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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 March 31, 2005
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 |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of May 6, 2005, there were 30,342,296 shares of the registrant's common
stock, $.01 par value, 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, 2004
and March 31, 2005..................................................................... 3
Condensed Consolidated Statements of Income - Three Months Ended
March 31, 2004 and 2005................................................................ 4
Condensed Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2004 and 2005................................................................ 5
Notes to Condensed Consolidated Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 17
Item 4. Controls and Procedures................................................................... 33
Part II - Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.......... 33
Item 6. Exhibits.................................................................................. 33
Signatures........................................................................................... 34
Note: The terms "Bluegreen(R),""Bluegreen Communities(R)," and "Bluegreen
Vacation Club(R)" are registered in the U.S. Patent and Trademark Office by
Bluegreen Corporation.
The terms "La Cabana Beach and Racquet Club(TM)," "The Hammocks at Marathon
Resort(TM)," "Casa Del Mar Beach Resort(TM)," "Orlando's Sunshine Resort(TM),"
"Solara Surfside Resort(TM)," "Mountain Run at Boyne(TM)," "The Falls Village
Resort(TM)," "Big Cedar(R) Wilderness Club(TM)," "The Lodge Alley Inn(TM),"
"Harbour Lights Resort(TM)," "Shore Crest Vacation Villas(TM)," "Laurel Crest
Resort(TM)," "MountainLoft Resort(TM)," "Shenandoah Crossing Resort(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)," "Carolina
National(TM)," "Brickshire(TM)," "Golf Club at Brickshire(TM)," and "Preserve at
Jordan Lake(TM)" are trademarks or service marks of Bluegreen Corporation in the
United States.
The term "Big Cedar(R)" is registered in the U.S. Patent and Trademark
Office by Big Cedar, L.L.C.
The term "Bass Pro Shops(R)" is registered in the U.S. Patent and
Trademark Office by Bass Pro, Inc.
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.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, March 31,
2004 2005
---- ----
(Note) (Unaudited)
ASSETS
Cash and cash equivalents (including restricted cash of approximately $19,396
and $18,399 at December 31, 2004 and March 31, 2005, respectively) ............. $ 98,538 $ 112,946
Contracts receivable, net ......................................................... 28,085 41,151
Notes receivable, net ............................................................. 121,949 107,116
Prepaid expenses .................................................................. 7,810 7,381
Other assets ...................................................................... 22,359 24,945
Inventory, net .................................................................... 205,213 217,709
Retained interests in notes receivable sold ....................................... 72,099 80,473
Property and equipment, net ....................................................... 74,244 75,080
Intangible assets and goodwill .................................................... 4,512 4,465
--------- ---------
Total assets ............................................................ $ 634,809 $ 671,266
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable .................................................................. $ 11,552 $ 11,233
Accrued liabilities and other ..................................................... 44,351 49,138
Deferred income ................................................................... 24,235 30,396
Deferred income taxes ............................................................. 58,150 62,477
Receivable-backed notes payable ................................................... 43,696 40,324
Lines-of-credit and notes payable ................................................. 71,949 65,288
10.50% senior secured notes payable ............................................... 110,000 110,000
Junior subordinated debentures .................................................... -- 23,196
--------- ---------
Total liabilities .............................................................. 363,933 392,052
Minority interest ................................................................. 6,009 6,782
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; 32,990 and 33,097
shares issued at December 31, 2004 and March 31, 2005, respectively ............ 330 331
Additional paid-in capital ........................................................ 167,408 168,060
Treasury stock, 2,756 common shares at both December 31, 2004 and March 31,
2005, at cost .................................................................. (12,885) (12,885)
Accumulated other comprehensive income, net of income taxes ....................... 832 1,287
Retained earnings ................................................................. 109,182 115,639
--------- ---------
Total shareholders' equity ................................................... 264,867 272,432
--------- ---------
Total liabilities and shareholders' equity .............................. $ 634,809 $ 671,266
========= =========
Note: The condensed consolidated balance sheet at December 31, 2004 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
March 31, March 31,
2004 2005
---- ----
Revenues:
Sales of real estate .............................................. $ 86,191 $104,021
Other resort and communities operations revenue ................... 13,552 18,044
Interest income ................................................... 5,021 6,542
Gain on sales of notes receivable ................................. 2,380 1,441
-------- --------
107,144 130,048
Costs and expenses:
Cost of real estate sales ......................................... 29,240 32,887
Cost of other resort and communities operations ................... 13,913 19,636
Selling, general and administrative expenses ...................... 50,449 62,033
Interest expense .................................................. 3,999 3,215
Provision for loan losses ......................................... 870 147
Other expense ..................................................... 201 858
-------- --------
98,672 118,776
-------- --------
Income before minority interest and provision for income taxes ....... 8,472 11,272
Minority interest in income of consolidated subsidiary ............... 829 773
-------- --------
Income before provision for income taxes ............................. 7,643 10,499
Provision for income taxes ........................................... 2,943 4,042
-------- --------
Net income ........................................................... $ 4,700 $ 6,457
======== ========
Income per common share:
Basic ............................................................ $ 0.19 $ 0.21
======== ========
Diluted .......................................................... $ 0.17 $ 0.21
======== ========
Weighted average number of common and common equivalent shares:
Basic ............................................................ 25,190 30,316
======== ========
Diluted .......................................................... 30,319 31,294
======== ========
See accompanying notes to condensed consolidated financial statements.
4
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
2004 2005
---- ----
Operating activities:
Net income ................................................................ $ 4,700 $ 6,457
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest in income of consolidated subsidiary ............... 829 773
Depreciation and amortization ........................................ 4,000 4,458
Gain on sale of notes receivable ..................................... (2,380) (1,441)
(Gain) loss on sale of property and equipment ........................ 24 --
Provision for loan losses ............................................ 870 147
Provision for deferred income taxes .................................. 2,943 4,042
Interest accretion on retained interests in notes receivable sold .... (1,838) (1,663)
Proceeds from sales of notes receivable .............................. 33,582 38,183
Proceeds from borrowings collateralized by notes receivable .......... 3,591 10,103
Payments on borrowings collateralized by notes receivable ............ (2,581) (13,475)
Change in operating assets and liabilities:
Contracts receivable .................................................... (15,633) (13,066)
Notes receivable ........................................................ (28,407) (32,932)
Inventory ............................................................... 9,797 2,290
Prepaid expenses and other assets ....................................... 113 (1,747)
Accounts payable, accrued liabilities and other ......................... 13,947 10,633
--------- ---------
Net cash provided by operating activities .................................... 23,557 12,762
--------- ---------
Investing activities:
Purchases of property and equipment ....................................... (4,593) (3,524)
Investment in statutory business trust .................................... -- (696)
Cash received from retained interests in notes receivable sold ............ 3,682 1,829
--------- ---------
Net cash used by investing activities ........................................ (911) (2,391)
--------- ---------
Financing activities:
Borrowings under line-of-credit facilities and other notes payable ........ -- 2,219
Payments under line-of-credit facilities and other notes payable .......... (19,804) (20,822)
Proceeds from issuance of junior subordinated debentures .................. -- 23,196
Payment of debt issuance costs ............................................ (694) (1,204)
Proceeds from exercise of stock options ................................... 2,039 648
--------- ---------
Net cash (used) provided by financing activities ............................. (18,459) 4,037
--------- ---------
Net increase in cash and cash equivalents .................................... 4,187 14,408
Cash and cash equivalents at beginning of period ............................. 53,647 98,538
--------- ---------
Cash and cash equivalents at end of period ................................... 57,834 112,946
Restricted cash and cash equivalents at end of period ........................ (18,537) (18,399)
--------- ---------
Unrestricted cash and cash equivalents at end of period ...................... $ 39,297 $ 94,547
========= =========
See accompanying notes to condensed consolidated financial statements.
5
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
(Unaudited)
Three Months Ended
March 31, March 31,
2004 2005
---- ----
Supplemental schedule of non-cash operating, investing
and financing activities:
Inventory acquired through financing ................................. $ 75 $11,710
======= =======
Inventory acquired through foreclosure or deedback in lieu of
foreclosure ........................................................ $ 1,848 $ 3,076
======= =======
Property and equipment acquired through financing .................... $ 49 $ 232
======= =======
Retained interests in notes receivable sold .......................... $ 7,978 $ 7,800
======= =======
Net change in unrealized losses in retained interests in notes
receivable sold ................................................ $ 560 $ 455
======= =======
Conversion of 8.25% convertible subordinated debentures .............. $ 3,245 $ --
======= =======
See accompanying notes to condensed consolidated financial statements.
6
BLUEGREEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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 items that, in our opinion, are necessary for a
fair presentation of our financial position, results of operations and cash
flows for the interim periods. The results of operations for the three months
ended March 31, 2005 are not necessarily indicative of the results to be
expected for the year ending December 31, 2005. For further information, refer
to our audited consolidated financial statements for the year ended December 31,
2004, which are included in our Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 16, 2005.
Organization
We are a leading provider of leisure products and lifestyle choices
through our resorts and residential communities businesses. Our resorts business
("Bluegreen 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. 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
third-party, worldwide vacation ownership exchange networks. We are currently
marketing and selling VOIs in 18 resorts located in the United States and Aruba,
16 of which have active sales offices. We also sell VOIs at five off-site sales
offices located in the United States. Our residential communities business
("Bluegreen Communities(TM)") 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 three months ended March 31, 2005, 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.
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. Additionally, we do not consolidate
our wholly owned statutory business trusts (see Note 4) 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. The statutory business trusts
are accounted for under the equity method of accounting. 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.
7
Reclassifications
We have made certain reclassifications of prior period amounts to conform
to the current period presentation.
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 for the first quarter of 2004, includes an adjustment , to both net income
and shares outstanding as if approximately $31.1 million of 8.25% convertible
subordinated debentures, which were outstanding on March 31, 2004 but which were
redeemed prior to December 31, 2004, were converted into common stock at the
beginning of the periods presented. There were no anti-dilutive stock options
for the three months ended March 31, 2004 and 2005.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended
March 31, March 31,
2004 2005
-----------------------
Basic earnings per share - numerator:
Net income ............................................... $ 4,700 $ 6,457
=======================
Diluted earnings per share - numerator:
Net income - basic ....................................... $ 4,700 $ 6,457
Effect of dilutive securities, net of income taxes ....... 318 --
-----------------------
Net income - diluted .................................... $ 5,018 $ 6,457
=======================
Denominator:
Denominator for basic earnings per share -
weighted-average shares ............................... 25,190 30,316
Effect of dilutive securities:
Stock options ......................................... 1,022 978
Convertible securities ................................ 4,107 --
-----------------------
Dilutive potential common shares ............................ 5,129 978
-----------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversions ....... 30,319 31,294
=======================
Basic earnings per common share ............................. $ 0.19 $ 0.21
=======================
Diluted earnings per common share ........................... $ 0.17 $ 0.21
=======================
Retained Interests in Notes Receivable Sold
When we sell our notes receivable either pursuant to our vacation
ownership receivables purchase facilities (more fully described in Note 2) or
through 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."
8
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.
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 currently require companies to record
compensation cost for employee stock options at fair value. We 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 no stock options
granted to our employees or non-employee directors during the three months ended
March 31, 2004 or 2005.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. 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
March 31, 2004 March 31, 2005
-------------- --------------
Net income, as reported .................................. $ 4,700 $ 6,457
Pro forma stock-based employee compensation
cost, net of income taxes ............................. (64) (61)
--------- ---------
Pro forma net income ..................................... $ 4,636 $ 6,396
========= =========
Earnings per share, as reported:
Basic .................................................. $ 0.19 $ 0.21
Diluted ................................................ $ 0.17 $ 0.21
Pro forma earnings per share:
Basic .................................................. $ 0.18 $ 0.21
Diluted ................................................ $ 0.16 $ 0.20
See "Recent Accounting Pronouncements" for a discussion of SFAS No. 123
(revision) which we anticipate adopting as of January 1, 2006.
Comprehensive Income
Accumulated 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):
Three Months Ended
March 31, 2004 March 31, 2005
-------------- --------------
Net income ............................................... $ 4,700 $6,457
Net unrealized (losses)/gains on retained interests in
notes receivable sold, net of income taxes ............ (344) 455
------- ------
Total comprehensive income ............................... $ 4,356 $6,912
======= ======
9
Recent Accounting Pronouncements
In December 2004, the FASB issued (revised 2004), Share-Based Payment, a
revision of SFAS No. 123, Accounting for Stock-Based Compensation. The revised
statement supersedes APB No. 25, Accounting for Stock-Based Compensation, and
amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in the
revised statement is similar to the approach described in SFAS No. 123. However,
the revised statement requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement based
on their fair values. Pro forma disclosure will no longer be an alternative. The
new standard will become effective for us on January 1, 2006. As permitted by
SFAS No. 123, we currently account for share-based payments to employees using
APB No. 25's intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options. Accordingly, the adoption of the
revised statement's fair value method will likely have a significant impact on
our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of the revised statement cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted the revised statement in the
periods presented, the impact of that standard on our results of operations
would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net income and earnings per share above (see "Stock
Based Compensation"). The revised statement also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While we cannot
estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amount of operating
cash flows recognized in prior periods for such excess tax deductions have not
been material.
In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions. This statement amends SFAS No. 66, Accounting for
Sales of Real Estate, and 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. SOP 04-2 was
issued to address the diversity in practice caused by a lack of guidance
specific to real estate time-sharing transactions. Areas of diversity in
practice have included accounting for uncollectible notes receivable, recovery
or repossession of VOIs, selling and marketing costs, operations during holding
periods, developer subsidies to property owners' associations and upgrade and
reload transactions. The provisions of SFAS No. 152 and SOP 04-2 become
effective for us on January 1, 2006. We have not yet completely evaluated the
impact of these standards on our financial position or results of operations.
2. Sales of Notes Receivable
On December 31, 2004, we executed agreements for a vacation ownership
receivables purchase facility (the "BB&T Purchase Facility") with Branch Banking
and Trust Company ("BB&T"). The BB&T Purchase Facility utilizes an owner's trust
structure, pursuant to which we sell receivables to Bluegreen Receivables
Finance Corporation IX, our wholly-owned, special purpose finance subsidiary
("BRFC IX"), and BRFC IX sells 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 the BB&T Purchase Facility. The
BB&T Purchase Facility has detailed requirements with respect to the eligibility
of receivables for purchase, and fundings under the BB&T Purchase Facility are
subject to certain conditions precedent. Under the 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, is paid at closing in
cash. The balance of the purchase price is deferred until such time as BB&T has
received a specified return and all servicing, custodial, agent and similar fees
and expenses have been paid. BB&T earns a return equal to the commercial paper
rate 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. We act as servicer under the BB&T
Purchase Facility for a fee. The BB&T Purchase Facility allows for sales of
notes receivable for a cumulative purchase price of up to $140.0 million, the
commitment for $40.0 million of which expires on July 5, 2005, and the remainder
of which expires on December 30, 2005. The BB&T Purchase Facility includes
various conditions to purchase, covenants, trigger events and other provisions
customary for a transaction of this type. BB&T's obligation to purchase under
the BB&T Purchase Facility may terminate earlier than the dates noted above upon
the occurrence of certain specified events set forth in the BB&T Purchase
Facility agreement.
On March 31, 2005, we sold $44.9 million of aggregate principal balance of
notes receivable under the BB&T Purchase Facility for a cumulative purchase
price of $38.2 million. In connection with this transaction, we recognized an
aggregate gain of $1.4 million and recorded a retained interest in notes
receivable sold of $7.8 million and a servicing asset totaling $0.5 million. The
following assumptions were used to measure the initial fair value of the
retained interests in notes
10
receivable sold during the three months ended March 31, 2005: prepayment rates
ranging from 17% to 14% per annum as the portfolios mature; loss severity rate
of 45%; default rates ranging from 9% to 1% per annum as the portfolios mature;
and a discount rate of 12%.
The remaining availability under the BB&T Purchase Facility was $101.8
million at March 31, 2005.
3. Lines-of-Credit and Notes Payable
On January 11, 2005, we entered into a $50.0 million revolving credit
facility with Resort Finance, LLC ("RFL"). Borrowings from this facility (the
"RFL A&D Facility") will be used to finance the acquisition and development of
vacation ownership resorts . The RFL A&D Facility is secured by 1) a first
mortgage and lien on all assets purchased with the RFL A&D Facility; 2) a first
assignment of all construction contracts, related documents, building permits
and completion bond; 3) a negative pledge of our interest in any management,
marketing, maintenance or service contracts; and 4) a first assignment of all
operating agreements, rents and other revenues at the vacation ownership resorts
which serve as collateral for the RFL A&D Facility, subject to any requirements
of the respective property owners' associations. Borrowings under the RFL A&D
Facility can be made through January 10, 2007. Principal payments will be
effected through agreed-upon release prices paid to RFL as vacation ownership
interests in the resorts that serve as collateral for the RFL A&D Facility are
sold. The outstanding principal balance of any borrowings under the RFL A&D
Facility must be repaid by January 10, 2008. The interest charged on outstanding
borrowings will be the 30-day LIBOR plus 3.90%, subject to a 6.90% floor, and
will be payable monthly. We are required to pay a commitment fee equal to 1.00%
of the $50.0 million facility amount, which will be 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 are 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
include customary conditions to funding, acceleration provisions and certain
financial affirmative and negative covenants. On January 11, 2005, we borrowed
$9.5 million under the RFL A&D Facility in connection with the acquisition of
the Daytona Surfside Inn & Suites resort in Daytona Beach, Florida (the "Daytona
Resort"). As of March 31, 2005, the total commitment under the RFL A&D Facility
for the Daytona Resort was $14.7 million, the $5.2 million balance of which can
be borrowed during 2005 to fund refurbishment of the Daytona Resort.
Note 4. Trust Preferred Debt
We have formed statutory business trusts (collectively, the "Trusts") for
the purpose of issuing trust preferred securities and investing 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.
On March 15, 2005, one of the Trusts ("BST I") issued $22.5 million of
trust preferred securities. BST I 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 9.16% through March 30, 2010 and thereafter at a
floating rate of 4.90% over the 3-month LIBOR until the scheduled maturity date
of March 30, 2035. 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 five
years from the issue date or sooner following certain specified events. In
addition, we contributed $696,000 to BST I 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 I's common securities are nearly identical to the trust preferred
securities.
On May 4, 2005, one of the Trusts ("BST II") issued $25.0 million of trust
preferred securities. BST II 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 9.158% through July 30, 2010 and thereafter at a floating rate of 4.85% over
the 3-month LIBOR until the scheduled maturity date of July 30, 2035.
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 five years from
the issue date or sooner following certain specified events. In addition, we
contributed $774,000 to BST II 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
II's common securities are nearly identical to the trust preferred securities.
11
On May 10, 2005, one of the Trusts ("BST III") issued $10.0 million of
trust preferred securities. BST III 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 9.193% through July 30, 2010 and thereafter at a
floating rate of 4.85% over the 3-month LIBOR until the scheduled maturity date
of July 30, 2035. 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 five
years from the issue date or sooner following certain specified events. In
addition, we contributed $310,000 to BST III 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 III's common securities are nearly identical to the trust preferred
securities.
The issuances of trust preferred securities were part of larger pooled
trust securities offerings which were not registered under the Securities Act of
1933. Proceeds will be used for general corporate purposes and debt repayment.
Note 5. Senior Secured Notes Payable
On April 1, 1998, we consummated a private placement offering (the
"Offering") of $110 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 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 therefor. The Notes are unconditionally
guaranteed, jointly and severally, by each of our 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 covers
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 is presented below:
12
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
December 31, 2004
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
ASSETS
Cash and cash equivalents ............................. $ 70,256 $ 16,766 $ 11,516 $ -- $ 98,538
Contracts receivable, net ............................. -- 1,365 26,720 -- 28,085
Intercompany receivable ............................... 73,778 -- -- (73,778) --
Notes receivable, net ................................. -- 31,958 89,991 -- 121,949
Other assets .......................................... 2,645 9,150 22,886 -- 34,681
Inventory, net ........................................ -- 20,605 184,608 -- 205,213
Retained interests in notes receivable sold ........... -- 72,099 -- -- 72,099
Investments in subsidiaries ........................... 213,011 -- 3,230 (216,241) --
Property and equipment, net ........................... 15,084 2,013 57,147 -- 74,244
--------- --------- --------- --------- ---------
Total assets ..................................... $ 374,774 $ 153,956 $ 396,098 $(290,019) $ 634,809
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other ...... $ 12,353 $ 14,845 $ 52,940 $ -- $ 80,138
Intercompany payable ................................. -- 6,557 67,221 (73,778) --
Deferred income taxes ................................ (18,683) 34,210 42,623 -- 58,150
Lines-of-credit and notes payable .................... 6,237 26,141 83,267 -- 115,645
10.50% senior secured notes payable .................. 110,000 -- -- -- 110,000
--------- --------- --------- --------- ---------
Total liabilities ................................ 109,907 81,753 246,051 (73,778) 363,933
Minority interest .................................... -- -- -- 6,009 6,009
Total shareholders' equity ........................... 264,867 72,203 150,047 (222,250) 264,867
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity ....... $ 374,774 $ 153,956 $ 396,098 $(290,019) $ 634,809
========= ========= ========= ========= =========
March 31, 2005
(Unaudited)
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
ASSETS
Cash and cash equivalents ............................. $ 78,450 $ 21,462 $ 13,034 $ -- $ 112,946
Contracts receivable, net ............................. -- 2,243 38,908 -- 41,151
Intercompany receivable ............................... 94,720 -- -- (94,720) --
Notes receivable, net ................................. 32,685 74,431 -- 107,116
Other assets .......................................... 6,338 8,291 22,162 -- 36,791
Inventory, net ........................................ -- 22,240 195,469 -- 217,709
Retained interests in notes receivable sold ........... -- 80,473 -- -- 80,473
Investments in subsidiaries ........................... 219,607 -- 3,230 (222,837) --
Property and equipment, net ........................... 14,421 1,860 58,799 -- 75,080
--------- --------- --------- --------- ---------
Total assets ..................................... $ 413,536 $ 169,254 $ 406,033 $(317,557) $ 671,266
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other ...... $ 20,134 $ 17,399 $ 53,234 $ -- $ 90,767
Intercompany payable ................................. -- 8,379 86,341 (94,720) --
Deferred income taxes ................................ (18,440) 36,748 44,169 -- 62,477
Lines-of-credit and notes payable .................... 6,214 29,697 69,701 -- 105,612
10.50% senior secured notes payable .................. 110,000 -- -- -- 110,000
Junior subordinated debentures ....................... 23,196 -- -- 23,196
--------- --------- --------- --------- ---------
Total liabilities ................................ 141,104 92,223 253,445 (94,720) 392,052
Minority interest .................................... -- -- -- 6,782 6,782
Total shareholders' equity ........................... 272,432 77,031 152,588 (229,619) 272,432
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity ....... $ 413,536 $ 169,254 $ 406,033 $(317,557) $ 671,266
========= ========= ========= ========= =========
13
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended March 31, 2004
-------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
REVENUES
Sales of real estate ........................................ $ -- $ 8,307 $ 77,884 $ -- $ 86,191
Other resort and communities operations revenue ............. -- 2,049 11,503 -- 13,552
Management fees ............................................. 198 -- -- (198) --
Equity income from subsidiaries ............................. 11,297 -- -- (11,297) --
Interest income ............................................. 97 2,687 2,237 -- 5,021
Gain on sales of notes receivable ........................... -- 2,380 -- -- 2,380
--------- --------- --------- --------- ---------
11,592 15,423 91,624 (11,495) 107,144
COSTS AND EXPENSES
Cost of real estate sales ................................... -- 1,787 27,453 -- 29,240
Cost of other resort and communities operations ............. -- 1,181 12,732 -- 13,913
Management fees ............................................. -- 198 -- (198) --
Selling, general and administrative expenses ................ 8,137 4,573 37,739 -- 50,449
Interest expense ............................................ 2,555 389 1,055 -- 3,999
Provision for loan losses ................................... -- 274 596 -- 870
Other expense (income) ...................................... 329 332 (460) -- 201
--------- --------- --------- --------- ---------
11,021 8,734 79,115 (198) 98,672
--------- --------- --------- --------- ---------
Income before minority interest and provision
(benefit) for income taxes ............................... 571 6,689 12,509 (11,297) 8,472
Minority interest in income of consolidated subsidiary ...... -- -- -- 829 829
--------- --------- --------- --------- ---------
Income before provision (benefit) for income
taxes .................................................... 571 6,689 12,509 (12,126) 7,643
Provision (benefit) for income taxes ........................ (4,129) 2,256 4,816 -- 2,943
--------- --------- --------- --------- ---------
Net income .................................................. $ 4,700 $ 4,433 $ 7,693 $ (12,126) $ 4,700
========= ========= ========= ========= =========
Three Months Ended March 31, 2005
-------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------ ---------- ------------ ------------
REVENUES
Sales of real estate ........................................ $ -- $ 9,556 $ 94,465 $ -- $ 104,021
Other resort and communities operations revenue ............. -- 3,200 14,844 -- 18,044
Management fees ............................................. 11,538 -- -- (11,538) --
Equity income from subsidiaries ............................. 6,141 -- -- (6,141) --
Interest income ............................................. 206 2,908 3,428 -- 6,542
Gain on sales of notes receivable ........................... -- 1,441 -- -- 1,441
--------- --------- --------- --------- ---------
17,885 17,105 112,737 (17,679) 130,048
COSTS AND EXPENSES
Cost of real estate sales ................................... -- 2,580 30,307 -- 32,887
Cost of other resort and communities operations ............. -- 1,107 18,529 -- 19,636
Management fees ............................................. -- 264 11,274 (11,538) --
Selling, general and administrative expenses ................ 10,102 5,042 46,889 -- 62,033
Interest expense ............................................ 1,174 544 1,497 -- 3,215
Provision for loan losses ................................... -- 147 -- -- 147
Other expense (income) ...................................... (46) 795 109 -- 858
--------- --------- --------- --------- ---------
11,230 10,479 108,605 (11,538) 118,776
--------- --------- --------- --------- ---------
Income before minority interest and provision
(benefit) for income taxes ............................... 6,655 6,626 4,132 (6,141) 11,272
Minority interest in income of consolidated subsidiary ...... -- -- -- 773 773
--------- --------- --------- --------- ---------
Income before provision (benefit) for income
taxes .................................................... 6,655 6,626 4,132 (6,914) 10,499
Provision for income taxes .................................. 197 2,253 1,592 -- 4,042
--------- --------- --------- --------- ---------
Net income .................................................. $ 6,458 $ 4,373 $ 2,540 $ (6,914) $ 6,457
========= ========= ========= ========= =========
14
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31, 2004
-----------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------ ---------- ------------
Operating activities:
Net cash provided by operating activities .......................... $ 1,068 $ 2,423 $ 20,066 $ 23,557
--------- --------- --------- ---------
Investing activities:
Purchases of property and equipment ............................... (1,393) (288) (2,912) (4,593)
Cash received from retained interests in notes receivable sold .... -- 3,682 -- 3,682
--------- --------- --------- ---------
Net cash (used) provided by investing activities ................... (1,393) 3,394 (2,912) (911)
--------- --------- --------- ---------
Financing activities:
Payments under line-of-credit facilities and notes payable ........ (185) (2,244) (17,375) (19,804)
Payment of debt issuance costs .................................... (540) (191) 37 (694)
Proceeds from exercise of stock options ........................... 2,039 -- -- 2,039
--------- --------- --------- ---------
Net cash (used) provided by financing activities ................... 1,314 (2,435) (17,338) (18,459)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............... 989 3,382 (184) 4,187
Cash and cash equivalents at beginning of period ................... 29,872 8,716 15,059 53,647
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......................... 30,861 12,098 14,875 57,834
Restricted cash and cash equivalents at end of period .............. (173) (6,327) (12,037) (18,537)
--------- --------- --------- ---------
Unrestricted cash and cash equivalents at end of period ............ $ 30,688 $ 5,771 $ 2,838 $ 39,297
========= ========= ========= =========
Three Months Ended March 31, 2005
-----------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------ ---------- ------------
Operating activities:
Net cash (used) provided by operating activities ................... $ (13,892) $ 4,434 $ 22,220 $ 12,762
Investing activities:
Cash received from retained interests in notes receivable sold .... -- 1,829 -- 1,829
Investment in statutory business trust ............................ (696) -- -- (696)
Purchases of property and equipment ............................... (301) 14 (3,237) (3,524)
--------- --------- --------- ---------
Net cash (used) provided by investing activities ................... (997) 1,843 (3,237) (2,391)
Financing activities:
Payments under line-of-credit facilities and notes payable ........ (23) (431) (20,368) (20,822)
Payment of debt issuance costs .................................... (738) (1,150) 684 (1,204)
Borrowings under LOC facilities and N/P ........................... -- -- 2,219 2,219
Proceeds from junior subordinated debentures ...................... 23,196 -- -- 23,196
Proceeds from exercise of stock options ........................... 648 -- -- 648
--------- --------- --------- ---------
Net cash provided (used) by financing activities ................... 23,083 (1,581) (17,465) 4,037
--------- --------- --------- ---------
Net increase in cash and cash equivalents .......................... 8,194 4,696 1,518 14,408
Cash and cash equivalents at beginning of period ................... 70,256 16,766 11,516 98,538
--------- --------- --------- ---------
Cash and cash equivalents at end of period ......................... 78,450 21,462 13,034 112,946
Restricted cash and cash equivalents at end of period .............. (173) (9,082) (9,144) (18,399)
--------- --------- --------- ---------
Unrestricted cash and cash equivalents at end of period ............ $ 78,277 $ 12,380 $ 3,890 $ 94,547
========= ========= ========= =========
15
5. Business Segments
We have two reportable business segments. Bluegreen Resorts develops,
markets and sells VOIs in our resorts, 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. Required disclosures for our
business segments are as follows (in thousands):
Bluegreen Bluegreen
Resorts Communities Totals
------- ----------- ------
For the three months ended March 31, 2004
Sales of real estate .......................................... $ 53,147 $ 33,044 $ 86,191
Other resort and communities operations revenue ............... 12,205 1,347 13,552
Depreciation expense .......................................... 1,102 458 1,560
Field operating profit ........................................ 8,209 5,219 13,428
For the three months ended March 31, 2005
Sales of real estate .......................................... $ 65,644 $ 38,377 $104,021
Other resort and communities operations revenue ............... 16,562 1,482 18,044
Depreciation expense .......................................... 1,676 418 2,094
Field operating profit ........................................ 10,386 7,733 18,119
Net inventory by business segment:
December 31, March 31,
2004 2005
------------ ---------
Bluegreen Resorts ............................................ $126,238 $140,628
Bluegreen Communities ........................................ 78,975 77,081
-------- --------
Total ........................................................ $205,213 $217,709
======== ========
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
March 31, 2004 March 31, 2005
-------------- --------------
Field operating profit for reportable segments ............ $ 13,428 $ 18,119
Interest income ........................................... 5,021 6,542
Gain on sales of notes receivable ......................... 2,380 1,441
Other expense ............................................. (201) (858)
Corporate general and administrative expenses ............. (7,287) (10,610)
Interest expense .......................................... (3,999) (3,215)
Provision for loan losses ................................. (870) (147)
-------- --------
Consolidated income before minority interest and
provision for income taxes ............................. $ 8,472 $ 11,272
======== ========
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 are not exclusive an 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.
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.
o We are subject to the risks of the real estate market and the risks
associated with real estate development, including the risk and
uncertainties relating to the cost and availability of land and
construction materials.
o We may not successfully execute our growth strategy and we may face
additional risks as we expand into new markets.
o We may face a variety of risks when we expand our operations.
o Excessive claims for development-related defects could adversely
affect our financial condition and operating results.
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.
o Our results of operations and financial condition could be adversely
impacted if our estimates concerning our notes receivable are
incorrect.
o Anticipated changes in generally accepted accounting principles,
especially those related to our resorts business and sales of notes
receivable, could have a material adverse impact on our results of
operations.
17
In addition to the foregoing, reference is also made to other risks and factors
detailed in reports filed by the Company with the Securities and Exchange
Commission including our Annual Report on Form 10-K for the year ended December
31, 2004.
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 have historically had a
material impact on our revenues and results of operations. However, we
continually review and have historically increased the sales prices of our VOIs
annually and construction costs have increased and are expected 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 gross profit. To the extent inflationary trends affect interest
rates, a portion of our debt service costs 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 all development has not been completed, we recognize income 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 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. 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.
We are spending a substantial amount of management time and resources to comply
with changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-
18
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 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. For a more detailed discussion of these
critical accounting policies see "Critical Accounting Policies and Estimates"
appearing in our Annual Report on Form 10-K for the year ended December 31,
2004.
19
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.
Bluegreen Bluegreen
Resorts Communities Total
------- ----------- -----
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
------ -------- ------ -------- ------ --------
(dollars in thousands)
Three Months Ended March 31, 2004
Sales of real estate .................. $ 53,147 100% $ 33,044 100% $ 86,191 100%
Cost of real estate sales ............. (10,859) (20) (18,381) (56) (29,240) (34)
--------- --------- ---------
Gross profit .......................... 42,288 80 14,663 44 56,951 66
Other resort and communities
operations revenues ................. 12,205 23 1,347 4 13,552 16
Cost of other resort and
communities operations .............. (12,442) (23) (1,471) (4) (13,913) (16)
Selling and marketing
expenses ............................ (29,535) (56) (6,798) (21) (36,333) (42)
Field general and
administrative expenses (1) ......... (4,307) (9) (2,522) (8) (6,829) (8)
--------- --------- ---------
Field Operating Profit ................ $ 8,209 15% $ 5,219 16% $ 13,428 16%
========= ========= =========
Three Months Ended March 31, 2005
Sales of real estate .................. $ 65,644 100% $ 38,377 100% $ 104,021 100%
Cost of real estate sales ............. (13,195) (20) (19,692) (51) (32,887) (32)
--------- --------- ---------
Gross profit .......................... 52,449 80 18,685 49 71,134 68
Other resort and communities
operations revenues ................. 16,562 25 1,482 4 18,044 17
Cost of other resort and
communities operations .............. (18,099) (28) (1,537) (4) (19,636) (19)
Selling and marketing
expenses ............................ (36,709) (56) (8,037) (21) (44,746) (43)
Field general and
administrative expenses (1) ......... (3,817) (6) (2,860) (7) (6,677) (6)
--------- --------- ---------
Field Operating Profit ................ $ 10,386 16% $ 7,733 20% $ 18,119 17%
========= ========= =========
(1) General and administrative expenses attributable to corporate overhead
have been excluded from the tables. Corporate general and administrative
expenses totaled $7.3 million for the three months ended March 31, 2004
and $10.6 million for the three months ended March 31, 2005. See
"Corporate General and Administrative Expenses," below, for further
discussion.
Sales and Field Operations. Consolidated sales increased $17.8 million or 21%
from $86.2 million during the three months ended March 31, 2004 to $104.0
million during the three months ended March 31, 2005.
Bluegreen Resorts. During the three months ended March 31, 2004 and March 31,
2005, sales of VOIs contributed $53.1 million (62%) and $65.6 million (63%) of
our total consolidated sales, respectively.
20
The following table sets forth certain information for sales of VOIs for the
periods indicated, before giving effect to the percentage-of-completion method
of accounting.
Three Months Ended
------------------
March 31, March 31,
2004 2005
---- ----
Number of VOI sale transactions ........ 5,953 6,689
Average sales price per transaction .... $ 9,718 $10,124
Gross margin ........................... 80% 80%
The $12.5 million or 24% increase in Bluegreen Resorts' sales during the three
months ended March 31, 2005, as compared to the three months ended March 31,
2004, was due primarily to same-resort sales increases at our various sales
offices. Same-resort sales increased by approximately $9.0 million or 16% during
the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004. The same-resort sales increase was primarily attributable to the
increase in sales at The Fountains resort, located in Orlando, Florida. The
Fountains(TM), which commenced sales operations in December 2003, generated $5.6
million in sales during the three months ended March 31, 2005 as compared to
$1.8 million during the three months ended March 31, 2004. The sales increase
was also due to our continued focus on marketing to our growing Bluegreen
Vacation Club owner base and to sales prospects referred to us by our existing
Bluegreen Vacation Club owners and other prospects. Sales to owner and referral
prospects increased by 35% during the three months ended March 31, 2005 as
compared to the three months ended March 31, 2004. This, combined with a 9%
overall increase in the number of sales prospects seen by Bluegreen Resorts from
approximately 48,500 prospects during the three months ended March 31, 2004 to
approximately 53,000 prospects during the three months ended March 31, 2005 and
a relatively consistent sale-to-tour conversion ratio of 14% during these
periods significantly contributed to the overall sales increase during the three
months ended March 31, 2005 as compared to the three months ended March 31,
2004. The increase in the number of prospects seen by Bluegreen Resorts and
consequently the increase in sales was partially due to our two new sales sites,
an offsite sales office in Dallas, Texas (opened in October 2004) and The
Hammocks at Marathon(TM) in Marathon, Florida (opened in August 2004). The
increase in the average sales price per transaction reflected in the above table
also contributed to the increase in sales.
Bluegreen Resorts' gross margin remained relatively constant during the three
months ended March 31, 2004 and March 31, 2005 at approximately 80%. Bluegreen
Resorts' gross margin more typically ranges between 75% and 77%. During the
three months ended March 3, 2004, our gross margin was favorably impacted by the
sale of relatively lower cost VOIs acquired through opportunistic acquisitions
in 2003. Approximately 144 VOIs were constructed and became available for sale
during the three months ended March 31, 2005 at the Fountains resort, one of our
opportunistic 2003 acquisitions which favorably impacted our gross margin during
the three months ended March 31, 2005. We anticipate that our gross margin will
return to historical levels in the future.
Other resort operations revenues increased $4.4 million or 36% during the three
months ended March 31, 2005 as compared to the three months ended March 31,
2004. This increase was due primarily to increases in revenues from our
mini-vacation sales, vacation ownership tour and lead generation business, as
well as fees earned by our wholly-owned title company for providing title
processing services on all of our VOI sales.
Cost of other resort operations increased $5.7 million or 45% during the three
months ended March 31, 2005 as compared to the three months ended March 31,
2004. The increase in the cost of other resort operations was due primarily to
increases in the related revenues discussed above as well as due to higher
subsidies incurred relative to the property owners' associations that maintain
our resorts. These subsidies increased in the aggregate due to the increase in
our VOI inventory.
Selling and marketing expenses for Bluegreen Resorts increased $7.2 million or
24% during the three months ended March 31, 2005 as compared to the three months
ended March 31, 2004. This increase was primarily related to the increase in
sales. As a percentage of sales, selling and marketing expenses remained
relatively consistent during the three months ended March 31, 2004 and March 31,
2005 at approximately 56%. 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 assurance can be given that selling
and marketing expenses will not increase as a percentage of sales in future
periods.
21
Field general and administrative expenses for Bluegreen Resorts decreased
$490,000 or 11% during the three months ended March 31, 2005, as compared to the
three months ended March 31, 2004, due primarily to the consolidation of our
Harbor Springs (Boyne Highlands) sales office operations with our Mountain Run
at Boyne sales office in Boyne Falls, Michigan.
As of December 31, 2004 and March 31, 2005, Bluegreen Resorts had no sales or
Field Operating Profit deferred under percentage-of-completion accounting.
Bluegreen Communities. During the three months ended March 31, 2004 and March
31, 2005, Bluegreen Communities generated $33.0 million (38%) and $38.4 million
(37%) of our total consolidated sales, respectively.
The table below sets forth the number of homesites sold by Bluegreen Communities
and the average sales price per homesite for the periods indicated, before
giving effect to the percentage-of-completion method of accounting and excluding
sales of bulk parcels.
Three Months Ended
------------------
March 31, March 31,
2004 2005
---- ----
Number of homesites sold ........... 716 635
Average sales price per homesite ... $64,812 $75,498
Gross margin ....................... 44% 49%
Bluegreen Communities' sales increased $5.3 million or 16% during the three
months ended March 31, 2005, as compared to the three months ended March 31,
2004, due primarily to sales increases in our golf course communities. Sales
recognized at Sanctuary Cove at St. Andrews Sound, an approximately 500-acre
golf course community in Brunswick, Georgia, totaled $14.3 million during the
three months ended March 31, 2005 as compared to $5.8 million during the three
months ended March 31, 2004. Sales recognized at Traditions of Braselton(TM), a
1,142 acre golf course community in Braselton, Georgia, totaled $6.4 million
during the three months ended March 31, 2005 as compared to $4.3 million during
the three months ended March 31, 2004. In July 2004, we acquired and commenced
sales at our approximately 800-acre golf course community in Chatham County,
North Carolina known as Chapel Ridge. Chapel Ridge recognized sales of
approximately $5.3 million during the three months ended March 31, 2005. These
increases in sales as well as increases in sales at certain of our other
properties were partially offset by decreases in sales in projects that were
substantially sold out either during or prior to the three months ended March
31, 2005. Certain of our properties are expected to sell out earlier in 2005
than previously anticipated as a result of the continued strong demand for our
communities. Although there is no assurance that we will be successful, we are
currently pursuing the acquisition of several properties in order to replace
these sold-out projects. The increase in the average sales price per transaction
reflected in the above table also contributed to the increase in sales.
Bluegreen Communities' gross margin increased from 44% during the three months
ended March 31, 2004 to 49% during the three months ended March 31, 2005.
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 44% and 51% of sales and
is expected to approximate these percentages for the foreseeable future.
Selling and marketing expenses for Bluegreen Communities increased $1.2 million
or 18% primarily as a result of the increase in sales. As a percentage of sales,
selling and marketing expenses remained relatively consistent during the three
months ended March 31, 2004 and March 31, 2005 at 21%.
As of December 31, 2004, Bluegreen Communities had $27.2 million of sales and
$10.9 million of Field Operating Profit deferred under percentage-of-completion
accounting. As of March 31, 2005, Bluegreen Communities had $37.2 million of
sales and $15.4 million of Field Operating Profit deferred under
percentage-of-completion accounting.
Corporate General and Administrative Expenses. Our corporate general and
administrative expenses consist primarily of expenses associated with
administering the various support functions at our corporate headquarters,
including accounting, human resources, information technology, mergers and
acquisitions, mortgage servicing, treasury and legal. Such expenses were $7.3
million and $10.6 million during the three months ended March 31, 2004 and March
31, 2005, respectively. As a
22
percentage of sales of real estate, corporate general and administrative
expenses were 9% and 10% during the three months ended March 31, 2004 and March
31, 2005, respectively.
The $3.3 million or 46% increase in corporate general and administrative
expenses during the three months ended March 31, 2005, as compared to the three
months ended March 31, 2004, was due primarily to the additional costs incurred
in connection with implementing the requirements associated with the
Sarbanes-Oxley Act of 2002 as well as higher personnel and other expenses
incurred in our information technology, accounting and acquisition and
development areas to support our growth.
For a discussion of field selling, general and administrative expenses, please
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 earned totaled $5.0 million and $6.5 million during the three months
ended March 31, 2004 and March 31, 2005, respectively.
The $1.5 million or 30% increase in interest income during the three months
ended March 31, 2005 was due to higher interest income earned from our notes
receivable and our retained interests in notes receivable sold primarily as a
result of higher average aggregate notes receivable and retained interest in
notes receivable sold balances during the three months ended March 31, 2005 as
compared to the three months ended March 31, 2004.
Gain on Sales of Notes Receivable. During the three months ended March 31, 2004
and March 31, 2005, we sold $39.5 million and $44.9 million, respectively, of
notes receivable pursuant to our vacation ownership receivables purchase
facilities in place during the respective periods. In connection with these
sales, we recognized gains on sales of notes receivable of $2.4 million and $1.4
million during the three months ended March 31, 2004 and March 31, 2005,
respectively.
The decrease of $939,000 or 39% in the gain on sale of notes receivable
recognized during the three months ended March 31, 2005, as compared to the
three months ended March 31, 2004, was due to an increase in the related cost of
funds and other relevant variables associated with the transaction during the
three months ended March 31, 2005 as compared to the transaction during the
three months ended March 31, 2004.
The amount of notes receivable sold during a period depends on several factors,
including the amount of availability, if any, under receivables purchase
facilities, the amount of eligible receivables available for sale, our cash
requirements, the covenants and other provisions of the relevant vacation
ownership receivables purchase facility (as described further below) and
management's discretion. We have recognized gains on sales of notes receivable
each quarter since the three months ended December 31, 2000 (18 consecutive
quarters). The generally accepted accounting principles governing our sale of
receivable transactions is evolving and structuring such transactions in order
to achieve off-balance sheet accounting treatment is becoming more difficult.
Should our ability to structure the monetization of our receivables through
off-balance sheet transactions be limited, gains on sales of receivables may not
be recognized consistently from quarter to quarter.
Interest Expense. Interest expense was $4.0 million and $3.2 million during the
three months ended March 31, 2004 and March 31, 2005, respectively. The $784,000
or 20% decrease during the three months ended March 31, 2005, as compared to the
three months ended March 31, 2004, was primarily as a result of lower average
debt outstanding and more interest being capitalized due to increased
construction activity.
Provision for Loan Losses. We recorded provisions for loan losses totaling
$870,000 and $147,000 during the three months ended March 31, 2004 and March 31,
2005, respectively. Our sale of vacation ownership notes receivable without
recourse on March 31, 2005 resulted in the reduction of our provision for loan
losses. Also, non-recourse sales of notes receivable pursuant to our vacation
ownership receivables purchase facilities were higher in the aggregate during
the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004.
The allowance for loan losses by division as of December 31, 2004 and March 31,
2005 was as follows:
Bluegreen Bluegreen
Resorts Communities Other Total
------- ----------- ----- -----
(dollars in thousands)
December 31, 2004
Notes receivable ....................... $ 121,273 $ 10,901 $ 186 $ 132,360
Allowance for loan losses .............. (9,974) (251) (186) (10,411)
--------- --------- --------- ---------
Notes receivable, net .................. $ 111,299 $ 10,650 $ -- $ 121,949
========= ========= ========= =========
Allowance as a % of gross notes
receivable