR alleging that the two subsidiaries failed to collect and remit sales
and use taxes to the State of Wisconsin during the period from April 1, 1998
through March 31, 2002 totaling $1.4 million. The majority of the assessment is
based on the subsidiaries not charging sales tax to purchasers of VOIs at our
Christmas Mountain Village(TM) resort during the period from January 1, 1994
through December 31, 1999. The statute requiring the assessment of sales tax on
sales of certain VOIs in Wisconsin was repealed in December 1999. We acquired
the subsidiaries that were the subject of the notices in connection with the
acquisition of RDI Group, Inc. ("RDI") on September 30, 1997. Under the RDI
purchase agreement, we had certain rights of off set for amounts owed the
sellers based on any breach of representations and warranties.
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On August 31, 2004, we settled the sales tax assessments and all interest
and penalties for $2.3 million. Of this amount, $750,000 was already accrued in
connection with the indemnification by RDI's former stockholders and
approximately $210,000 will be reimbursed to us by certain property owners'
associations that serve the Christmas Mountain Village Resort. We recognized an
expense of $1.3 million from this settlement during the three months ended
September 30, 2004.
In the ordinary course of our business, we become subject to claims or
proceedings from time to time relating to the purchase, subdivision, sale or
financing of real estate. Additionally, from time to time, we become involved in
disputes with existing and former employees. We believe that these claims are
routine litigation incidental to our business.
8. Business Segments
We have two reportable business segments. Bluegreen Resorts develops,
markets and sells VOIs in our Bluegreen Vacation Club resorts, and provides
resort management services to resort property owners associations. Bluegreen
Communities acquires large tracts of real estate, which are subdivided, improved
(in some cases to include a golf course on the property) and sold, typically on
a retail basis as homesites. Disclosures for our business segments are as
follows (in thousands):
Bluegreen Bluegreen
Resorts Communities Totals
--------- ----------- --------
As of and for the three months ended September 30, 2003
Sales of real estate ...................................... $ 83,925 $ 25,016 $108,941
Other resort and communities operations revenue ........... 12,826 1,723 14,549
Depreciation expense ...................................... 959 452 1,411
Field operating profit .................................... 21,799 2,028 23,827
Inventory, net ............................................ 93,228 117,126 210,354
As of and for the three months ended September 30, 2004
Sales of real estate ...................................... $ 96,104 $ 65,794 $161,898
Other resort and communities operations revenue ........... 17,782 1,880 19,662
Depreciation expense ...................................... 1,387 426 1,813
Field operating profit .................................... 19,355 15,584 34,939
Inventory, net ............................................ 109,165 88,759 197,924
For the nine months ended September 30, 2003
Sales of real estate ...................................... $191,060 $ 65,689 $256,749
Other resort and communities operations revenue ........... 37,605 4,987 42,592
Depreciation expense ...................................... 2,628 1,249 3,877
Field operating profit .................................... 40,796 5,644 46,440
For the nine months ended September 30, 2004
Sales of real estate ...................................... $235,888 $140,515 $376,403
Other resort and communities operations revenue ........... 46,824 5,552 52,376
Depreciation expense ...................................... 3,689 1,341 5,030
Field operating profit .................................... 43,694 28,173 71,867
Reconciliations to Consolidated Amounts
Field operating profit for our reportable segments reconciled to our
consolidated income before provision for income taxes and minority interest is
as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2004 2003 2004
------------- ------------- ------------- -------------
Field operating profit for reportable
segments ................................. $ 23,827 $ 34,939 $ 46,440 $ 71,867
Interest income ............................. 4,441 5,743 12,308 15,484
Gain on sales of notes receivable ........... 476 3,333 3,360 6,929
Other income (expense) ...................... (515) (591) 608 (556)
Corporate general and administrative
expenses ................................. (4,991) (10,703) (15,520) (24,232)
Interest expense ............................ (3,650) (3,242) (9,626) (11,339)
Provision for loan losses ................... (2,300) (2,603) (5,525) (6,502)
-------- -------- -------- --------
Consolidated income before minority
interest and provision for income taxes .. $ 17,288 $ 26,876 $ 32,045 $ 51,651
======== ======== ======== ========
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
Cautionary Statement Regarding Forward-Looking Statements and Risk Factors
We desire to take advantage of the "safe harbor" provisions of the Private
Securities Reform Act of 1995 (the "Act") and are making the following
statements pursuant to the Act to do so. Certain statements in this Quarterly
Report and our other filings with the SEC constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act. You may identify these statements by
forward-looking words such as "may," "intend," "expect," "anticipate,"
"believe," "will," "should," "project," "estimate," "plan" or other comparable
terminology or by other statements that do not relate to historical facts. All
statements, trend analyses and other information relative to the market for our
products, remaining life of project sales, our expected future sales, financial
position, operating results, liquidity and capital resources, our business
strategy, financial plan and expected capital requirements as well as trends in
our operations or results are forward-looking statements. These forward-looking
statements are subject to known and unknown risks and uncertainties, many of
which are beyond our control, including changes in economic conditions,
generally, in areas where we operate, or in the travel and tourism industry,
increases in interest rates, changes in regulations, results of claims or
litigation pending or brought against us in the future and other factors
discussed throughout our SEC filings, all of which could cause our actual
results, performance or achievements, or industry trends, to differ materially
from any future results, performance, or achievements or trends expressed or
implied herein. Given these uncertainties, investors are cautioned not to place
undue reliance on these forward-looking statements and no assurance can be given
that the plans, estimates and expectations reflected herein will be achieved.
Factors that could adversely affect our future results can also be considered
general "risk factors" with respect to our business, whether or not they relate
to a forward-looking statement. We wish to caution you that the important
factors set forth below and elsewhere in this report in some cases have
affected, and in the future could affect, our actual results and could cause our
actual consolidated results to differ materially from those expressed in any
forward-looking statements. Please also see our Annual Report on Form 10-K for
the year ended December 31, 2003 for further discussion of the factors,
including those set forth below.
o Our continued liquidity depends on our ability to sell or borrow
against our notes receivable.
o We depend on additional funding to finance our operations.
o Our success depends on our ability to market our products
efficiently.
o We would incur substantial losses if the customers we finance
default on their obligations to pay the balance of the purchase
price; and, our results of operations and financial condition could
be adversely impacted if our estimates concerning our notes
receivable are incorrect.
o We are subject to the risks of the real estate market and the risks
associated with real estate development, including risks and
uncertainties relating to the cost and availability of land and
construction materials.
o We may not successfully execute our growth strategy.
o We may face a variety of risks when, and if,we expand our
operations.
o Excessive claims for development-related defects could adversely
affect our financial condition and operating results.
o We may face additional risks as we expand into new markets.
o The limited resale market for VOIs could adversely affect our
business.
o Extensive federal, state and local laws and regulations affect the
way we conduct our business.
o Environmental liabilities, including claims with respect to mold or
hazardous or toxic substances, could have a material adverse impact
on our business.
o We could incur costs to comply with laws governing accessibility of
facilities by disabled persons.
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o Our internal controls over financial reporting could be found not to
be effective as required under Section 404 of the Sarbanes-Oxley Act
of 2002
Executive Overview
We operate through two business segments. Bluegreen Resorts develops, markets
and sells VOIs in our Bluegreen Vacation Club resorts, and provides resort
management services to resort property owners associations. Bluegreen
Communities acquires large tracts of real estate, which are subdivided, improved
(in some cases to include a golf course on the property) and sold, typically on
a retail basis, as homesites.
We have historically experienced and expect to continue to experience seasonal
fluctuations in our gross revenues and net earnings. This seasonality may cause
significant fluctuations in our quarterly operating results, with the majority
of our gross revenues and net earnings historically occurring in the quarters
ending in June and September each year. Other material fluctuations in operating
results may occur due to the timing of development and the requirement that we
use the percentage-of-completion method of accounting. Under this method of
income recognition, income is recognized as work progresses. Measures of
progress are based on the relationship of costs incurred to date to expected
total costs. We expect that we will continue to invest in projects that will
require substantial development (with significant capital requirements), and
hence that our results of operations may fluctuate significantly between
quarterly and annual periods as a result of the required use of the
percentage-of-completion method of accounting.
We do not believe that inflation and changing prices currently have had or will
have for the foreseeable future a material impact on our revenues and results of
operations, other than to the extent that we continually review and have
historically increased the sales prices of our VOIs annually and that
construction costs have and are expected to continue to increase. There is no
assurance that we will be able to continue to increase our sales prices or that
increased construction costs will not have a material adverse impact on our
results of operations. To the extent inflationary trends affect interest rates,
a portion of our debt service costs and pricing on our receivable sales
transactions may be adversely affected.
We recognize revenue on homesite and VOI sales when a minimum of 10% of the
sales price has been received in cash, the refund or rescission period has
expired, collectibility of the receivable representing the remainder of the
sales price is reasonably assured and we have completed substantially all of our
obligations with respect to any development of the real estate sold. In cases
where we otherwise meet the revenue recognition criteria previously noted but
all development has not been completed, we recognize revenue in accordance with
the percentage-of-completion method of accounting.
Costs associated with the acquisition and development of vacation ownership
resorts and residential communities, including carrying costs such as interest
and taxes, are capitalized as inventory and are allocated to cost of real estate
sold as the respective revenues are recognized.
A portion of our revenues historically has been and is expected to continue to
be comprised of gains on sales of notes receivable. The gains are recorded on
our consolidated statements of income and the related retained interests in the
notes receivable sold are recorded on our consolidated balance sheets at the
time of sale. The amount of gains recognized and the fair value of the retained
interests recorded are based in part on management's best estimates of future
prepayment, default rates, loss severity rates, discount rates and other
considerations in light of then-current conditions. If actual prepayments with
respect to loans occur more quickly than we projected at the time such loans
were sold, as can occur when interest rates decline, interest would be less than
expected and may cause a decline in the fair value of the retained interests and
a charge to operations. If actual defaults or other factors discussed above with
respect to loans sold are greater than estimated, charge-offs would exceed
previously estimated amounts and the cash flow from the retained interests in
notes receivable sold would decrease. Also, to the extent the portfolio of
receivables sold fails to satisfy specified performance criteria (as may occur
due to, for example, an increase in default rates or loan loss severity) or
certain other events occur, the funds received from obligors must be distributed
on an accelerated basis to investors. If the accelerated payment formula were to
become applicable, the cash flow to us from the retained interests in notes
receivable sold would be reduced until the outside investors were paid or the
regular payment formula was resumed. If these situations were to occur on a
material basis, it could cause a decline in the fair value of the retained
interests and a charge to earnings currently. There is no assurance that the
carrying value of our retained interests in notes receivable sold will be fully
realized or that future loan sales will be consummated or, if consummated,
result in gains. See "Vacation Ownership Receivables Purchase Facilities - Off
Balance Sheet Arrangements," below.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial condition are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported
20
amounts of assets, liabilities, revenues and expenses, and related disclosure of
commitments and contingencies. On an ongoing basis, management evaluates its
estimates, including those that relate to the recognition of revenue, including
revenue recognition under the percentage-of-completion method of accounting; our
reserve for loan losses; the valuation of retained interests in notes receivable
sold and the related gains on sales of notes receivable; the recovery of the
carrying value of real estate inventories, golf courses, intangible assets and
other assets; and the estimate of contingent liabilities related to litigation
and other claims and assessments. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
these estimates under different assumptions and conditions. If actual results
significantly differ from management's estimates, our results of operations and
financial condition could be materially adversely impacted. For a more detailed
discussion of these critical accounting policies see "Critical Accounting
Policies and Estimates" included in our Annual Report on Form 10-K for the year
ended December 31, 2003.
Results of Operations
We review financial information, allocate resources and manage our business as
two segments, Bluegreen Resorts and Bluegreen Communities. The information
reviewed is based on internal reports and excludes general and administrative
expenses attributable to corporate overhead. The information provided is based
on a management approach and is used by us for the purpose of tracking trends
and changes in results. It does not reflect the actual economic costs,
contributions or results of operations of the segments as stand alone
businesses. If a different basis of presentation or allocation were utilized,
the relative contributions of the segments might differ but the relative trends,
in our view, would likely not be materially impacted. The table below sets forth
net revenue and income from operations by segment.
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Bluegreen Bluegreen
Resorts Communities Total
------------------------ ----------------------- -----------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
--------- ---------- --------- ---------- --------- ----------
(dollars in thousands)
Three Months Ended
September 30, 2003
Sales of real estate .............. $ 83,925 100% $ 25,016 100% $ 108,941 100%
Cost of real estate sales ......... (16,464) (20) (14,569) (58) (31,033) (29)
--------- --------- ---------
Gross profit ...................... 67,461 80 10,447 42 77,908 71
Other resort and communities
operations revenues ........... 12,826 15 1,723 7 14,549 13
Cost of other resort and
communities operations ........ (12,834) (15) (1,996) (8) (14,830) (14)
Selling and marketing
expenses ...................... (41,650) (50) (5,854) (23) (47,504) (44)
Field general and administrative
expenses (1) .................. (4,004) (5) (2,292) (9) (6,296) (6)
--------- --------- ---------
Field Operating Profit ............ $ 21,799 26% $ 2,028 8% $ 23,827 22%
========= ========= =========
Three Months Ended
September 30, 2004
Sales of real estate .............. $ 96,104 100% $ 65,794 100% $ 161,898 100%
Cost of real estate sales ......... (23,873) (25) (34,914) (53) (58,787) (36)
--------- --------- ---------
Gross profit ...................... 72,231 75 30,880 47 103,111 64
Other resort and communities
operations revenues ........... 17,782 19 1,880 3 19,662 12
Cost of other resort and
communities operations ........ (18,165) (19) (2,033) (3) (20,198) (12)
Selling and marketing
expenses ...................... (48,154) (50) (11,796) (18) (59,950) (37)
Field general and
administrative expenses (1) ..... (4,339) (5) (3,347) (5) (7,686) (5)
--------- --------- ---------
Field Operating Profit ............ $ 19,355 20% $ 15,584 24% $ 34,939 22%
========= ========= =========
Nine Months Ended
September 30, 2003
Sales of real estate .............. $ 191,060 100% $ 65,689 100% $ 256,749 100%
Cost of real estate sales ......... (39,327) (21) (37,039) (56) (76,366) (30)
--------- --------- ---------
Gross profit ...................... 151,733 79 28,650 44 180,383 70
Other resort and communities
operations revenues ........... 37,605 20 4,987 8 42,592 17
Cost of other resort and
communities operations ........ (38,655) (20) (5,467) (8) (44,122) (17)
Selling and marketing
expenses ...................... (98,514) (52) (15,232) (23) (113,746) (44)
Field general and
administrative expenses (1) ... (11,373) (6) (7,294) (11) (18,667) (7)
--------- --------- ---------
Field Operating Profit ............ $ 40,796 21% $ 5,644 9% $ 46,440 18%
========= ========= =========
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