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 ........................... 8.2% 2.3% 100.0% 7.9% ========= ========= ========= ========= March 31, 2005 Notes receivable ....................... $ 105,016 $ 10,233 $ 186 $ 115,435 Allowance for loan losses .............. (7,786) (347) (186) (8,319) --------- --------- --------- --------- Notes receivable, net .................. $ 97,230 $ 9,886 $ -- $ 107,116 ========= ========= ========= ========= Allowance as a % of gross notes receivable ........................... 7.4% 3.4% 100.0% 7.2% ========= ========= ========= ========= 23 Minority Interest in Income of Consolidated Subsidiary. We include the results of operations and financial position of Bluegreen/Big Cedar Vacations, LLC (the "Subsidiary"), our 51%-owned subsidiary, in our consolidated financial statements (see Note 1 of the Notes to Condensed Consolidated Financial Statements). The minority interest in income of consolidated subsidiary is the portion of our consolidated pre-tax income that is earned by Big Cedar, L.L.C., the unaffiliated 49% interest holder in the Subsidiary. Minority interest in income of consolidated subsidiary was $829,000 and $773,000 during the three months ended March 31, 2004 and March 31, 2005, respectively. Summary. Based on the factors discussed above, our net income was $4.7 million and $6.5 million during the three months ended March 31, 2004 and March 31, 2005, respectively. Changes in Financial Condition The following table summarizes our cash flows for the three months ended March 31, 2004 and March 31, 2005 (in thousands): Three months ended ---------------------------- March 31, March 31, 2004 2005 ---------------------------- Cash flows provided by operating activities $ 23,557 $ 12,762 Cash flows used by investing activities (911) (2,391) Cash flows (used) provided by financing activities (18,459) 4,037 -------- -------- Net increase in cash $ 4,187 $ 14,408 ======== ======== Cash Flows From Operating Activities. Cash flows provided by operating activities decreased $13.1 million or 51% from $25.8 million to $12.7 million during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. This decrease was due primarily to increased construction and development spending during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, and the fact that we had no significant acquisitions of inventory during the three months ended March 31, 2004. During the three months ended March 31, 2005, we acquired the Daytona Surfside Inn & Suites resort in Daytona Beach, Florida (the "Daytona Resort") for $2.0 million in cash from operations plus a $9.5 million note payable and 1,053 acres of land for a Bluegreen Communities development to be known as Saddle Creek Forrest in Magnolia, Texas for $500,000 in cash from operations plus a $2.2 million note payable. Cash Flows From Investing Activities. Cash flows used in investing activities increased $1.5 million or 162% from $911,000 to $2.4 million during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. This increase was due primarily to lower amounts of cash received from our retained interests in notes receivable sold, as we have not yet begun receiving cash flows on our retained interest in a 2004 term securitization transaction due to reserve funding requirements. In addition, during the three months ended March 31, 2005, we capitalized $696,000 into a statutory business trust for the purpose of issuing trust preferred securities and investing the proceeds thereof in our junior subordinated debentures (see "Liquidity and Capital Resources.") These increased expenditures were partially offset by lower cash expenditures for property and equipment during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004 Cash Flows From Financing Activities. Cash flows provided by financing activities increased $22.5 million or 122% from cash outflows of $18.5 million during the three months ended March 31, 2004 to cash inflows of $4.0 million during the three months ended March 31, 2005. This increase was due primarily to the $23.2 million of cash received in connection with our issuance of the junior subordinated debentures partially offset by lower cash proceeds from the exercise of stock options during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. 24 Liquidity and Capital Resources Our capital resources are provided from both internal and external sources. Our primary capital resources from internal operations are: (i) cash sales, (ii) downpayments on homesite and VOI sales which are financed, (iii) proceeds from the sale of, or borrowings collateralized by, notes receivable, including cash received from our retained interests in notes receivable sold, (iv) principal and interest payments on the purchase money mortgage loans and contracts for deed owned arising from sales of VOIs and homesites and (v) net cash generated from other resort services and other communities operations. Historically, external sources of liquidity have included non-recourse sales of notes receivable, borrowings under secured and unsecured lines-of-credit, seller and bank financing of inventory acquisitions and the issuance of debt securities. Our capital resources are used to support our operations, including (i) acquiring and developing inventory, (ii) providing financing for customer purchases, (iii) funding operating expenses and (iv) satisfying our debt and other obligations. As we are continually selling and marketing real estate (VOIs and homesites), it is necessary for us to continually acquire and develop new resorts and communities in order to maintain adequate levels of inventory to support operations. We anticipate that we will continue to require external sources of liquidity to support our operations, satisfy our debt and other obligations and to provide funds for future acquisitions. Our level of debt and debt service requirements has several important effects on our operations, including the following: (i) we have significant cash requirements to service debt, reducing funds available for operations and future business opportunities and increasing our vulnerability to adverse economic and industry conditions; (ii) our leveraged position increases our vulnerability to competitive pressures; (iii) the financial covenants and other restrictions contained in the indentures, the credit agreements and other agreements relating to our indebtedness require us to meet certain financial tests and restrict our ability to, among other things, borrow additional funds, dispose of assets, make investments or pay cash dividends on, or repurchase, preferred or common stock; and (iv) funds available for working capital, capital expenditures, acquisitions and general corporate purposes may be limited. Certain of our competitors operate on a less leveraged basis and have greater operating and financial flexibility than we do. We intend to continue to pursue a growth-oriented strategy, particularly with respect to our Bluegreen Resorts business segment. In connection with this strategy, we may from time to time acquire, among other things, additional resort properties and completed but unsold VOIs; land upon which additional resorts may be built; management contracts; loan portfolios of vacation ownership mortgages; portfolios which include properties or assets which may be integrated into our operations; interests in joint ventures; and operating companies providing or possessing management, sales, marketing, development, administration and/or other expertise with respect to our operations in the vacation ownership industry. In addition, we intend to continue to focus Bluegreen Communities on larger, more capital intensive projects particularly in those regions where we believe the market for our products is strongest, such as new golf communities in the Southeast and other areas and continued growth in our successful regions in Texas. The following is a discussion of our purchase and credit facilities that were important sources of our liquidity as of March 31, 2005. These facilities do not constitute all of our outstanding indebtedness as of March 31, 2005. Our other indebtedness includes outstanding senior secured notes payable, borrowings collateralized by real estate inventories that were not incurred pursuant to an ongoing credit facility and capital leases. Vacation Ownership Receivables Purchase Facilities -Off Balance Sheet Arrangements Our ability to sell and/or borrow against our notes receivable from VOI buyers is a critical factor in our continued liquidity. When we sell VOIs, a financed buyer is only required to pay a minimum of 10% of the purchase in cash at the time of sale, however, selling, marketing and administrative expenses are primarily cash expenses and, in our case for the three months ended March 31, 2005, approximated 62% of sales. Accordingly, having facilities available for the hypothecation and sale of these vacation ownership receivables is a critical factor to our ability to meet our short and long-term cash needs. The RFL Purchase Facility. On October 8, 2003, RFL acquired and assumed the rights, obligations and commitments of ING as initial purchaser in an existing vacation ownership receivables purchase facility (the "RFL Purchase Facility") originally executed between ING and us in April 2002. The RFL Purchase Facility utilizes an owner's trust structure, pursuant to which we sell receivables to Bluegreen Receivables Finance Corporation V, our wholly-owned, special purpose finance subsidiary ("BRFC V"), and BRFC V sells the receivables to an owners' trust (a qualified special purpose entity) without recourse to us or BRFC V except for breaches of certain representations and warranties at the time of sale. We did not enter into any guarantees in connection with the RFL Purchase Facility. The RFL Purchase Facility has detailed requirements with respect to the eligibility of receivables for purchase, and fundings under the RFL Purchase Facility are subject to certain conditions precedent. Under the RFL Purchase Facility, a variable purchase price of 85.00% of the principal balance of the receivables sold, subject to certain terms and conditions, is paid at closing in cash. The balance of the purchase price is deferred until such time as RFL has received a specified return and all servicing, custodial, agent and similar fees and expenses have been paid. 25 On September 30, 2004, we executed an extension of the RFL Purchase Facility to allow for sales of notes receivable for a cumulative purchase price of up to $100.0 million on a revolving basis through September 29, 2005, at a variable purchase price of 85.00% of the principal balance, subject to the eligibility requirements and certain conditions precedent. RFL earns a return equal to the one-month London Interbank Offered Rate ("LIBOR") plus an additional return of 3.25%, subject to use of alternate return rates in certain circumstances. In addition, through September 2005, RFL receives a 0.25% annual program fee. We act as servicer under the RFL Purchase Facility for a fee. As of March 31, 2005, the remaining availability under the RFL Purchase Facility was $80.9 million, subject to eligibility requirements and conditions precedent. The RFL Purchase Facility includes various conditions to purchase, covenants, trigger events and other provisions customary for a transaction of this type. RFL's obligation to purchase under the RFL Purchase Facility may terminate upon the occurrence of specified events. These specified events, some of which are subject to materiality qualifiers and cure periods, include, without limitation, (i) our breach of the representations or warranties in the RFL Purchase Facility; (ii) our failure to perform our covenants in the RFL Purchase Facility, including, without limitation, a failure to pay principal or interest due to RFL; (iii) our commencement of a bankruptcy proceeding or the like; (iv) a material adverse change to us since December 31, 2001; (v) the amount borrowed under the RFL Purchase Facility exceeding the borrowing base; (vi) significant delinquencies or defaults on the receivables sold; (vii) a payment default by us under any other borrowing arrangement of $5 million or more, or an event of default under any indenture, facility or agreement that results in a default under any borrowing arrangement; (viii) a default or breach under any other agreement beyond the applicable grace period if such default or breach (a) involves the failure to make a payment in excess of 5% of our tangible net worth or (b) causes, or permits the holder of indebtedness to cause, an amount in excess of 5% of our tangible net worth to become due; (ix) our tangible net worth not equaling at least $110 million plus 50% of net income and 100% of the proceeds from new equity financing following the first closing under the RFL Purchase Facility; (x) the ratio of our debt to tangible net worth exceeding 6 to 1; or (xi) our failure to perform our servicing obligations. The GE Purchase Facility. On August 3, 2004, we executed agreements for a vacation ownership receivables purchase facility (the "GE Purchase Facility") with General Electric Capital Corporation ("GE"). The GE Purchase Facility utilizes an owner's trust structure, pursuant to which we sell receivables to Bluegreen Receivables Finance Corporation VII, our wholly-owned, special purpose finance subsidiary ("BRFC VII"), and BRFC VII sells the receivables to an owner's trust (a qualified special purpose entity) without recourse to us or BRFC VII except for breaches of certain customary representations and warranties at the time of sale. We did not enter into any guarantees in connection with the GE Purchase Facility. The GE Purchase Facility has detailed requirements with respect to the eligibility of receivables for purchase, and fundings under the GE Purchase Facility are subject to certain conditions precedent. Under the GE Purchase Facility, a variable purchase price of approximately 89.5% of the principal balance of the receivables sold (79.5% in the case of receivables originated in Aruba), subject to adjustment under certain terms and conditions, is paid at closing in cash. The balance of the purchase price is deferred until such time as GE has received a specified return, a specified overcollateralization ratio is achieved, a cash reserve account is fully funded and all servicing, custodial, agent and similar fees and expenses have been paid. GE earns a return equal to the applicable Swap Rate (which is essentially a published interest swap arrangement rate as defined in the GE Purchase Facility agreements) plus 3.50%, subject to use of alternate return rates in certain circumstances. In addition, we paid GE a structuring fee of approximately $938,000 in October 2004. We act as servicer under the GE Purchase Facility for a fee. The GE Purchase Facility allows for sales of notes receivable for a cumulative purchase price of up to $125.0 million through October 2, 2006. As of March 31, 2005, the remaining availability under the GE Purchase Facility was $86.4 million, subject to eligibility requirements and conditions precedent. The GE Purchase Facility includes various conditions to purchase, covenants, trigger events and other provisions customary for a transaction of this type. GE's obligation to purchase under the GE Purchase Facility may terminate earlier than the dates noted above upon the occurrence of certain specified events set forth in the GE Purchase Facility agreements. These specified events, some of which are subject to materiality qualifiers and cure periods, include, without limitation, (i) the aggregate amount of all advances under the GE Purchase Facility equaling $125.0 million; (ii) our breach of the representations or warranties in the GE Purchase Facility; (iii) our failure to perform our covenants in the GE Purchase Facility; (iv) our commencement of a bankruptcy proceeding or the like; (v) failing to maintain a specified overcollateralization amount; (vi) significant delinquencies or defaults on the receivables sold; (vii) recovery rates falling below a pre-determined amount; (viii) a default or breach under any other agreement beyond the applicable grace period if such default or breach (a) involves the failure to make a payment in excess of 5% of our Tangible Net Worth (as defined in the GE Purchase Facility agreements to include our subordinated debentures) or (b) causes, or permits the holder of indebtedness to cause, an amount in excess of 5% of our Tangible Net Worth to become due; (ix) our Tangible Net Worth at the end of any calendar quarter not equaling at least $185.0 million plus 50% of net income following June 30, 2004; (x) the ratio of our debt (excluding our subordinated debentures and, after the expiration of the funding period, up to $600.0 26 million of receivable-backed indebtedness) to Tangible Net Worth exceeding 2.25 to 1; (xi) the ratio of our consolidated earnings before interest, taxes, depreciation and amortization to our interest expense (net of interest income) falling below 2.00 to 1; (xii) the number of points available in the Bluegreen Vacation Club to be less than approximately 623.6 million; (xiii) our ceasing to conduct the vacation ownership business and originate vacation ownership receivables or if certain changes in our ownership or control occur; (xiv) the failure of certain of our resorts to be part of the Bluegreen Vacation Club or be managed by us, one of our subsidiaries or another entity acceptable to GE; (xv) operating budgets and reserve accounts maintained by the property owners' associations responsible for maintaining certain of our resorts failing to comply with applicable laws and governing documents; (xvi) our failure to discharge, stay or bond pending appeal any final judgments for the payment of an amount in excess of 2.5% of our Tangible Net Worth in a timely manner; (xvii) our default under or breach of certain resort management or marketing contracts; or (xviii) our failure to perform our servicing obligations, otherwise have our servicing rights terminated or if we do not exercise the Servicer Purchase Option pursuant to the terms of the GE Purchase Facility. The BB&T Purchase Facility. 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 on a revolving basis, the commitment for $40.0 million of which expires on July 5, 2005, and the remainder of which expires on December 30, 2005. On March 31, 2005, we sold $44.9 million in vacation ownership receivables pursuant to the BB&T Purchase Facility for a cumulative purchase price of $38.2 million. As a result of this sale, we recognized a gain of $1.4 million and recorded a retained interest in notes receivable sold and a servicing asset of $7.8 million and $470,000, respectively. As of March 31, 2005, the remaining availability under the BB&T Purchase Facility was $101.8 million, subject to eligibility requirements and conditions precedent. 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 agreements. These specified events, some of which are subject to materiality qualifiers and cure periods, include, without limitation, (i) our breach of the representations or warranties in the BB&T Purchase Facility; (ii) our failure to perform our covenants in the BB&T Purchase Facility, including, without limitation, a failure to pay principal or interest due to BB & T; (iii) our commencement of a bankruptcy proceeding or the like; (iv) a materially adverse change to us since December 31, 2004; (v) the amount funded under the BB&T Purchase Facility exceeding the funding base; (vi) significant delinquencies or defaults on the receivables sold, or serviced by us generally; (vii) a payment default by us under any other borrowing arrangement when such arrangement is an obligation in excess of 5% of our tangible net worth or an event of default under any indenture, facility or agreement that causes or permits the holder of such obligation to cause such financing arrangement to become due and payable; (viii) a default or breach under any other agreement beyond the applicable grace period if such default or breach (a) involves the failure to make a payment in excess of 5% of our tangible net worth or (b) causes or permits the holder of indebtedness to cause, an amount in excess of 5% of our tangible net worth to become due; (ix) our tangible net worth not equaling at least 80% of our tangible net worth at December 31, 2003 plus 80% of any increase in our tangible net worth thereafter; (x) the ratio of our debt to tangible net worth exceeding 3 to 1; or (xi) our failure to perform our servicing obligations. We have chosen to monetize our receivables through the RFL Purchase Facility, the GE Purchase Facility, the BB&T Purchase Facility (collectively, the "Purchase Facilities") and, historically, other similar facilities, as these off-balance sheet arrangements provide us with cash inflows both currently and in the future at what we believe to be competitive rates without adding leverage to our balance sheet or retaining recourse for losses on the receivables sold. In addition, these sale transactions have generated gains on our income statement on a quarterly basis, which would not be realized under a traditional financing arrangement. The generally accepted accounting principles governing the sales of notes receivable are evolving and it is becoming more difficult to structure transactions in a manner that such transactions would be accounted 27 for off-balance sheet. Should we become unable to obtain off-balance sheet treatment for future sales of receivables, while it would have minimal impact, if any, on our liquidity, it could have a material adverse impact on our quarterly results of operations and our debt level, which could adversely impact our compliance with debt covenants in current or future debt arrangements. The Purchase Facilities discussed above are the only ongoing receivables purchase facilities under which we currently have the ability to sell receivables. Factors which could adversely impact our ability to obtain new or additional vacation ownership receivable purchase facilities include a downturn in general economic conditions; negative trends in the commercial paper or LIBOR markets; increases in interest rates; a decrease in the number of financial institutions or other entities willing to enter into facilities with vacation ownership companies; a deterioration in the performance of our vacation ownership notes receivable or in the performance of portfolios sold in prior transactions, specifically increased delinquency, default and loss severity rates; and a deterioration in our performance generally. There can be no assurance that we will obtain new purchase facilities to replace the Purchase Facilities when these facilities are fully funded or expire. As indicated above, our inability to sell vacation ownership receivables under a current or future facility could have a material adverse impact on our liquidity. However, management believes that to the extent we could not sell receivables under a purchase facility, we could potentially mitigate the adverse impact on our liquidity by using our receivables as collateral under existing or future credit facilities. Historically, we have also been a party to a number of securitization-type transactions, all of which in our opinion utilize customary structures and terms for transactions of this type. In each securitization-type transaction, we sold receivables to a wholly-owned special purpose entity which, in turn, sold the receivables either directly to third parties or to a trust established for the transaction. In each transaction, the receivables were sold on a non-recourse basis (except for breaches of certain representations and warranties) and the special purpose entity has a retained interest in the receivables sold. We have acted as servicer of the receivables pools in each transaction for a fee, with the servicing obligations specified under the applicable transaction documents. Under the terms of the applicable securitization transaction, the cash payments received from obligors on the receivables sold are distributed to the investors (which, depending on the transaction, may acquire the receivables directly or purchase an interest in, or make loans secured by the receivables to, a trust that owns the receivables), parties providing services in connection with the facility, and our special purpose subsidiary as the holder of the retained interests in the receivables according to specified formulas. In general, available funds are applied monthly to pay fees to service providers, make interest and principal payments to investors, fund required reserves, if any, and pay distributions in respect of the retained interests in the receivables. Pursuant to the terms of the transaction documents, however, to the extent the portfolio of receivables fails to satisfy specified performance criteria (as may occur due to an increase in default rates or loan loss severity) or other trigger events, the funds received from obligors are distributed on an accelerated basis to investors. In effect, during a period in which the accelerated payment formula is applicable, funds go to outside investors until they receive the full amount owed to them and only then are payments made to our subsidiary in its capacity as the holder of the retained interests. Depending on the circumstances and the transaction, the application of the accelerated payment formula may be permanent or temporary until the trigger event is cured. If the accelerated payment formula were to become applicable, the cash flow on the retained interests in the receivables would be reduced until the outside investors were paid or the regular payment formula was resumed. Such a reduction in cash flow could cause a decline in the fair value of our retained interests in the receivables sold. Declines in fair value that are determined to be other than temporary are charged to operations in the current period. In each facility, the failure of the pool of receivables to comply with specified portfolio covenants can create a trigger event, which results in the use of the accelerated payment formula (in certain circumstances until the trigger event is cured and in other circumstances permanently) and, to the extent there was any remaining commitment to purchase receivables from our special purpose subsidiary, the suspension or termination of that commitment. In addition, in each securitization facility certain breaches of our obligations as servicer or other events allow the indenture trustee to cause the servicing to be transferred to a substitute third party servicer. In that case, our obligation to service the receivables would terminate and we would cease to receive a servicing fee. The following is a summary of significant financial information related to the Purchase Facility and prior similar facilities during the periods presented below (in thousands): December 31, March 31, 2004 2005 --------------------------------- On Balance Sheet: Retained interests in notes receivable sold $ 72,099 $ 80,473 Servicing assets (included in other assets) 3,357 3,535 Off Balance Sheet: Notes receivable sold without recourse 326,076 357,198 Principal balance owed to note receivable purchasers 297,122 314,155 28 Three Months Ended -------------------------- Income Statement: March 31, March 31, 2004 2005 -------------------------- Gain on sales of notes receivable $ 2,380 $ 1,441 Interest accretion on retained interests in notes receivable sold 1,838 1,663 Servicing fee income 1,048 1,272 Amortization of servicing assets (228) (292) Credit Facilities for Bluegreen Resorts' Receivables and Inventories In addition to the vacation ownership receivables purchase facilities discussed above, we maintain various credit facilities with financial institutions that provide receivable, acquisition and development financing for our vacation ownership projects. The GMAC Receivables Facility. In February 2003, we entered into a revolving vacation ownership receivables credit facility (the "GMAC Receivables Facility") with Residential Funding Corporation ("RFC"), an affiliate of GMAC. The borrowing limit under the GMAC Receivables Facility, as increased by amendment, is $75.0 million. The borrowing period on the GMAC Receivables Facility, as amended, expires on September 15, 2006, and outstanding borrowings mature no later than September 15, 2013. The GMAC Receivables Facility has detailed requirements with respect to the eligibility of receivables for inclusion and other conditions to funding. The borrowing base under the GMAC Receivables Facility is 90% of the outstanding principal balance of eligible notes arising from the sale of VOIs. The GMAC Receivables Facility includes affirmative, negative and financial covenants and events of default. All principal and interest payments received on pledged receivables are applied to principal and interest due under the GMAC Receivables Facility. Indebtedness under the facility bears interest at LIBOR plus 4.00% (6.86% at March 31, 2005). During the three months ended March 31, 2005, we pledged approximately $6.6 million in aggregate principal balance of vacation ownership receivables under the GMAC Receivables Facility and received $6.0 million in cash borrowings. As of March 31, 2005, $31.7 million was outstanding under the GMAC Receivables Facility. The GMAC AD&C Facility. RFC has also provided us with a $75.0 million acquisition, development and construction revolving credit facility for Bluegreen Resorts (the "GMAC AD&C Facility"). The borrowing period on the GMAC AD&C Facility, as amended, expires on September 15, 2006, and outstanding borrowings mature no later than September 15, 2010, although specific draws typically are due four years from the borrowing date. Principal will be repaid through agreed-upon release prices as VOIs are sold at the financed resorts, subject to minimum required amortization. Indebtedness under the facility bears interest at LIBOR plus 4.75% (7.61% at March 31, 2005). Interest payments are due monthly. During the three months ended March 31, 2005, we borrowed $2.2 million under the GMAC AD&C Facility to fund the development of VOIs at The Fountains. As of March 31, 2005, $29.9 million was outstanding under the GMAC AD&C Facility. The Textron Facility. During December 2003, we signed a combination $30.0 million Acquisition and Development and Timeshare Receivables facility with Textron Financial Corporation (the "Textron Facility"). The borrowing period for acquisition and development loans under the Textron Facility expired on October 1, 2004, and outstanding acquisition and development borrowings mature no later than January 1, 2006. The borrowing period for vacation ownership receivables loans under the Textron Facility expires on March 1, 2006, and outstanding vacation ownership receivables borrowings mature no later than March 31, 2009. Principal is being repaid semi-annually commencing September 14, 2004, subject to minimum required amortization, with the balance due upon the earlier of i) the date that 85% of the VOIs in the financed resort are sold or ii) the maturity date. Acquisition and development indebtedness under the facility bears interest at the prime lending rate plus 1.25%, subject to a minimum interest rate of 6.25%. Interest payments are due monthly. Receivable-backed borrowings under the Textron Facility bears interest at the prime lending rate plus 1.00%, subject to a 6.00% minimum interest rate. During the three months ended March 31, 2005, we borrowed $3.4 million collateralized by $3.7 million of vacation ownership receivables. As of March 31, 2005, $6.0 million was outstanding under the Textron Facility. The RFL A&D Facility. On January 11, 2005, we entered into a $50.0 million revolving credit facility with RFL (the "RFL A&D Facility"). We use the proceeds from the RFL A&D Facility 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 29 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 Resort. The total commitment under the RFL A&D Facility for the Daytona Resort is $14.7 million, the $5.2 million balance of which can be borrowed during 2005 to fund refurbishment of the Daytona Resort. Under an existing $30.0 million revolving credit facility with Wells Fargo Foothill, Inc. ("Foothill") primarily used for borrowings collateralized by Bluegreen Communities receivables and inventory, we can also borrow up to $10.0 million of the facility collateralized by the pledge of vacation ownership receivables. See "Credit Facilities for Bluegreen Communities' Receivables and Inventories," below, for further details on this facility. Credit Facilities for Bluegreen Communities' Receivables and Inventories The Foothill Facility. We have a $30.0 million revolving credit facility with Foothill secured by the pledge of Bluegreen Communities' receivables, with up to $10.0 million of the total facility available for Bluegreen Communities' inventory borrowings and, as indicated above, up to $10.0 million of the total facility available for the pledge of Bluegreen Resorts' receivables (the "Foothill Facility"). The Foothill Facility requires principal payments based on agreed-upon release prices as homesites in the encumbered communities are sold and bears interest at the prime lending rate plus 1.25% (7.00% at March 31, 2005), payable monthly. The interest rate charged on outstanding receivable borrowings under the Foothill Facility, as amended, is the prime lending rate plus 0.25% (6.00% at March 31, 2005) when the average monthly outstanding loan balance is greater than or equal to $15.0 million. If the average monthly outstanding loan balance is less than $15.0 million, the interest rate is the greater of 4.00% or the prime lending rate plus 0.50% (6.25% at March 31, 2005). All principal and interest payments received on pledged receivables are applied to principal and interest due under the Foothill Facility. We can borrow under the Foothill Facility through December 31, 2006. At March 31, 2005, the outstanding principal balance under this facility was approximately $8.6 million, approximately $3.4 million of which is collateralized by our Traditions of Braselton golf course community in Braselton, Georgia, $3.8 million of which related to Bluegreen Communities' receivables borrowings and $1.4 million of which related to Bluegreen Resorts' receivables borrowings. Outstanding indebtedness related to the Traditions of Braselton borrowing is due on March 10, 2006 and the maturity date for borrowings collateralized by receivables is December 31, 2008. The GMAC Communities Facility. We have a $50.0 million revolving credit facility with RFC (the "GMAC Communities Facility"). The GMAC Communities Facility is secured by the real property homesites (and personal property related thereto) at the following Bluegreen Communities projects, as well as any Bluegreen Communities projects acquired by us with funds borrowed under the GMAC Communities Facility (the "Secured Projects"): Brickshire (New Kent County, Virginia); Mountain Lakes Ranch (Bluffdale, Texas); Ridge Lake Shores (Magnolia, Texas); Riverwood Forest (Fulshear, Texas); Waterstone (Boerne, Texas); Catawba Falls Preserve (Black Mountain, North Carolina); Lake Ridge at Joe Pool Lake (Cedar Hill and Grand Prairie, Texas); Mystic Shores at Canyon Lake (Spring Branch, Texas); and Yellowstone Creek Ranch (Pueblo, Colorado). In addition, the GMAC Communities Facility is secured by our Carolina National and The Preserve at Jordan Lake golf courses in Southport, North Carolina and Chapel Hill, North Carolina, respectively. Borrowings can be drawn on such projects through September 25, 2006. Principal payments are effected through agreed-upon release prices paid to RFC as homesites in the Secured Projects are sold. The outstanding principal balance of any borrowings under the GMAC Communities Facility must be repaid by September 25, 2006. The interest charged on outstanding borrowings is at the prime lending rate plus 1.00% (6.75% at March 31, 2005) and is payable monthly. The GMAC Communities Facility includes customary conditions to funding, acceleration and event of default provisions and certain financial affirmative and negative covenants. We use the proceeds from the GMAC Communities Facility to repay outstanding indebtedness on Bluegreen Communities projects, finance the acquisition and development of Bluegreen Communities projects and for general corporate purposes. As of March 31, 2005, $1.6 million was outstanding under the GMAC Communities Facility. In April 2005, we borrowed an additional $9.0 million under the GMAC Communities Facility, approximately $2.4 million of which was used to repay a term loan with another financial institution. 30 Over the past several years, substantially all of our homesite sales have been for cash and we have not provided a significant amount of financing to homesite purchasers. Accordingly, in recent years we have reduced the borrowing capacity under credit agreements secured by Bluegreen Communities' receivables. We attribute the significant volume of cash sales to an increased willingness on the part of banks to extend direct customer homesite financing at attractive interest rates. No assurances can be given that local banks will continue to provide such customer financing. Historically, we have funded development for road and utility construction, amenities, surveys and engineering fees from internal operations and have financed the acquisition of Bluegreen Communities properties through seller, bank or financial institution loans. Terms for repayment under these loans typically call for interest to be paid monthly and principal to be repaid through homesite releases. The release price is usually an amount based on a pre-determined percentage (typically 25% to 55%) of the gross selling price of the homesites in the subdivision. In addition, the agreements generally call for minimum cumulative annual amortization. When we provide financing for our customers (and therefore the release price is not available in cash at closing to repay the lender), we are required to pay the lender with cash derived from other operating activities, principally from cash sales or the pledge of receivables originated from earlier property sales. Trust Preferred Debt On March 15, 2005, one of our wholly-owned statutory business 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, another of our wholly-owned statutory business 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. On May 10, 2005, another of our wholly-owned statutory business 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. We also expect to create similar trusts and participate in other pooled trust preferred securities transactions in the future as a source of additional financing. Unsecured Credit Facility We have a $15.0 million unsecured line-of-credit with Wachovia Bank, N.A. Amounts borrowed under the line bear interest at LIBOR plus 2.00% (4.86% at March 31, 2005). Interest is due monthly and all outstanding amounts are due on June 30, 2006. We are only allowed to borrow under the line-of-credit in amounts less than the remaining availability under our current, active vacation ownership receivables purchase facilities plus availability under certain receivables warehouse facilities, less any outstanding letters of credit. The line-of-credit agreement contains certain covenants and conditions typical of arrangements of this type. As of March 31, 2005, no borrowings were outstanding under the line. There are an aggregate of $607,000 of irrevocable letters of credit under this line-of-credit which were required in connection with the obtaining of plats for one of our Bluegreen Communities projects. These letters of credit expire on December 31, 2005. This line-of-credit is an available source of short-term liquidity for us, although we have not drawn any borrowings under this facility recently. 31 Commitments Our material commitments as of March 31, 2005 included the required payments due on our receivable-backed debt, lines of credit and other notes and debentures payable, commitments to complete our vacation ownership and communities projects based on our sales contracts with customers and commitments under noncancelable operating leases. The following table summarizes the contractual minimum principal payments required on all of our outstanding debt (including our receivable-backed debt, lines-of-credit and other notes and debentures payable) and our noncancelable operating leases as of March 31, 2005, by period due (in thousands): Payments Due by Period ---------------------------------------------------------------------- Less than 1 -- 3 4 -- 5 After 5 Contractual Obligations 1 year Years Years Years Total ----------------------- ------ ----- ----- ----- ----- Receivable-backed notes payable $ -- $ -- $ 8,615 $ 31,709 $ 40,324 Lines-of-credit and notes payable 29,191 36,069 28 -- 65,288 Junior subordinated debentures -- -- -- 23,196 23,196(1) 10.5% senior secured notes -- -- 110,000 -- 110,000(2) Noncancelable operating leases 5,138 9,486 6,672 6,793 28,089 -------- -------- -------- -------- -------- Total contractual obligations $ 34,329 $ 45,555 $125,315 $ 61,698 $266,897 ======== ======== ======== ======== ======== (1) This amount excludes the May 4, 2005 issuance of an additional $25.8 million of junior subordinated debentures to one of our statutory business trusts in connection with a concurrent issuance by the trust of trust preferred securities. See also "Liquidity and Capital Resources - Trust Preferred Securities." (2) The Notes are redeemable at our option, in whole or in part, in cash, together with accrued and unpaid interest, if any, to the date of redemption at the following redemption prices: 2005 -- 101.75% and 2006 and thereafter -- 100.00%. We intend to use cash flow from operations, including cash received from the sale of vacation ownership notes receivable, and cash received from new borrowings under existing or future debt facilities in order to satisfy the principal payments in the Contractual Obligations. While we believe that we will be able to meet all required debt payments when due, there can be no assurance that this will be the case. As noted above, we have $607,000 in letters-of-credit outstanding at March 31, 2005, all of which were issued under the unsecured line-of-credit with Wachovia Bank, N.A. These letters-of-credit, which expire on December 31, 2005, were required in connection with the obtaining of governmental approval of plats for one of our Bluegreen Communities projects. We estimate that the total cash required to complete resort buildings in which sales have occurred and resort amenities and other common costs in projects in which sales have occurred to be approximately $20.2 million as of March 31, 2005. We estimate that the total cash required to complete our Bluegreen Communities projects in which sales have occurred to be approximately $75.2 million as of March 31, 2005. These amounts assume that we are not obligated to develop any building, project or amenity in which a commitment has not been made through a sales contract to a customer; however, we anticipate that we will incur such obligations in the future. We plan to fund these expenditures over the next five years primarily with available capacity on existing or proposed credit facilities and cash generated from operations. There can be no assurance that we will be able to obtain the financing or generate the cash from operations necessary to complete the foregoing plans or that actual costs will not exceed those estimated. During 2004, we executed various agreements with Carolinian Resort Development LLC ("CRD") to develop a vacation ownership resort in Myrtle Beach, South Carolina (the "Carolinian Resort"). CRD is obtaining zoning and other approvals (collectively, the "Approvals") for this project and is responsible for constructing the Carolinian Resort for sale to us upon its completion pursuant to plans and specifications agreed-upon by us. The purchase price of the completed Carolinian Resort is anticipated to be $20.6 million, $2.9 million of which has been paid by us as a deposit and is being held in escrow as of March 31, 2005. Should CRD default under the agreements governing the construction and sale of the Carolinian Resort to us, we may exercise certain remedies including termination of the agreements and receiving a refund for our deposit or obtaining specific performance. The Carolinian Resort is expected to be completed in November 2005. RFC has agreed to provide financing to us for the purchase of the Carolinian Resort under the GMAC AD&C Facility, and hence this borrowing would mature in November 2009. See "Liquidity and Capital Resources -- Credit Facilities for Bluegreen Resorts' Receivables and Inventories" for a discussion of the terms of the GMAC AD&C Facility. 32 We believe that our existing cash, anticipated cash generated from operations, anticipated future permitted borrowings under existing or proposed credit facilities and anticipated future sales of notes receivable under the purchase facility and one or more replacement facilities we will seek to put in place will be sufficient to meet our anticipated working capital, capital expenditures and debt service requirements for the foreseeable future. We will be required to renew or replace credit and receivables purchase facilities that have expired or that will expire in the near term. We will, in the future, also require additional credit facilities or will be required to issue corporate debt or equity securities in connection with acquisitions or otherwise. Any debt incurred or issued by us may be secured or unsecured, bear fixed or variable rate interest and may be subject to such terms as the lender may require and management deems prudent. There can be no assurance that the credit facilities or receivables purchase facilities which have expired or which are scheduled to expire in the near term will be renewed or replaced or that sufficient funds will be available from operations or under existing, proposed or future revolving credit or other borrowing arrangements or receivables purchase facilities to meet our cash needs, including, our debt service obligations. To the extent we are not able to sell notes receivable or borrow under such facilities, our ability to satisfy our obligations would be materially adversely affected. We have a large number of credit facilities, indentures, and other outstanding debt instruments, and receivables purchase facilities which include customary conditions to funding, eligibility requirements for collateral, cross-default and other acceleration provisions, certain financial and other affirmative and negative covenants, including, among others, limits on the incurrence of indebtedness, limits on the repurchase of securities, payment of dividends, investments in joint ventures and other restricted payments, the incurrence of liens, transactions with affiliates, covenants concerning net worth, fixed charge coverage requirements, debt-to-equity ratios, portfolio performance requirements and events of default or termination. No assurance can be given that we will not be required to seek waivers of such covenants or that such covenants will not limit our ability to raise funds, sell receivables, satisfy or refinance our obligations or otherwise adversely affect our operations. In addition, our future operating performance and ability to meet our financial obligations will be subject to future economic conditions and to financial, business and other factors, many of which will be beyond our control. Item 4. CONTROLS AND PROCEDURES a) As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our principal executive officer and principal financial officer of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2005. Based on such evaluation, such officers have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us required to be included in our periodic SEC filings. b) There has been no change in our internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds We did not purchase any of our equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. From time to time, our Board of Directors has adopted and publicly announced a share repurchase program. Repurchases under such programs are subject to the price of our stock, prevailing market conditions, our financial condition and available resources, other investment alternatives and other factors. We are not required to seek shareholder approval of share repurchase programs, have not done so in the past, and do not anticipate doing so in the future, except to the extent we may be required to do so under applicable law. We have not repurchased any shares since the fiscal year ended April 1, 2001. As of March 31, 2005, there were 694,500 shares remaining for purchase under our current repurchase program, however we have no present intention of acquiring these remaining shares. Item 6. Exhibits Exhibits: 10.1 Amended and Restated Trust Agreement among Bluegreen Corporation, as Depositor, JPMorgan Chase Bank, National Association, as Property Trustee, Chase Bank USA, National Association, as Delaware Trustee and the Administrative Trustees Named Herein as Administrative Trustees dated as of March 15, 2005. 10.2 Junior Subordinated Indenture between Bluegreen Corporation and JPMorgan Chase Bank, National Association, as Trustee dated as of March 15, 2005. 10.3 Amended and Restated Trust Agreement among Bluegreen Corporation, as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trustees Named Herein as Administrative Trustees dated as of May 4, 2005. 10.4 Junior Subordinated Indenture between Bluegreen Corporation and Wilmington Trust Company as Trustee dated as of May 4, 2005. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BLUEGREEN CORPORATION (Registrant) Date: May 6, 2005 By: /s/ George F. Donovan ----------------------------------- George F. Donovan President and Chief Executive Officer Date: May 6, 2005 By: /s/ Anthony M. Puleo ----------------------------------- Anthony M. Puleo Senior Vice President, and Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 34