UNITED STATES
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 June 30, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number: 0-19292
Bluegreen Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 03-0300793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4960 Conference Way North, Suite 100,
Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
(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 a large accelerated
filer, an accelerated filer, or a non-accelerated files. (See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act). (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act)
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of August 6, 2007, there
were 31,199,528 shares of the registrant's common stock, $0.01 par value,
outstanding.
2
BLUEGREEN CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2006 and June 30, 2007 ............ 4
Condensed Consolidated Statements of Income - Three months ended June 30, 2006 and 2007 . 5
Condensed Consolidated Statements of Income - Six months ended June 30, 2006 and 2007 ... 6
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2006 and 2007 7
Notes to Condensed Consolidated Financial Statements .................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 24
Item 4. Controls and Procedures ................................................................. 45
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................... 46
Item 1A. Risk Factors ........................................................................... 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ............................. 47
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 47
Item 6. Exhibits ................................................................................ 47
Signatures ...................................................................................... 49
TRADEMARKS
The terms "Bluegreen(R)," "Bluegreen Communities(R)," "Bluegreen Vacation
Club(R)," "Colorful Places To Live And Play(R)," "You're Going To Like What You
See!(R)," "Encore Rewards(R)," "Outdoor Traveler Logo(R)," and the "Bluegreen
Logo(R)" are registered in the U.S. Patent and Trademark Office by Bluegreen
Corporation.
The terms "The Hammocks at Marathon(TM)," "Orlando's Sunshine Resort(TM),"
"Solara Surfside(TM)," "Mountain Run at Boyne(TM)," "The Falls Village(TM),"
"Bluegreen Wilderness Club(TM)," "The Lodge Alley Inn(TM)," "Carolina
Grande(TM)," "Harbour Lights(TM)," "Patrick Henry Square(TM)," "SeaGlass
Tower(TM)," "Shore Crest Vacation Villas(TM)," "Laurel Crest(TM),"
"MountainLoft(TM)," "Daytona SeaBreeze(TM)," "Shenandoah Crossing(TM),"
"Christmas Mountain Village(TM)," "Traditions of Braselton(TM)," "Sanctuary Cove
at St. Andrews Sound(TM)," "Catawba Falls Preserve(TM)," "Mountain Lakes
Ranch(TM)," "Silver Lakes Ranch(TM)," "Mystic Shores(TM)," "Lake Ridge at Joe
Pool Lake(TM)," "Ridge Lake Shores(TM)," "Mountain Springs Ranch(TM),"
"Havenwood at Hunter's CrossingTM," "Vintage Oaks at the Vineyard(TM)," "The
Bridges at Preston Crossings(TM)," "Saddle Creek Forest(TM)," "The Settlement at
Patriot Ranch(TM)," "Carolina National(TM)," "Brickshire(TM)," "Golf Club at
Brickshire(TM)," "Preserve at Jordan Lake(TM)," "Encore Dividends(TM),"
Bluegreen Preferred(TM)," and "Bluegreen Traveler Plus(TM)," are trademarks or
service marks of Bluegreen Corporation in the United States.
The terms "Big Cedar(R)" and "Bass Pro Shops(R)" are registered in the
U.S. Patent and Trademark Office by Bass Pro Trademarks, LP.
The term "World Golf Village(R)" is registered in the U.S. Patent and
Trademark Office by World Golf Foundation, Inc. All other marks are registered
marks of their respective owners.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, June 30,
2006 2007
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents (including restricted cash of $21,476
and $26,675 at December 31, 2006 and June 30, 2007, respectively) ............. $ 71,148 $ 85,993
Contracts receivable, net ...................................................... 23,856 27,345
Notes receivable (net of allowance of $13,499 and $23,902 at
December 31, 2006 and June 30, 2007, respectively) ............................ 144,251 214,680
Prepaid expenses ............................................................... 10,800 12,038
Other assets ................................................................... 27,465 26,496
Inventory, net ................................................................. 349,333 379,008
Retained interests in notes receivable sold .................................... 130,623 128,442
Property and equipment, net .................................................... 92,445 100,574
Goodwill ....................................................................... 4,291 4,291
------------ ------------
Total assets .............................................................. $ 854,212 $ 978,867
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable ............................................................... $ 18,465 $ 19,116
Accrued liabilities and other .................................................. 49,458 57,015
Deferred income ................................................................ 40,270 45,489
Deferred income taxes .......................................................... 87,624 92,334
Receivable-backed notes payable ................................................ 21,050 92,508
Lines-of-credit and notes payable .............................................. 124,412 126,212
10.50% senior secured notes payable ............................................ 55,000 55,000
Junior subordinated debentures ................................................. 90,208 110,827
------------ ------------
Total liabilities ............................................................ 486,487 598,501
Minority interest .............................................................. 14,702 17,968
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 1,000 shares authorized; none issued .......... -- --
Common stock, $.01 par value, 90,000 shares authorized; 33,603 and 33,741 shares
issued at December 31, 2006 and June 30, 2007, respectively .................. 336 337
Additional paid-in capital ..................................................... 175,164 176,869
Treasury stock, 2,756 common shares at both December 31, 2006 and
June 30, 2007, at cost ....................................................... (12,885) (12,885)
Accumulated other comprehensive income, net of income taxes .................... 12,632 10,876
Retained earnings .............................................................. 177,776 187,201
------------ ------------
Total shareholders' equity ................................................... 353,023 362,398
------------ ------------
Total liabilities and shareholders' equity ................................ $ 854,212 $ 978,867
============ ============
Note: The condensed consolidated balance sheet at December 31, 2006 has been
derived from the audited consolidated financial statements at that date
but does not include all of the information and footnotes required by
United States generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed consolidated financial statements.
4
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
June 30,
----------------------
2006 2007
--------- ---------
Revenues:
Gross sales of real estate ............................................. $ 157,239 $ 158,506
Estimated uncollectible VOI notes receivable ........................... (15,292) (15,232)
--------- ---------
Sales of real estate ................................................... 141,947 143,274
Other resort and communities operations revenue ........................ 13,620 15,590
Interest income ........................................................ 9,499 12,108
Gain on sales of notes receivable ...................................... 47 --
Other income, net ...................................................... 837 --
--------- ---------
165,950 170,972
--------- ---------
Costs and expenses:
Cost of real estate sales .............................................. 49,022 46,305
Cost of other resort and communities operations ........................ 12,937 11,855
Selling, general and administrative expenses ........................... 88,089 98,452
Interest expense ....................................................... 3,526 5,881
Other expense, net ..................................................... -- 246
--------- ---------
153,574 162,739
--------- ---------
Income before minority interest and provision for income taxes ............ 12,376 8,233
Minority interest in income of consolidated subsidiary .................... 1,677 1,633
--------- ---------
Income before provision for income taxes and change in accounting principle 10,699 6,600
Provision for income taxes ................................................ 4,119 2,508
--------- ---------
Net income ................................................................ $ 6,580 $ 4,092
========= =========
Net income per common share:
Basic ................................................................. $ 0.22 $ 0.13
========= =========
Diluted ............................................................... $ 0.21 $ 0.13
========= =========
Weighted average number of common and common equivalent shares:
Basic ................................................................. 30,526 30,926
========= =========
Diluted ............................................................... 31,054 31,277
========= =========
See accompanying notes to condensed consolidated financial statements.
5
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Six Months Ended
June 30,
----------------------
2006 2007
--------- ---------
Revenues:
Gross sales of real estate ...................................................... $ 289,629 $ 291,890
Estimated uncollectible VOI notes receivable .................................... (25,922) (26,594)
--------- ---------
Sales of real estate ............................................................ 263,707 265,296
Other resort and communities operations revenue ................................. 30,287 30,608
Interest income ................................................................. 17,672 21,950
Gain on sales of notes receivable ............................................... 552 --
Other income, net ............................................................... 690 --
--------- ---------
312,908 317,854
--------- ---------
Costs and expenses:
Cost of real estate sales ....................................................... 94,244 83,037
Cost of other resort and communities operations ................................. 29,717 24,274
Selling, general and administrative expenses .................................... 162,162 179,845
Interest expense ................................................................ 6,832 11,032
Other expense, net .............................................................. -- 1,197
--------- ---------
292,955 299,385
Income before minority interest and provision for income taxes ................... 19,953 18,469
Minority interest in income of consolidated subsidiary ........................... 2,699 3,267
--------- ---------
Income before provision for income taxes and change in accounting principle ...... 17,254 15,202
Provision for income taxes ....................................................... 6,643 5,777
--------- ---------
Income before cumulative effect of change in accounting principle ................ 10,611 9,425
Cumulative effect of change in accounting principle, net of tax .................. (5,678) --
Minority interest in income of cumulative effect of change in accounting principle 1,184 --
--------- ---------
Net income ....................................................................... $ 6,117 $ 9,425
========= =========
Income before cumulative effect of change in accounting principle
per common share:
Basic .......................................................................... $ 0.35 $ 0.30
========= =========
Diluted ........................................................................ $ 0.34 $ 0.30
========= =========
Cumulative effect of change in accounting principle, net of tax and net of
minority interest in income of cumulative effect of change in accounting
principle per common share:
Basic .......................................................................... $ (0.15) $ --
========= =========
Diluted ........................................................................ $ (0.14) $ --
========= =========
Net income per common share:
Basic .......................................................................... $ 0.20 $ 0.30
========= =========
Diluted ........................................................................ $ 0.20 $ 0.30
========= =========
Weighted average number of common and common equivalent shares:
Basic .......................................................................... 30,519 30,943
========= =========
Diluted ........................................................................ 31,089 31,324
========= =========
See accompanying notes to condensed consolidated financial statements.
6
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2006 2007
--------- ---------
(restated)
Operating activities:
Net income .................................................................. $ 6,117 $ 9,425
Adjustments to reconcile net income to net cash used in operating activities:
Cumulative effect of change in accounting principle, net .................. 5,678 --
Non-cash stock compensation expense ...................................... 917 1,153
Minority interest in income of consolidated subsidiary ................... 1,515 3,267
Depreciation and amortization ............................................ 8,101 8,983
Gain on sale of notes receivable .......................................... (9,707) (7,967)
Loss on sale of property and equipment ................................... 76 526
Provision for loan losses ................................................ 25,922 26,614
Provision for deferred income taxes ...................................... 6,643 5,777
Interest accretion on retained interests in notes receivable sold ........ (5,184) (8,512)
Proceeds from sales of notes receivable .................................. 51,789 46,026
Change in operating assets and liabilities:
Contracts receivable ..................................................... (12,944) (3,489)
Notes receivable ......................................................... (121,332) (140,013)
Inventory ................................................................ (15,287) (17,075)
Prepaid expenses and other assets ........................................ (9,761) 335
Accounts payable, accrued liabilities and other .......................... 15,385 14,920
--------- ---------
Net cash used in operating activities ......................................... (52,072) (60,030)
--------- ---------
Investing activities:
Purchases of property and equipment ......................................... (13,138) (15,159)
Investment in statutory business trust ...................................... (464) (619)
Cash received from retained interests in notes receivable sold .............. 14,969 12,935
--------- ---------
Net cash provided (used) by investing activities .............................. 1,367 (2,843)
--------- ---------
Financing activities:
Proceeds from borrowings collateralized by notes receivable .................. 29,732 77,348
Payments on borrowings collateralized by notes receivable .................... (9,989) (7,292)
Borrowings under lines-of-credit facilities and other notes payable .......... 35,169 38,055
Payments under lines-of-credit facilities and other notes payable ............ (31,225) (49,996)
Proceeds from issuance of junior subordinated debentures ..................... 15,464 20,619
Payment of debt issuance costs ............................................... (2,686) (1,569)
Proceeds from exercise of stock options ...................................... 173 553
--------- ---------
Net cash provided by financing activities ..................................... 36,638 77,718
--------- ---------
Net (decrease) increase in cash and cash equivalents .......................... (14,067) 14,845
Cash and cash equivalents at beginning of period .............................. 84,704 71,148
--------- ---------
Cash and cash equivalents at end of period .................................... 70,637 85,993
Restricted cash and cash equivalents at end of period ......................... (26,818) (26,675)
--------- ---------
Unrestricted cash and cash equivalents at end of period ....................... $ 43,819 $ 59,318
========= =========
See accompanying notes to condensed consolidated financial statements.
7
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2006 2007
--------- ---------
(restated)
Supplemental schedule of non-cash operating, investing,
and financing activities:
Inventory acquired through financing ................................... $ 71,447 $ 12,600
========= =========
Property and equipment acquired through financing ...................... $ 4,460 $ 896
========= =========
Retained interests in notes receivable sold ............................ $ 6,479 $ 5,065
========= =========
Net change in unrealized gains in retained interests in notes
receivable sold ...................................................... $ (1,995) $ (2,823)
========= =========
See accompanying notes to condensed consolidated financial statements.
8
BLUEGREEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
1. Organization and Significant Accounting Policies
We have prepared the accompanying unaudited condensed consolidated
financial statements in accordance with United States generally accepted
accounting principles 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 United States
generally accepted accounting principles 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 and six
months ended June 30, 2007, are not necessarily indicative of the results to be
expected for the year ending December 31, 2007. Subsequent to the issuance of
our March 31, 2007 condensed consolidated financial statements, our management
determined that certain information in the consolidated statements of cash flows
should be restated for all periods presented to conform with Statement of
Financial Accounting Standards ("SFAS") No. 95, Statement of Cash Flows, in
response to comments of the Staff of the Securities and Exchange Commission (the
"SEC"). We have restated the financial statements and corresponding financial
information to correctly reflect the classification of borrowings collateralized
by notes receivable as cash flows from financing activities. We had previously
reported these cash flows as operating activities as the majority of Bluegreen
Resorts' sales result in the origination of notes receivable from its customers;
and, accelerating the conversion of such notes receivable into cash, either
through the pledge or sale of our notes receivable, on a regular basis is an
integral function of our operations. We will continue to include the proceeds
from sales of notes receivable as cash flows from operations consistent with
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, and SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions. For further information, refer to our audited
consolidated financial statements for the year ended December 31, 2006, which
are included in our 2006 Annual Report on Form 10-K/A ("Annual Report").
Organization
We provide Colorful Places to Live and Play(R) through our resorts and
residential communities businesses. Our resorts business ("Bluegreen Resorts")
acquires, develops, markets, sells and manages real estate-based vacation
ownership interests ("VOIs") in resorts generally located in popular,
high-volume, "drive-to" vacation destinations. VOIs in our resorts typically
entitle the buyer to use resort accommodations through an annual or biennial
allotment of "points" which represent their ownership and beneficial use rights
in perpetuity in our Bluegreen Vacation Club (supported by an underlying deeded
VOI held in trust for the buyer). Depending on the extent of their ownership and
beneficial rights, members in our Bluegreen Vacation Club may stay in any of our
participating resorts or take advantage of other vacation options, including
cruises and stays at approximately 3,700 resorts offered primarily by a
third-party world-wide vacation ownership exchange network. We are currently
marketing and selling VOIs in 21 resorts located in the United States and Aruba,
21 of which have active sales offices. We also sell VOIs at seven off-site sales
offices and on the campuses of two resorts under development located in the
United States. Our residential communities business ("Bluegreen Communities")
acquires, develops and subdivides property and markets residential homesites,
the majority of which are sold directly to retail customers who seek to build a
home in a high quality residential setting, in some cases on properties
featuring a golf course and other related amenities. During the six months ended
June 30, 2007, sales recognized by Bluegreen Resorts comprised approximately 73%
of our total sales of real estate while sales recognized by Bluegreen
Communities comprised approximately 27% of our total sales of real estate. Our
other resort and communities operations revenues consist primarily of resort
property management services, resort title services, resort amenity operations,
non-cash sales incentives provided to buyers of VOIs, rental brokerage services,
realty operations and daily-fee golf course operations. We also generate
significant interest income by providing financing to individual purchasers of
VOIs.
9
Principles of Consolidation
Our consolidated financial statements include the accounts of all of our
wholly-owned subsidiaries and entities in which we hold a controlling financial
interest. The only non-wholly owned subsidiary that we consolidate is
Bluegreen/Big Cedar Vacations, LLC (the "Joint Venture"), as we hold a 51%
equity interest in the Joint Venture, have an active role as the day-to-day
manager of the Joint Venture's activities, and have majority voting control of
the Joint Venture's management committee. Additionally, we do not consolidate
our wholly-owned statutory business trusts (see Note 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 ("FIN No. 46R"). The statutory
business trusts are accounted for under the equity method of accounting. We have
eliminated all significant intercompany balances and transactions.
Use of Estimates
United States generally accepted accounting principles 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.
Reclassifications
We have made certain reclassifications of prior period amounts to conform
to the current period presentation.
Earnings Per Common Share
We compute basic earnings per common share by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per
common share is computed in the same manner as basic earnings per share, but
also gives effect to all dilutive stock options using the treasury stock method.
During the six months ended June 30, 2007 a total of 138,313 common shares were
issued as a result of stock option exercises. There were approximately 1.2
million stock options not included in diluted earnings per common share during
the three and six months ended June 30, 2007, respectively, as the effect would
be anti-dilutive. There were approximately 0.8 million stock options not
included in diluted earnings per common share during the three and six months
ended June 30, 2006, as the effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2006 2007 2006 2007
--------- --------- --------- ---------
Basic and diluted earnings per share - numerator:
Net income ................................................................. $ 6,580 $ 4,092 $ 6,117 $ 9,425
========= ========= ========= =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares .................................................. 30,526 30,926 30,519 30,943
--------- --------- --------- ---------
Effect of dilutive securities:
Stock options ............................................................ 528 351 570 381
--------- --------- --------- ---------
Denominator for diluted earnings per share - adjusted
weighted-average shares 31,054 31,277 31,089 31,324
========= ========= ========= =========
Basic earnings per common share ............................................. $ 0.22 $ 0.13 $ 0.20 $ 0.30
========= ========= ========= =========
Diluted earnings per common share ........................................... $ 0.21 $ 0.13 $ 0.20 $ 0.30
========= ========= ========= =========
Retained Interests in Notes Receivable Sold
When we sell our notes receivable either pursuant to our VOI 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 ("SFAS No. 140") and related interpretations. The
evaluation of sale treatment under SFAS No. 140 involves legal assessments of
the transactions, which include
10
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 estimated 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. 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 on a quarterly basis 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. Interest on the retained interests
in notes receivable sold is accreted using the effective yield method.
Allowance for Uncollectible Notes Receivable
The table below sets forth the activity in our allowance for uncollectible
notes receivable for the six months ended June 30, 2007 (in thousands):
Balance, December 31, 2006 ................... $ 13,499
Provision for loan losses (1) ................ 26,614
Less: Allowance on sold receivables ......... (8,191)
Less: Write-offs of uncollectible receivables (8,020)
--------
Balance, June 30, 2007 ....................... $ 23,902
========
(1) Includes provision for loan losses on homesite notes receivable
Stock-Based Compensation
We recognize stock-based compensation expense under the provisions of SFAS
No. 123R, Share-Based Payment (revised 2004) ("SFAS No. 123R"), which we adopted
January 1, 2006, utilizing the modified prospective method.
We utilize the Black-Scholes option pricing model for calculating the fair
value of each option granted. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, this model
requires the input of subjective assumptions, including the expected price
volatility of the underlying stock. Projected data related to the expected
volatility and expected life of stock options is based upon historical and other
information. Changes in these subjective assumptions can materially affect the
fair value of the estimate, and therefore, the existing valuation models do not
provide a precise measure of the fair value of our employee stock options.
Additionally, SFAS No. 123R also requires us to estimate forfeitures in
calculating the expense relating to stock-based compensation.
Total compensation costs related to stock-based compensation charged
against income during the three and six months ended June 30, 2006 was $0.4
million and $0.9 million, respectively. Total compensation costs related to
stock-based compensation charged against income during the three and six months
ended June 30, 2007, was $0.5 million and $1.2 million, respectively. There were
no stock options granted during the three and six months ended June 30, 2006 or
2007. As of June 30, 2007, there was $6.3 million of total unrecognized
compensation cost related
11
to unvested stock-based compensation arrangements, which is expected to be
recognized over a weighted average period of approximately 3.6 years.
On July 18, 2007, stock options to acquire an aggregate of approximately
136,000 shares of common stock were granted to certain of our non-employee
directors at an exercise price of $11.98, which was equal to the closing price
of our common stock on the date of grant. Additionally, on July 18, 2007 we
granted approximately 213,500 shares of restricted stock to certain of our
non-employee directors and employees. A total of 16,694 shares of restricted
stock were granted to directors and vest ratably over twelve months. The
remaining restricted shares were granted to employees and vest at the end of 5
years.
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 Six Months Ended
June 30, June 30,
------------------ ------------------
2006 2007 2006 2007
------- ------- ------- -------
Net income ......................................... $ 6,580 4,092 $ 6,117 $ 9,425
Change in net unrealized gains on retained interests
in notes receivable sold, net of income taxes ..... (2,058) (1,548) (1,204) (1,756)
------- ------- ------- -------
Total comprehensive income ......................... $ 4,522 $ 2,544 $ 4,913 $ 7,669
======= ======= ======= =======
Cumulative Effect of Change in Accounting Principle from the Adoption of SFAS
No. 152
Effective January 1, 2006, we adopted SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions ("SFAS No. 152"). This statement amends SFAS
No. 66, Accounting for Sales of Real Estate, and SFAS No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, in association with
the issuance of American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 04-2, Accounting for Real Estate Time-Sharing
Transactions. SFAS No. 152 was issued to address the diversity in practice
resulting from a lack of guidance specific to the timeshare industry. Among
other things, the new standard addresses the treatment of sales incentives
provided by a seller to a buyer to consummate a transaction, the calculation of
and presentation of uncollectible notes receivable, the recognition of changes
in inventory cost estimates, recovery or repossession of VOIs, selling and
marketing costs, operations during holding periods, developer subsidies to
property owners' associations and upgrade and reload transactions. Restatement
of previously reported financial statements is not permitted.
The adoption of SFAS No. 152 on January 1, 2006, resulted in a net charge
of $4.5 million, which is presented as a cumulative effect of change in
accounting principle, net of the related tax benefit and the charge related to
minority interest.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). SFAS No. 157 establishes a common definition for fair value
under United States generally accepted accounting principles guidance requiring
the use of fair value, establishes a framework for measuring fair value, and
expands disclosure about such fair value measurements. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 157
effective January 1, 2008, and are currently assessing the impact the statement
will have on our financial condition, results of operations, cash flows or
disclosures.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS No. 159"). SFAS No. 159 allows
entities to voluntarily choose, at specified election dates, to measure many
financial assets and financial liabilities at fair value. The election is made
on an instrument-by-instrument basis and is irrevocable. Subsequent to the
adoption of SFAS No. 159, changes in fair value for the particular instruments
shall be reported in earnings. Upon initial adoption, SFAS No. 159 provides
entities with a one-time chance to elect the fair value option for existing
eligible items. The effect of the first measurement to fair value should be
reported as a cumulative-effect adjustment to the opening balance of retained
earnings in the year
12
the Statement is adopted. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a
material impact on our financial condition, results of operations, cash flows or
disclosures.
2. Sales of Notes Receivable
During the first quarter of 2007, we sold $51.2 million in VOI receivables
pursuant to a receivables purchase facility (the "2006-A GE Purchase Facility")
with General Electric Capital Corporation ("GE"). Under the 2006-A GE Purchase
Facility, a variable purchase price of approximately 90% of the principal
balance of the receivables sold, subject to certain terms and conditions, is
paid at closing in cash. The balance of the purchase price is deferred until
such time as GE has received a specified return, a specified over
collateralization 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 a published interest
swap arrangement rate as defined in the 2006-A GE Purchase Facility agreements)
plus 2.35%, subject to use of alternate return rates in certain circumstances.
Subject to compliance with the terms and conditions of funding, the 2006-A GE
Purchase Facility allows for sales of notes receivable for a cumulative purchase
price of up to $125.0 million through March 2008. As of June 30, 2007, the
remaining availability under the 2006-A GE Purchase Facility was $14.2 million
of aggregate purchase price, subject to eligibility requirements and fulfillment
of conditions precedent.
Sales of notes receivable during the three and six months ended June 30,
2006, and the six months ended June 30, 2007 were as follows (in millions):
Three Months Ended June 30, 2006
--------------------------------
Aggregate
Principal Initial Fair
Balance of Value of
Notes Purchase Gain Retained
Sale Facility Receivable Price Recognized Interest
--------------------------------------------- ---------- --------- ---------- ------------
2006-A GE Purchase Facility $ 16.6 $ 15.0 $ 2.7 $ 2.2
====== ====== ====== ======
Six Months Ended June 30, 2006
------------------------------
Aggregate
Principal Initial Fair
Balance of Value of
Notes Purchase Gain Retained
Sale Facility Receivable Price Recognized Interest
--------------------------------------------- ---------- -------- ---------- ------------
2005 Term Securitization $ 18.6 $ 16.7 $ 3.6 $ 3.3
2006-A GE Purchase Facility 39.0 35.1 6.1 4.8
------ ------ ------ ------
Total $ 57.6 $ 51.8 $ 9.7 $ 8.1
====== ====== ====== ======
Six Months Ended June 30, 2007
------------------------------
Aggregate
Principal Initial Fair
Balance of Value of
Notes Purchase Gain Retained
Sale Facility Receivable Price Recognized Interest
--------------------------------------------- ---------- -------- ---------- ------------
2006-A GE Purchase Facility $ 51.2 $ 46.0 $ 8.0 $ 6.2
====== ====== ====== ======
13
In accordance with SFAS No. 152, approximately $2.6 million and $9.2
million of the gain were recorded as an increase to VOI sales for the three and
six months ended June 30, 2006, respectively. The remaining $47,000 and $552,000
of the gains were recorded as gain on sales of notes receivable on the
accompanying statements of income for the three and six months ended June 30,
2006, respectively. Approximately $8.0 million of the gain was recorded as an
increase to VOI sales for the six months ended June 30, 2007. There were no
sales of notes receivables that qualified for off-balance sheet treatment during
the three months ended June 30, 2007.
The following assumptions were used to measure the initial fair value of
the retained interest in notes receivable sold for each of the transactions
during the six months ended June 30, 2006: prepayment rates decreasing from
14.0% to 9.0% per annum as the portfolios mature; loss severity rates ranging
from 35.0% to 71.3%; default rates decreasing from 10.0% to 1.0% per annum as
the portfolios mature; and a discount rate of 9.0%.
The following assumptions were used to measure the initial fair value of
the retained interest in notes receivable sold for each of the transactions
during the six months ended June 30, 2007: prepayment rates decreasing from
15.0% to 11.0% per annum as the portfolios mature; loss severity rate ranging
from 38% to 71.3%; default rates decreasing from 10.5% to 1.0% per annum as the
portfolios mature; and a discount rate of 9.0%.
3. Lines-of-Credit and Receivable-Backed Notes Payable
In February 2007, we borrowed $12.6 million under the GMAC Communities
Facility (this facility is described in more detail in the "Liquidity and
Capital Resources" section of Management Discussion and Analysis) in connection
with the acquisition of 350 acres near St. Simons Island, Georgia, for a
property to be called Sanctuary River Club at St. Andrews Sound. In February of
2007, we also borrowed $12.5 million under the GMAC Communities Facility to fund
development activities on various communities. As of June 30, 2007, the GMAC
Communities Facility had an outstanding balance of $46.4 million bearing
interest at 9.25%. The remaining availability under the GMAC Communities
Facility, subject to the terms and conditions of the facility, was $28.6 million
as of June 30, 2007.
In April 2007, we borrowed $10.9 million from Textron Financial
Corporation. The proceeds received under this loan were used primarily for the
completion of development at The Grande Villas at World Golf Village resort in
St. Augustine, Florida. As of June 30, 2007 the outstanding balance was $10.9
million bearing interest at 9.50%, and we had the ability to borrow an
additional $1.6 million under this loan.
During April 2007, the Joint Venture entered into a $45.0 million
revolving vacation ownership interest ("VOI") receivables credit facility (the
"Facility") with General Electric Capital Corporation ("GE"). Bluegreen
Corporation has guaranteed the full payment and performance of the Joint Venture
in connection with the Facility. The Facility allows for advances on a revolving
basis through April 16, 2009. All outstanding borrowings on the Facility mature
no later than April 16, 2016. The Facility has detailed requirements with
respect to the eligibility of receivables for inclusion and other conditions to
funding. The borrowing base under the Facility ranges from 97% - 90% (based on
the spread between the weighted average note receivable coupon and GE's interest
rate) of the outstanding principal balance of eligible notes receivable arising
from the sale of VOIs. The 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
Facility. Indebtedness under the Facility bears interest adjusted monthly at the
one month London Interbank Offered Rate ("LIBOR") plus 1.75%. The Joint Venture
was required to pay an upfront loan commitment fee of $225,000 in connection
with the Facility. In April 2007, the Joint Venture pledged $26.8 million in
aggregate principal balance of notes receivable under the Facility and received
$25.7 million in cash proceeds, net of issuance costs. As of June 30, 2007, the
outstanding balance was $24.0 million bearing interest at 7.07%, and the
remaining availability under the Facility, subject to the terms and conditions
of the facility, was $21.0 million.
In April 2007, we transferred $20.4 million of VOI notes receivable to the 2006
BB&T Purchase Facility and received $17.3 million in cash proceeds. In June
2007, we transferred an additional $40.7 million in aggregate principal balance
of notes receivable under the same facility and received $34.6 million in cash
proceeds. As of June 30, 2007, the outstanding balance on this facility was
$51.4 million and the remaining availability under the 2006 BB&T Purchase
Facility, subject to the terms and conditions of the facility, was $86.1
million, bearing interest at 6.57%. In August 2007, we transferred $32.0 million
of VOI notes receivable to the 2006 BB&T Purchase Facility and received $27.2
million in cash proceeds. Immediately following the funding, the remaining
availability under the 2006 BB&T Purchase Facility, subject to the terms and
conditions of the facility, was $58.9 million.
14
In June 2007, we borrowed $14.8 million under the GMAC AD&C Facility, the
proceeds of which will be used for development spending at The Fountains Resort
in Orlando, Florida. As of June 30, 2007 the outstanding balance on this
line-of-credit was $50.0 million, bearing interest at 9.82% and the remaining
availability under the GMAC AD&C Facility was $100.0 million as of June 30,
2007.
Total interest expense capitalized to construction in progress was $3.5
million and $5.8 million for the three and six months ended June 30, 2006,
respectively, and $3.9 million and $7.3 million for the three and six months
ended June 30, 2007, respectively.
4. Trust Preferred Securities Offerings
We have formed business statutory 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 February 26, 2007, one of the Trusts, Bluegreen Statutory Trust VI
("BST VI") issued $20.0 million of trust preferred securities. BST VI used the
proceeds from issuing the trust preferred securities to purchase an identical
amount of junior subordinated debentures from us. Interest on the junior
subordinated debentures and distributions on the trust preferred securities will
be payable quarterly in arrears at a fixed rate of 9.84% through April 2012, and
thereafter at a variable rate of interest, per annum, reset quarterly, equal to
the 3-month LIBOR plus 4.80% until the scheduled maturity date of April 30,
2037. Distributions on the trust preferred securities will be cumulative and
based upon the liquidation value of the trust preferred security. The trust
preferred securities will be subject to mandatory redemption, in whole or in
part, upon repayment of the junior subordinated debentures at maturity or their
earlier redemption. The junior subordinated debentures are redeemable five years
from the issue date or sooner following certain specified events. In addition,
we contributed $619,000 to BST VI in exchange for its common securities, all of
which are owned by us. Those proceeds were also used by BST VI to purchase an
identical amount of junior subordinated debentures from us. The terms of BST
VI's common securities are nearly identical to the trust preferred securities.
The above issuances of trust preferred securities were part of larger
pooled trust securities offerings which were not registered under the Securities
Act of 1933. Proceeds were used for general corporate purposes and debt
repayment.
We had the following junior subordinated debentures outstanding at June
30, 2007 (dollars in thousands):
Outstanding Initial
Amount of Equity Fixed Variable Beginning
Junior To Interest Interest Optional
Subordinated Trust Issue Rate Rate Redemption Maturity
Trust Debentures (3) Date (1) (2) Date Date
----------------------------------------------------------------------------------------------------------------------
3-month
Bluegreen Statutory Trust I ..... $ 23,196 $ 696 3/15/05 9.160% LIBOR 3/30/10 3/30/35
+ 4.90%
3-month
Bluegreen Statutory Trust II .... 25,774 774 5/04/05 9.158% LIBOR 7/30/10 7/30/35
+ 4.85%
3-month
Bluegreen Statutory Trust III ... 10,310 310 5/10/05 9.193% LIBOR 7/30/10 7/30/35
+ 4.85%
3-month
Bluegreen Statutory Trust IV .... 15,464 464 4/24/06 10.130% LIBOR 6/30/11 6/30/36
+ 4.85%
3-month
Bluegreen Statutory Trust V ..... 15,464 464 7/21/06 10.280% LIBOR 9/30/11 9/30/36
+ 4.85%
3-month
Bluegreen Statutory Trust VI .... 20,619 619 2/26/07 9.842% LIBOR 4/30/12 4/30/37
+ 4.80%
------------------------
$ 110,827 $ 3,327
========================
15
(1) Both the trust preferred securities and junior subordinated
debentures bear interest at a fixed interest rate from the issue
date through the beginning optional redemption date.
(2) Both the trust preferred securities and junior subordinated
debentures bear interest at a variable interest rate from the
beginning optional redemption date through the maturity date.
(3) Initial equity in trust is recorded as a component of Other assets
in our Condensed Consolidated Balance Sheets.
5. Senior Secured Notes Payable
On April 1, 1998, we consummated a private placement offering of $110.0
million in aggregate principal amount of 10.50% senior secured notes payable due
April 1, 2008 (the "Notes"). On September 27, 2005, we redeemed $55.0 million in
aggregate principal amount of the Notes at a redemption price of 101.75% plus
accrued and unpaid interest through September 26, 2005 of approximately $1.4
million. At June 30, 2007, $55.0 million of the Notes remained outstanding. None
of the assets of Bluegreen Corporation secures its obligations under the Notes,
and the Notes are effectively subordinated to our secured indebtedness to any
third party to the extent of assets serving as security therefor. The Notes are
unconditionally guaranteed, jointly and severally, by each of our subsidiaries
(the "Subsidiary Guarantors"), with the exception of the Joint Venture,
Bluegreen Properties N.V., Resort Title Agency, Inc., any special purpose
finance subsidiary, any subsidiary which is formed and continues to operate for
the limited purpose of holding a real estate license and acting as a broker, and
certain other subsidiaries which have individually less than $50,000 of assets
(collectively, "Non-Guarantor Subsidiaries"). Each of the note guarantees covers
the full amount of the Notes and each of the Subsidiary Guarantors is 100%
owned, directly or indirectly by us. Supplemental financial information for
Bluegreen Corporation, its combined Non-Guarantor Subsidiaries and its combined
Subsidiary Guarantors is presented below:
16
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
December 31, 2006
------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents ....................... $ 36,316 $ 17,002 $ 17,830 $ -- $ 71,148
Contracts receivable, net ....................... -- 1,222 22,634 -- 23,856
Intercompany receivable ......................... 165,997 -- -- (165,997) --
Notes receivable, net ........................... -- 57,845 86,406 -- 144,251
Inventory, net .................................. -- 17,967 331,366 -- 349,333
Retained interests in notes receivable sold ..... -- 130,623 -- -- 130,623
Property and equipment, net ..................... 16,110 933 75,402 -- 92,445
Investments in subsidiaries ..................... 290,084 -- 3,230 (293,314) --
Other assets .................................... 7,860 4,582 30,114 -- 42,556
----------- ------------- ---------- ------------ ------------
Total assets ................................ $ 516,367 $ 230,174 $ 566,982 $ (459,311) $ 854,212
=========== ============= ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other $ 33,303 $ 20,717 $ 54,173 $ -- $ 108,193
Intercompany payable .......................... -- 8,967 157,030 (165,997) --
Deferred income taxes ......................... (19,813) 47,864 59,573 -- 87,624
Lines-of-credit and notes payable ............. 4,646 18,914 121,902 -- 145,462
10.50% senior secured notes payable ........... 55,000 -- -- -- 55,000
Junior subordinated debentures ................ 90,208 -- -- -- 90,208
----------- ------------- ---------- ------------ ------------
Total liabilities .......................... 163,344 96,462 392,678 (165,997) 486,487
Minority interest ............................. -- -- -- 14,702 14,702
Total shareholders' equity .................... 353,023 133,712 174,304 (308,016) 353,023
----------- ------------- ---------- ------------ ------------
Total liabilities and shareholders' equity . $ 516,367 $ 230,174 $ 566,982 $ (459,311) $ 854,212
=========== ============= ========== ============ ============
June 30, 2007
(Unaudited)
------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents ....................... $ 41,156 $ 22,714 $ 22,123 $ -- $ 85,993
Contracts receivable, net ....................... -- 510 26,835 -- 27,345
Intercompany receivable ......................... 146,795 10,107 -- (156,902) --
Notes receivable, net ........................... -- 121,330 93,350 -- 214,680
Inventory, net .................................. -- 9,953 369,055 -- 379,008
Retained interests in notes receivable sold ..... -- 128,442 -- -- 128,442
Property and equipment, net ..................... 15,741 719 84,114 -- 100,574
Investments in subsidiaries ..................... 313,712 -- 3,230 (316,942) --
Other assets .................................... 9,044 4,064 29,717 -- 42,825
----------- ------------- ---------- ------------ ------------
Total assets ................................ $ 526,448 $ 297,839 $ 628,424 $ (473,844) $ 978,867
=========== ============= ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other $ 18,494 $ 16,158 $ 86,968 $ -- $ 121,620
Intercompany payable ........................... -- -- 174,870 (174,870) --
Deferred income taxes .......................... (20,704) 52,387 60,651 -- 92,334
Lines-of-credit and notes payable .............. 433 88,323 129,964 -- 218,720
10.50% senior secured notes payable ............ 55,000 -- -- -- 55,000
Junior subordinated debentures ................. 110,827 -- -- -- 110,827
----------- ------------- ---------- ------------ ------------
Total liabilities ........................... 164,050 156,868 452,453 (174,870) 598,501
Minority interest ............................. -- -- -- 17,968 17,968
Total shareholders' equity .................... 362,398 140,971 175,971 (316,942) 362,398
----------- ------------- ---------- ------------ ------------
Total liabilities and shareholders' equity .. $ 526,448 $ 297,839 $ 628,424 $ (473,844) $ 978,867
=========== ============= ========== ============ ============
17
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three Months Ended June 30, 2006
---------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate .................................... $ -- $ 13,908 $ 128,039 $ -- $ 141,947
Other resort and communities operations revenue ......... -- 3,906 9,714 -- 13,620
Management fees ......................................... 14,256 -- -- (14,256) --
Equity income from subsidiaries ......................... 3,646 -- -- (3,646) --
Interest income ......................................... 436 5,108 3,955 -- 9,499
Gain on sales of notes receivable ....................... -- 47 -- -- 47
Other income (expense), net ............................. 873 (94) 58 -- 837
----------- ------------- ---------- ------------ ------------
19,211 22,875 141,766 (17,902) 165,950
----------- ------------- ---------- ------------ ------------
COSTS AND EXPENSES
Cost of real estate sales ............................... -- 3,647 45,375 -- 49,022
Cost of other resort and communities operations ......... -- 1,145 11,792 -- 12,937
Management fees ......................................... -- 212 14,044 (14,256) --
Selling, general and administrative expenses ............ 10,765 7,572 69,752 -- 88,089
Interest expense ........................................ 28 779 2,719 -- 3,526
----------- ------------- ---------- ------------ ------------
10,793 13,355 143,682 (14,256) 153,574
----------- ------------- ---------- ------------ ------------
Income (loss) before minority interest and provision
(benefit) for income taxes ............................. 8,418 9,520 (1,916) (3,646) 12,376
Minority interest in income of consolidated subsidiary .. -- -- -- 1,677 1,677
----------- ------------- ---------- ------------ ------------
Income (loss) before provision (benefit) for income taxes
and cumulative effect of change in accounting principle 8,418 9,520 (1,916) (5,323) 10,699
Provision (benefit) for income taxes .................... 1,838 3,022 (741) -- 4,119
----------- ------------- ---------- ------------ ------------
Net income (loss) ....................................... $ 6,580 $ 6,498 $ (1,175) $ (5,323) $ 6,580
=========== ============= ========== ============ ============
Three Months Ended June 30, 2007
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ................................. $ -- $ 15,939 $ 127,335 $ -- $ 143,274
Other resort and communities operations revenue ...... -- 2,036 13,554 -- 15,590
Management fees ...................................... 17,044 -- -- (17,044) --
Equity income from subsidiaries ...................... 4,917 -- -- (4,917) --
Interest income ...................................... 534 7,991 3,583 -- 12,108
----------- ------------- ---------- ------------ ------------
22,495 25,966 144,472 (21,961) 170,972
COSTS AND EXPENSES
Cost of real estate sales ............................ -- 4,962 41,343 -- 46,305
Cost of other resort and communities operations ...... -- 1,069 10,786 -- 11,855
Management fees ...................................... -- 2,597 14,447 (17,044) --
Selling, general and administrative expenses ......... 12,486 9,221 76,745 -- 98,452
Interest expense ..................................... 7,307 1,130 (2,556) -- 5,881
Other expense (income), net .......................... 116 197 (67) -- 246
----------- ------------- ---------- ------------ ------------
19,909 19,176 140,698 (17,044) 162,739
----------- ------------- ---------- ------------ ------------
Income before minority interest and provision
for income taxes ................................... 2,586 6,790 3,774 (4,917) 8,233
Minority interest in income of consolidated subsidiary -- -- -- 1,633 1,633
----------- ------------- ---------- ------------ ------------
Income before provision for income taxes ............. 2,586 6,790 3,774 (6,550) 6,600
Provision (benefit) for income taxes ................. (1,506) 2,580 1,434 -- 2,508
----------- ------------- ---------- ------------ ------------
Net income ........................................... $ 4,092 $ 4,210 $ 2,340 $ (6,550) $ 4,092
=========== ============= ========== ============ ============
18
Six Months Ended June 30, 2006
---------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate .................................... $ -- $ 25,144 $ 238,563 $ -- $ 263,707
Other resort and communities operations revenue ......... -- 7,070 23,217 -- 30,287
Management fees ......................................... 27,351 -- -- (27,351) --
Equity income from subsidiaries ......................... 1,063 -- -- (1,063) --
Interest income ......................................... 976 9,499 7,197 -- 17,672
Gain on sales of notes receivable ....................... -- 552 -- -- 552
Other (expense) income .................................. 1,003 (383) 70 -- 690
----------- ------------- ---------- ------------ ------------
30,393 41,882 269,047 (28,414) 312,908
----------- ------------- ---------- ------------ ------------
COSTS AND EXPENSES
Cost of real estate sales ............................... -- 7,337 86,907 -- 94,244
Cost of other resort and communities operations ......... -- 2,478 27,239 -- 29,717
Management fees ......................................... -- 453 26,898 (27,351) --
Selling, general and administrative expenses ............ 20,095 13,376 128,691 -- 162,162
Interest expense ........................................ 1,016 1,549 4,267 -- 6,832
Other (income) expense .................................. -- -- -- -- --
----------- ------------- ---------- ------------ ------------
21,111 25,193 274,002 (27,351) 292,955
----------- ------------- ---------- ------------ ------------
Income (loss) before minority interest and provision
(benefit) for income taxes ............................. 9,282 16,689 (4,955) (1,063) 19,953
Minority interest in income of consolidated subsidiary .. -- -- -- 2,699 2,699
----------- ------------- ---------- ------------ ------------
Income (loss) before provision (benefit) for income taxes
and cumulative effect of change in accounting principle 9,282 16,689 (4,955) (3,762) 17,254
Provision (benefit) for income taxes .................... 3,165 5,388 (1,910) -- 6,643
----------- ------------- ---------- ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle ................................... 6,117 11,301 (3,045) (3,762) 10,611
Cumulative effect of change in accounting principle, net
of tax. ................................................ -- (1,942) (3,736) -- (5,678)
Minority interest in income of cumulative effect of
change in accounting principle ......................... -- -- -- 1,184 1,184
----------- ------------- ---------- ------------ ------------
Net income (loss) ....................................... $ 6,117 $ 9,359 $ (6,781) $ (2,578) $ 6,117
=========== ============= ========== ============ ============
Six Months Ended June 30, 2007
-------------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ................................. $ -- $ 29,403 $ 235,893 $ -- $ 265,296
Other resort and communities operations revenue ...... -- 5,185 25,423 -- 30,608
Management fees ...................................... 31,687 -- -- (31,687) --
Equity income from subsidiaries ...................... 7,611 -- -- (7,611) --
Interest income ...................................... 981 14,530 6,439 -- 21,950
----------- ------------- ---------- ------------ ------------
40,279 49,118 267,755 (39,298) 317,854
COSTS AND EXPENSES
Cost of real estate sales ............................ -- 8,509 74,528 -- 83,037
Cost of other resort and communities operations ...... -- 2,265 22,009 -- 24,274
Management fees ...................................... -- 4,912 26,775 (31,687) --
Selling, general and administrative expenses ......... 22,825 16,209 140,811 -- 179,845
Interest expense ..................................... 8,837 2,195 -- -- 11,032
Other expense, net ................................... 83 317 797 -- 1,197
----------- ------------- ---------- ------------ ------------
31,745 34,407 264,920 (31,687) 299,385
----------- ------------- ---------- ------------ ------------
Income before minority interest and provision
for income taxes ................................... 8,534 14,711 2,835 (7,611) 18,469
Minority interest in income of consolidated subsidiary -- -- -- 3,267 3,267
----------- ------------- ---------- ------------ ------------
Income before provision for income taxes ............. 8,534 14,711 2,835 (10,878) 15,202
Provision (benefit) for income taxes ................. (891) 5,590 1,078 -- 5,777
----------- ------------- ---------- ------------ ------------
Net income ........................................... $ 9,425 $ 9,121 $ 1,757 $ (10,878) $ 9,425
=========== ============= ========== ============ ============
19
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, 2006
(restated)
----------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------ ---------- ------------
Operating activities:
Net cash (used) provided by operating activities .............. $ (32,689) $ (36,017) $ 16,634 $ (52,072)
----------- ------------- ---------- ------------
Investing activities:
Purchases of property and equipment .......................... (4,557) (30) (8,551) (13,138)
Investment in statutory business trust ....................... (464) -- -- (464)
Cash received from retained interests in notes receivable sold -- 14,969 -- 14,969
----------- ------------- ---------- ------------
Net cash (used) provided by investing activities .............. (5,021) 14,939 (8,551) 1,367
----------- ------------- ---------- ------------
Financing activities:
Proceeds from borrowings collateralized by notes receivable .. -- 29,732 -- 29,732
Payments from borrowings collateralized by notes receivable .. -- (5,570) (4,419) (9,989)
Borrowings under line-of-credit facilities and notes payable . -- -- 35,169 35,169
Payments under line-of-credit facilities and notes payable ... (805) (39) (30,381) (31,225)
Proceeds from issuance of junior subordinated debentures ..... 15,464 -- -- 15,464
Payment of debt issuance costs ............................... (498) (1,554) (634) (2,686)
Proceeds from exercise of stock options ...................... 173 -- -- 173
----------- ------------- ---------- ------------
Net cash provided (used) by financing activities .............. 14,334 22,569 (265) 36,638
----------- ------------- ---------- ------------
Net (decrease) increase in cash and cash equivalents .......... (23,376) 1,491 7,818 (14,067)
Cash and cash equivalents at beginning of period .............. 55,708 15,443 13,553 84,704
----------- ------------- ---------- ------------
Cash and cash equivalents at end of period .................... 32,332 16,934 21,371 70,637
Restricted cash and cash equivalents at end of period ......... (173) (10,951) (15,694) (26,818)
----------- ------------- ---------- ------------
Unrestricted cash and cash equivalents at end of period ....... $ 32,159 $ 5,983 $ 5,677 $ 43,819
=========== ============= ========== ============
Six Months Ended June 30, 2007
----------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------ ---------- ------------
Operating activities:
Net cash (used) provided by operating activities .................. $ (10,917) $ (77,953) $ 28,840 $ (60,030)
----------- ------------- ---------- ------------
Investing activities:
Purchases of property and equipment .............................. (1,950) (9) (13,200) (15,159)
Investment in statutory business trusts .......................... (619) -- -- (619)
Cash received from retained interests in notes receivable sold ... -- 12,935 -- 12,935
----------- ------------- ---------- ------------
Net cash (used) provided by investing activities .................. (2,569) 12,926 (13,200) (2,843)
----------- ------------- ---------- ------------
Financing activities:
Proceeds from borrowings collateralized by notes receivable ...... -- 77,348 -- 77,348
Payments from borrowings collateralized by notes receivable ...... -- (6,075) (1,217) (7,292)
Borrowings under line-of-credit facilities and other notes payable -- -- 38,055 38,055
Payments under line-of-credit facilities and other notes payable . (2,171) (89) (47,736) (49,996)
Proceeds from issuance of junior subordinated debentures ......... 20,619 -- -- 20,619
Payments of debt issuance costs .................................. (675) (447) (447) (1,569)
Proceeds from exercise of stock options .......................... 553 -- -- 553
----------- ------------- ---------- ------------
Net cash provided (used) by financing activities .................. 18,326 70,737 (11,345) 77,718
----------- ------------- ---------- ------------
Net increase in cash and cash equivalents ......................... 4,840 5,710 4,295 14,845
Cash and cash equivalents at beginning of period .................. 36,316 17,002 17,830 71,148
----------- ------------- ---------- ------------
Cash and cash equivalents at end of period ........................ 41,156 22,712 22,125 85,993
Restricted cash and cash equivalents at end of period ............. (173) (8,608) (17,894) (26,675)
----------- ------------- ---------- ------------
Unrestricted cash and cash equivalents at end of period ........... $ 40,983 $ 14,104 $ 4,231 $ 59,318
=========== ============= ========== ============
20
6. 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
other related amenities) and sold, typically on a retail basis as homesites.
We evaluate the performance and allocate resources to each business
segment based on its respective field operating profit. Field operating profit
is operating profit prior to the allocation of corporate overhead, interest
income, other income or expense, interest expense, income taxes, minority
interest and cumulative effect of change in accounting principle. Inventory and
notes receivable are the only assets that we evaluate on a segment basis -- all
other assets are only evaluated on a consolidated basis.
Disclosures for our business segments are as follows (in thousands):
Bluegreen Bluegreen
Resorts Communities Totals
--------- ----------- --------
For the three months ended June 30, 2006
Sales of real estate .......................... $ 91,386 $ 50,561 $141,947
Other resort and communities operations revenue 9,624 3,996 13,620
Depreciation expense .......................... 2,022 391 2,413
Field operating profit ........................ 2,507 14,577 17,084
For the three months ended June 30, 2007
Sales of real estate .......................... $ 105,247 $ 38,027 $143,274
Other resort and communities operations revenue 12,235 3,355 15,590
Depreciation expense .......................... 2,107 431 2,538
Field operating profit ........................ 8,811 6,527 15,338
For the six months ended June 30, 2006
Sales of real estate .......................... $ 165,521 $ 98,186 $263,707
Other resort and communities operations revenue 23,955 6,332 30,287
Depreciation expense .......................... 3,896 826 4,722
Field operating profit ........................ 5,155 24,356 29,511
For the six months ended June 30, 2007
Sales of real estate .......................... $ 192,395 $ 72,901 $265,296
Other resort and communities operations revenue 25,073 5,535 30,608
Depreciation expense .......................... 4,224 857 5,081
Field operating profit ........................ 17,660 15,335 32,995
Net notes receivable by business segment (in thousands):
December 31, 2006 June 30, 2007
----------------- -------------
Bluegreen Resorts .............. $ 137,509 $ 208,424
Bluegreen Communities .......... 6,742 6,256
------------- -------------
Total .......................... $ 144,251 $ 214,680
============= =============
Net inventory by business segment (in thousands):
December 31, 2006 June 30, 2007
----------------- -------------
Bluegreen Resorts ... $ 233,290 $ 243,928
Bluegreen Communities 116,043 135,080
----------- -----------
Total ............... $ 349,333 $ 379,008
=========== ===========
21
Reconciliations to Consolidated Amounts:
Field operating profit for our reportable segments reconciled to our
consolidated income before minority interest and provision for income taxes is
as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2006 2007 2006 2007
-------- -------- -------- --------
Field operating profit for reportable segments . $ 17,084 $ 15,338 $ 29,511 $ 32,995
Interest income ................................ 9,499 12,108 17,672 21,950
Gain on sales of notes receivable .............. 47 -- 552 --
Other (expense) income, net .................... 837 (246) 690 (1,197)
Corporate general and administrative expenses .. (11,565) (13,086) (21,640) (24,247)
Interest expense ............................... (3,526) (5,881) (6,832) (11,032)
-------- -------- -------- --------
Consolidated income before minority interest and
provision for income taxes .................... $ 12,376 $ 8,233 $ 19,953 $ 18,469
======== ======== ======== ========
7. Income Taxes
We and our subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few exceptions,
we are no longer subject to U.S. federal, state and local, or non-U.S. income
tax examinations by tax authorities for years before 2003. The Internal Revenue
Service ("IRS") commenced an examination of our U.S. income tax returns for 2004
and 2005 in the first quarter of 2007 that is anticipated to be complete by the
end of 2007.
On July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an Interpretation of FASB Statement No. 109 ("FIN 48") which
clarifies the accounting for uncertainty in tax positions. Based on an
evaluation of uncertain tax provisions, we are required to measure tax benefits
based on the largest amount of benefit that is greater than 50% likely of being
realized upon settlement. The adoption of FIN 48 on January 1, 2007 did not have
an impact on our financial position or results of operations. As of June 30,
2007, we had no amounts recorded for uncertain tax positions.
On July 12, 2007, the Michigan Governor signed the Michigan Business Tax Act
("MBT"), which imposes a business income tax and a modified gross receipts tax.
The new MBT becomes effective January 1, 2008, which will replace the state's
current Single Business Tax, which expires on December 31, 2007. The MBT creates
a new tax on business income and is assessed on every taxpayer with business
activity in Michigan, unless prohibited by federal P.L. 86-272 (15 USC ss.381 to
ss.384). The base of the tax starts with federal taxable income or a comparable
measure of income for partnerships and S corporations, which is then subject to
various adjustments, including apportionment, to identify business activity in
Michigan. The tax rate is 4.95%. MBT also creates a new tax based on a modified
measure of a business's gross receipts. The base of the tax is gross receipts
less purchases from other firms. Purchases from other firms include inventory
purchased during the tax year and capital expenditures. The tax rate is 0.8%. We
have not yet completed our analysis of the impact the MBT will have on our
effective tax rate.
8. Contingencies
In 2005, the State of Tennessee Audit Division (the "Division") audited
Bluegreen Vacations Unlimited, Inc., our wholly owned subsidiary, for the period
from December 1, 2001 through December 31, 2004. On September 23, 2006, the
Division issued a notice of assessment for $0.7 million of accommodations tax
based on the use of Bluegreen Vacation Club accommodations by Bluegreen Vacation
Club members who purchased non-Tennessee property. We believe the attempt to
impose such a tax is contrary to Tennessee law, and we intend to vigorously
oppose such assessment by the Division. While the timeshare industry has been
successful in challenging the imposition of sales taxes on the use of
accommodations by timeshare owners, there is no assurance that we will be
successful in contesting the current assessment.
Bluegreen Southwest One, L.P., ("Southwest"), a subsidiary of Bluegreen
Corporation, is the developer of the Mountain Lakes subdivision in Texas. In
Cause No. 28006; styled Betty Yvon Lesley et a1 v. Bluff Dale Development
Corporation, Bluegreen Southwest One. L.P.et al. in the 266th Judicial District
Court, Erath County, Texas, the Plaintiffs filed a declaratory judgment action
against Southwest in which they seek to develop their
22
reserved mineral interests in, on and under the Mountain Lakes subdivision.
Plaintiffs' claims are based on property law, oil and gas law, contract and tort
theories. The property owners association and some of the individual landowners
have filed cross actions against Bluegreen, Southwest and individual directors
of the property owners association related to the mineral rights and related to
certain amenities in the subdivision as described below. On January 17, 2007,
the court ruled that the restrictions placed on the development that prohibited
oil and gas production and development were invalid and not enforceable as a
matter of law, that such restrictions do not prohibit the prior reserved mineral
interests of the Plaintiffs from being developed and that a duty to exercise the
right to lease the minerals to third parties for development exists and has been
breached. The Court further ruled, that Southwest is the sole holder of the
right to lease the minerals to third parties. The order granting the Plaintiffs
motion was severed into a new cause styled Cause No. 28769 Betty Yvon Lesley et
a1 v. Bluff Dale Development Corporation, Bluegreen Southwest One. L.P.et al. in
the 266th Judicial District Court, Erath County, Texas. Southwest has appealed
the trial court's ruling but, at this time, is unable to predict the ultimate
resolution of the litigation. The appeal is styled Bluegreen Southwest One, LP
et al. v. Betty Yvon Lesley et al.; in the 11th Court of Appeals, Eastland,
Texas. Bluegreen does not believe that it has material exposure to the property
owners association based on the cross claim relating to the mineral rights other
than the potential claim for legal fees incurred by the property owners
association. As of June 30, 2007, Bluegreen established a reserve of $1.3
million in connection with the issues raised related to the mineral rights
claims. Separately, one of the amenity lakes in the Mountain Lakes development
did not reach the expected level after construction was completed. Owners of
homesites within the Mountain Lakes subdivision and the Property Owners
Association of Mountain Lakes have asserted claims against Southwest and
Bluegreen regarding such failure as part of the Lesley litigation referenced
above as well as in Cause No. 067-223662-07; Property Owners Association of
Mountain Lakes Ranch, Inc. v. Bluegreen Southwest One, L. P., et al.; in the
67TH Judicial District Court of Tarrant County, Texas. Southwest has been and
continues to investigate the causes and circumstances for the delay of the lake
to fill and currently estimates that the cost of remediating the condition will
be approximately $3.0 million, which was accrued during the year ended December
31, 2006. Additional claims may be pursued against us in the future in
connection with these matters, but it is not possible at this time to estimate
the likelihood of loss or amount of potential exposure with respect to any such
matters.
We filed suit against the general contractor with regard to alleged construction
defects at our Shore Crest Vacation Villas resort in South Carolina; styled
Shore Crest Vacation Villas II Owners Association, Inc., Bluegreen Corporation
vs. Welbro Constructors, S.C., Inc. et al. Case No.: 04-CP-26-500 and Shore
Crest Vacation Villas Owners Association, Inc., Bluegreen Vacations Unlimited,
Inc., as successor to Patten Resorts, Inc. and as successor to Bluegreen
Resorts, Inc. vs. Welbro Constructors Inc. et al. Case No. 04-CP-26-499. Whether
the matter is settled by litigation or by negotiation, it is possible that we
may need to participate financially in some way to correct the construction
deficiencies. We estimate that the total cost of repairs to correct the defects
will range from $4 million to $6 million. We cannot predict the extent of the
financial obligation that we may incur.
In Michelle Alamo, Ernest Alamo, Toniann Quinn and Terrance Quinn v. Vacation
Station, LLC, LeisurePath Vacation Club, LeisurePath, Inc., Bluegreen
Corporation, Superior Court of New Jersey, Bergen County, Docket No. L-6716-05,
Civil Action, Plaintiffs filed a purported "Class Action Complaint" on September
23, 2005. The Complaint raises allegations concerning the marketing of the
LeisurePath Travel Services Network product to the public, and, in particular,
New Jersey residents by Vacation Station, LLC, an independent distributor of
travel products. Vacation Station, LLC purchased LeisurePath membership kits
from LeisurePath, Inc.'s Master Distributor, Mini Vacations, Inc. and then sold
the memberships to consumers. The initial Plaintiffs (none of whom actually
bought the Leisure Path product) assert claims for violations of the New Jersey
Consumer Fraud Act, fraud, nuisance, negligence and for equitable relief all
stemming from the sale and marketing by Vacation Station, LLC of the LeisurePath
Travel Services Network. Plaintiffs are seeking the gifts and prizes they were
allegedly told by Vacation Station, LLC that they won as part of the sales
promotion, and that they be given the opportunity to rescind their agreement
with LeisurePath along with a full refund. Plaintiffs further seek punitive
damages, compensatory damages, attorney's fees and treble damages of unspecified
amounts. In February of 2007, the Plaintiffs amended the complaint to add two
additional Plaintiffs/proposed class representatives, Bruce Doxey and Karen
Smith-Doxey. Unlike the initial Plaintiffs who were first contacted by Vacation
Station, LLC some seven (7) months after LeisurePath terminated its relationship
with Vacation Station, LLC and did not purchase LeisurePath products, the Doxeys
purchased a participation in the LeisurePath Travel Services Network. On March
16, 2007, the Court denied a motion filed by Leisure Path and Bluegreen
Corporation to dismiss the Doxeys as parties to the lawsuit. Leisure Path and
Bluegreen Corporation intend to vigorously contest this action. Vacation
Station, LLC and its owner have each filed for bankruptcy protection.
23
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 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 and other factors discussed
throughout our SEC filings all of which could cause our actual results,
performance or achievements, or industry trends, to differ materially from any
future results, performance, or achievements or trends expressed or implied
herein. Given these uncertainties, investors are cautioned not to place undue
reliance on these forward-looking statements and no assurance can be given that
the plans, estimates and expectations reflected herein will be achieved. Factors
that could adversely affect our future results can also be considered general
risk factors with respect to our business, whether or not they relate to a
forward-looking statement. We wish to caution you that the important factors set
forth below and elsewhere in this report in some cases have affected, and in the
future could affect our actual results and could cause our actual consolidated
results to differ materially from those expressed in any forward-looking
statements.
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
successfully and efficiently.
o The state of the economy generally, interest rates, the availability
of financing and increased fuel prices, in particular, could affect
our ability to market VOIs and residential homesites.
o We would incur substantial losses if the customers we finance
default on their obligations to pay the balance of the purchase
price.
o Our results of operations and financial condition could be adversely
impacted if our estimates concerning our notes receivable and
inventory are incorrect.
o We are subject to the risks of the real estate market and the risks
associated with real estate development, including the risks and
uncertainties relating to the cost and availability of land, labor
and construction materials.
o We may not successfully acquire additional vacant or unimproved land
inventory or execute our growth strategy.
o We may face a variety of risks when we expand our operations.
o We may face additional risks when and if we expand into new markets.
o The limited resale market for VOIs could adversely affect our
business.
o We could incur losses based on the outcome of pending or future
litigation, claims, and assessments.
o Claims for development-related defects could adversely affect our
financial condition and operating results.
24
o We may be adversely affected by extensive federal, state and local
laws and regulations and changes in applicable laws and regulations,
including with respect to the imposition of additional taxes on
operations.
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.
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, 2006.
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 other related
amenities) and sold, typically on a retail basis, as homesites.
Effective January 1, 2006, we adopted the provisions of SFAS No. 152,
Accounting for Real Estate Time-Sharing Transactions, which changes the rules
for many aspects of timeshare accounting, including revenue recognition,
inventory costing and incidental operations. The adoption of SFAS No. 152
resulted in a $4.5 million or $0.14 per diluted share charge for the cumulative
effect of a change in accounting principle, net of income tax and minority
interest in 2006.
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 expected to occur
in the quarters ending in September and December each year. Although we expect
to see more potential customers at our sales offices during the quarters ending
in June and September, ultimate recognition of the resulting sales during these
periods may be delayed due to complex down payment requirements for purchases
under GAAP or due to the timing of development and the requirement that we use
the percentage-of-completion method of accounting. We expect that we will
continue to invest in projects that will require substantial development (with
significant capital requirements), and as a consequence, our results of
operations may fluctuate significantly between quarterly and annual periods as a
result of the required use of the percentage-of-completion method of accounting.
We believe that inflation and changing prices have materially impacted our
revenues and results of operations, specifically due to periodic increases in
the sales prices of our VOIs and homesites and continued increases in
construction and development costs. We expect the increased construction and
development costs over the past few years to result in an increase in our cost
of sales for the foreseeable future. There is no assurance that we will be able
to continue to increase our sales prices or that increased construction costs
will not have a material adverse impact on our gross margin. In addition, to the
extent that inflation in general or increased prices for our VOI and homesites
would adversely impact consumer sentiment, our results of operations could be
adversely impacted. Also, to the extent inflationary trends affect interest
rates, a portion of our debt service costs may increase.
We recognize revenue on homesite and VOI sales when a minimum of 10% of
the sales price has been received in cash, the refund or rescission period has
expired, collectibility of the receivable representing the remainder of the
sales price is reasonably assured and we have completed substantially all of our
obligations with respect to any development of the real estate sold. Refund or
rescission periods include those required by law and those provided for in our
sales contracts. With respect to VOI sales, the revenue recognition rules
require that incentives and other similarly treated items such as customer down
payment equity earned through our Sampler Program be considered in calculating
the required down payment for our VOI sales. If, after considering the value of
sales incentives provided, the required 10% of sales price down payment
threshold is not met, the VOI sale and the related cost of sale and direct
selling costs are deferred and not recognized until the buyer's commitment test
is satisfied, generally through the receipt of required mortgage note payments
from the buyer. Further, in cases where all development has not been completed,
recognition of income is subject to the percentage-of-completion method of
accounting.
25
Costs associated with the acquisition and development of vacation
ownership resorts and residential communities, including carrying costs such as
interest and taxes, are capitalized as inventory and are allocated to cost of
real estate sold as the respective revenues are recognized.
A portion of our revenues historically has been, and is expected to
continue to be, comprised of gains on sales of notes receivable. The gains are
recorded on our consolidated statement of income and the related retained
interests in the notes receivable sold are recorded on our consolidated balance
sheet at the time of sale. Effective January 1, 2006, the portion of these gains
related to the reversal of previously recorded allowances for loan losses on the
receivables sold is recorded as a component of revenue on sales of VOIs. The
amount of gains recognized and the fair value of the retained interests recorded
are based in part on management's best estimates of future prepayment rates,
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 "VOI Receivables Purchase Facilities - Off Balance Sheet
Arrangements," below.
In addition, we have historically sold VOI receivables to financial
institutions through warehouse purchase facilities to monetize the receivables
while accumulating receivables for a future term securitization transaction. We
have structured current and intend to structure future warehouse purchase
facilities so that sales of VOI receivables through these facilities will be
accounted for as on-balance sheet borrowings rather than as off-balance sheet
sales. Therefore, we will not recognize a gain on the sales of receivables sold
to the warehouse purchase facilities until such receivables are subsequently
included in a properly structured term securitization transaction. If the timing
of our term securitizations or securitization-type transactions changes from
prior history, it will impact future quarterly earnings patterns as compared to
comparable prior periods.
Critical Accounting Policies and Estimates
Our discussion and analysis of results of operations and financial
condition are based upon our condensed 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
estimated development cost and future sales on recovered VOIs for the purpose of
recognizing cost of sales related to VOI sales; our estimate of fair value
related to stock-based compensation; 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" in our Annual Report on Form
10-K for the year ended December 31, 2006.
26
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 an allocation of
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 Resorts Bluegreen Communities Total
------------------------- ------------------------- --------------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
--------- ------------ --------- ------------ --------- -------------
Three Months Ended
June 30, 2006
Sales of real estate ......... $ 91,386 100% $ 50,561 100% $ 141,947 100%
Cost of real estate sales .... (21,928) (24) (27,094) (54) (49,022) (35)
--------- --------- ---------
Gross profit ................. 69,458 76 23,467 46 92,925 65
Other resort and communities
operations revenues ........ 9,624 11 3,996 8 13,620 10
Cost of other resort and
communities operations ..... (9,887) (11) (3,050) (6) (12,937) (9)
Selling and marketing expenses (59,892) (66) (7,832) (15) (67,724) (48)
Field general and
administrative expenses (1) (6,796) (7) (2,004) (4) (8,800) (6)
--------- --------- ---------
Field operating profit ....... $ 2,507 3% $ 14,577 29% $ 17,084 12%
========= ========= =========
Three Months Ended
June 30, 2007
Sales of real estate ......... $ 105,247 100% $ 38,027 100% $ 143,274 100%
Cost of real estate sales .... (26,634) (25) (19,671) (52) (46,305) (32)
--------- --------- ---------
Gross profit ................. 78,613 75 18,356 48 96,969 68
Other resort and communities
operations revenues ........ 12,235 12 3,355 9 15,590 11
Cost of other resort and
communities operations ..... (8,900) (8) (2,955) (8) (11,855) (8)
Selling and marketing expenses (66,111) (64) (9,404) (25) (75,515) (53)
Field general and
administrative expenses (1) (7,026) (7) (2,825) (7) (9,851) (7)
--------- --------- ---------
Field operating profit ....... $ 8,811 8% $ 6,527 17% $ 15,338 11%
========= ========= =========
27
Bluegreen Resorts Bluegreen Communities Total
-------------------------- ------------------------- --------------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
--------- ------------- --------- ------------ --------- -------------
Six Months Ended
June 30, 2006
Sales of real estate .................. $ 165,521 100% $ 98,186 100% $ 263,707 100%
Cost of real estate sales ............. (38,975) (24) (55,269) (56) (94,244) (36)
--------- --------- ---------
Gross profit .......................... 126,546 76 42,917 44 169,463 64
Other resort and communities
operations revenues .................. 23,955 14 6,332 6 30,287 11
Cost of other resort and
communities operations ............... (24,536) (15) (5,181) (5) (29,717) (11)
Selling and marketing
expenses ............................. (107,813) (64) (14,812) (15) (122,625) (46)
Field general and
administrative expenses (1) .......... (12,997) (8) (4,900) (5) (17,897) (7)
--------- --------- ---------
Field operating profit ................ $ 5,155 3% $ 24,356 25% $ 29,511 11%
========= ========= =========
Six Months Ended
June 30, 2007
Sales of real estate .................. $ 192,395 100% $ 72,901 100% $ 265,296 100%
Cost of real estate sales ............. (45,511) (24) (37,526) (51) (83,037) (31)
--------- --------- ---------
Gross profit .......................... 146,884 76 35,375 49 182,259 69
Other resort and communities
operations revenues .................. 25,073 13 5,535 8 30,608 12
Cost of other resort and
communities operations ............... (18,929) (10) (5,345) (7) (24,274) (9)
Selling and marketing
expenses ............................. (121,412) (63) (14,472) (21) (135,884) (53)
Field general and
administrative expenses (1) .......... (13,956) (7) (5,758) (8) (19,714) (7)
--------- --------- ---------
Field operating profit ................ $ 17,660 9% $ 15,335 21% $ 32,995 12%
========= ========= =========
(1) General and administrative expenses attributable to corporate
overhead have been excluded from the tables. Corporate general and
administrative expenses totaled $11.6 million for the three months
ended June 30, 2006 and $13.1 million for the three months ended
June 30, 2007. Corporate general and administrative expenses totaled
$21.6 million for the six months ended June 30, 2006 and $24.2
million for the six months ended June 30, 2007. (See "Corporate
General and Administrative Expenses," below, for further
discussion).
Sales and Field Operations. Consolidated sales increased $1.3 million from
$142.0 million during the three months ended June 30, 2006 to $143.3 million
during the three months ended June 30, 2007. Consolidated sales increased $1.6
million from $263.7 million during the six months ended June 30, 2006 to $265.3
million during the six months ended June 30, 2007.
Bluegreen Resorts
During the three months ended June 30, 2006 and 2007, Bluegreen Resorts
generated $91.4 million (64%) and $105.2 million (73%) of our total consolidated
sales, respectively. During the six months ended June 30, 2006 and 2007,
Bluegreen Resorts generated $165.5 million (63%) and $192.4 million (73%) of our
total consolidated sales, respectively.
28
The following table sets forth certain information for sales of VOIs for
the periods indicated, before giving effect to the percentage-of-completion
method of accounting and sales deferred under SFAS No. 152.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2006 2007 2006 2007
------- ------- ------- -------
Number of VOI sales transactions 11,438 11,193 19,119 20,312
Average sales price per transaction $10,344 $11,359 $10,472 $11,003
Bluegreen Resorts' sales increased $13.9 million or 15% during the three
months ended June 30, 2007, as compared to the three months ended June 30, 2006.
Higher Resorts sales were primarily attributable to an increase in sales to
existing Bluegreen Vacation Club(R) owners, known as upgrade sales. Upgrade
sales rose 36% during the second quarter of 2007 compared to the same period
last year, and comprised 40% of Resorts sales for the second quarter of 2007 as
compared to 32% of Resorts sales during the second quarter of 2006. We
experienced a 4% increase in same-store sales, led by sales offices at the
Bluegreen Wilderness Club(TM) at Big Cedar(R) in Ridgedale, Missouri,
MountainLoft(TM) in Gatlinburg, Tennessee, the Smoky Mountain Preview Center in
Sevierville, Tennessee, The Falls Village(TM) resort in Branson, Missouri, and
Grande Villas at World Golf Village(R) in St. Augustine, Florida. Higher sales
were also attributable, to a lesser extent, to the opening of new sales offices
in Las Vegas, Nevada (opened in July 2006), Wisconsin Dells, Wisconsin (opened
in July 2006), and Williamsburg, Virginia (opened in August 2006), as well as a
system-wide price increase that went into effect during March 2007. The overall
increase in sales reflects an increase in the number of total prospects seen by
Bluegreen Resorts from approximately 85,600 during the three months ended June
20, 2006 to approximately 88,700 during the three months ended June 30, 2007,
coupled with a relatively constant sale-to-tour conversion ratio of 13%. Our
sale-to-tour conversion ratio for new prospects (i.e., excluding sales to our
existing owners) was approximately 10% during the three months ended June 30,
2006 and 2007.
Bluegreen Resorts' sales increased $26.9 million or 16% during the six
months ended June 30, 2007, as compared to the six months ended June 30, 2006.
Higher Resorts sales were primarily attributable to an increase in upgrade
sales. Upgrade sales rose 32% during the first half of 2007 compared to the same
period last year, and comprised 39% of Resorts sales for the first half of 2007
as compared to 33% of Resorts sales during the first half of 2006. We
experienced a 9% increase in same-store sales, led by sales offices at the
Fountains(TM) resort in Orlando, Florida, Bluegreen Wilderness Club(TM) at Big
Cedar(R) in Ridgedale, Missouri, MountainLoft(TM) in Gatlinburg, Tennessee, the
Smoky Mountain Preview Center in Sevierville, Tennessee, The Falls Village(TM)
resort in Branson, Missouri, and Grande Villas at World Golf Village(R) in St.
Augustine, Florida. Higher sales were also attributable, to a lesser extent, to
the opening of the new sales offices and system-wide price increase, both
described above. The overall increase in sales reflects an increase in the
number of total prospects seen by Bluegreen Resorts from approximately 147,900
during the first half of 2006 to approximately 151,100 during the first half of
2007, coupled with a higher sale-to-tour conversion ratio (13% during the first
half of 2006 as compared to 14% during the same period in 2007). Our
sale-to-tour conversion ratio for new prospects (i.e., excluding sales to our
existing owners) was approximately 10% and 11% for the six months ended June 30,
2006 and 2007, respectively.
Bluegreen Resorts' gross margin percentages vary between periods based on
the relative costs of the specific VOIs sold in each respective period.
Bluegreen Resorts' gross margin more typically ranges between 75% and 77%.
During the three and six months ended June 30, 2007, gross margin was negatively
impacted compared to the 2006 period by a higher proportion of sales of VOIs in
2007 of relatively higher costs resorts as compared to the same periods in 2006.
Overall gross margins have decreased compared to earlier periods reflecting the
higher costs of acquiring and developing properties. Acquisition and development
costs may continue to increase in future periods and, as a result, we may not be
able to earn historical gross margins.
Other resort operations revenue increased $2.6 million or 27% during the
three months ended June 30, 2007, as compared to the three months ended June 30,
2006. Other resort operations revenue increased $1.1 million or 5% during the
six months ended June 30, 2007, as compared to the six months ended June 30,
2006. The increase in 2007 represents higher management services fees due to an
increase in the number of resorts for which we provide management services as
well as an overall increase in the number of Bluegreen Vacation Club(R) owners.
These increases were partially off-set by lower title processing fees on our VOI
sales earned by our wholly-owned title company as compared to prior periods.
Additionally, during 2006, we began transitioning our mini-vacation package
business from primarily selling the packages to third-parties to using the sales
tours generated by mini-vacations
29
primarily for use at our own sales offices. This had the effect of increasing
the profitability of our other resort operations but increasing our selling and
marketing costs.
Cost of other resort operations decreased $1.0 million or 10% during the
three months ended June 30, 2007, as compared to the three months ended June 30,
2006. Cost of other resort operations decreased $5.6 million or 23% during the
six months ended June 30, 2007, as compared to the six months ended June 30,
2006. The decrease during both periods in 2007 compared to the same periods in
2006 primarily reflects the transition of the mini-vacation package business, as
previously discussed, as well as an increase in rental proceeds, which are
reflected as a reduction to cost of other resort operations.
Selling and marketing expenses for Bluegreen Resorts increased $6.2
million or 10% during the three months ended June 30, 2007, as compared to the
three months ended June 30, 2006. As a percentage of sales, selling and
marketing expenses decreased from 66% during the three months ended June 30,
2006 to 63% during the three months ended June 30, 2007. Selling and marketing
expenses for Bluegreen Resorts increased $13.6 million or 13% during the six
months ended June 30, 2007, as compared to the six months ended June 30, 2006.
As a percentage of sales, selling and marketing expenses decreased from 65%
during the six months ended June 30, 2006 to 63% during the six months ended
June 30, 2007. The increase in selling and marketing expenses during 2007 as
compared to the same periods in 2006 reflects the overall increase in sales,
higher marketing expenses at our newly opened off-site sales offices and the
previously discussed transition of our mini-vacations packages from being sold
externally to being used internally. As a percentage of sales, our marketing
costs decreased primarily a result of increased sales to owners, which generally
carry lower marketing costs, as well as changes to our sales commission policy,
partially offset by higher marketing costs as a percentage of sales at our new
off-site sales offices. 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.
Field general and administrative expenses for Bluegreen Resorts increased
$0.2 million or 3% during the three months June 30, 2007, as compared to the
three months ended June 30, 2006. Field general and administrative expenses for
Bluegreen Resorts increased $1.0 million or 7% during the six months June 30,
2007, as compared to the six months ended June 30, 2006. These increases reflect
the increased cost of operating additional sales and support offices.
As of December 31, 2006, Bluegreen Resorts had $614,000 of sales and
$345,000 of field operating profit deferred under percentage-of-completion
accounting. There were no sales or field operating profit deferred under
percentage of completion accounting as of June 30, 2007. Additionally, as of
June 30, 2007, approximately $37.8 million and $21.0 million of sales and field
operating profit, respectively, were deferred under SFAS No. 152 as compared to
$27.3 million and $15.3 million of sales and field operating profit,
respectively, as of December 31, 2006.
Bluegreen Communities
During the three months ended June 30, 2006 and 2007, Bluegreen
Communities generated $50.6 million (36%) and $38.0 million (27%) of our total
consolidated sales, respectively. During the six months ended June 30, 2006 and
2007, Bluegreen Communities generated $98.2 million (37%) and $72.9 million
(27%) 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 Six Months Ended
June 30, June 30,
------------------- -------------------
2006 2007 2006 2007
------- ------- ------- -------
Number of homesites sold 520 470 954 794
Average sales price per homesite $92,690 $83,629 $82,785 $83,181
Bluegreen Communities' sales decreased $12.5 million or 25% during the
three months ended June 30, 2007 as compared to the same period in 2006. The
decrease reflects the substantial sell-out of several communities that were
30
in active sales during the second quarter of 2006 and the impact of the
percentage-of-completion method of accounting, partially offset by the
commencement of sales at four new Bluegreen Communities subsequent to the second
quarter of 2006. In addition, although to a lesser extent, Bluegreen Communities
sales and revenue recognition under the percentage-of-completion method of
accounting during the second quarter of 2007 were impacted by inclement weather
in Texas where many Bluegreen Communities are located.
Sales decreased $25.3 million or 26% during the six months ended June 30,
2007 as compared to the same period in 2006 as a result of several of our more
mature developments either approaching sell out or selling out after June 30,
2006, partially offset by sales generated at new Bluegreen Communities that
commenced sales subsequent to the second quarter of 2006.
Before giving effect to the percentage-of-completion method of accounting
and the legal rescission period, we entered into contracts to sell homesites
totaling $38.4 million during the three months ended June 30, 2007, as compared
to $43.0 million during the three months ended June 30, 2006; and $71.1 million
and $87.7 million during the six months ended June 30, 2007 and 2006,
respectively. These sales consisted of real estate sold at the following
properties as of the three and six months ended June 30, 2006 and 2007:
Properties Not Substantially Sold Out at June 30, 2007 (in 000's)
----------------------------------------------------------------
Sales for the three months Sales for the six months
ended June 30, ended June 30,
------------------------------ ------------------------------
Project 2006 2007 Difference 2006 2007 Difference
---------------------------------- ------- ------- ---------- ------- ------- ----------
Chapel Ridge ...................... $10,312 $ 5,478 $ (4,834) $15,808 $10,494 $ (5,314)
Sanctuary River Club at St Andrews
Sound .......................... -- 2,566 2,566 -- 2,566 2,566
Mystic Shores ..................... 8,664 10,932 2,268 17,814 18,489 675
Havenwood at Hunter's Crossing .... 3,343 4,675 1,332 5,670 9,052 3,382
Lake Ridge at Joe Pool Lake ....... 4,027 1,834 (2,193) 8,900 4,531 (4,369)
Vintage Oaks at the Vineyard ...... -- 5,680 5,680 -- 10,176 10,176
The Bridges at Preston Crossings .. -- 563 563 -- 3,264 3,264
SugarTree on the Brazos ........... 240 922 682 780 1,592 812
Saddle Creek Forest ............... 1,294 1,634 340 4,002 3,123 (879)
The Settlement at Patriot Ranch ... 1,649 1,753 104 2,544 3,369 825
King Oaks ......................... -- 1,270 1,270 -- 3,177 3,177
------- ------- -------- ------- ------- --------
Total ............................ $29,529 $37,307 $ 7,778 $55,518 $69,833 $ 14,315
======= ======= ======== ======= ======= ========
Properties Substantially Sold Out at June 30, 2007 (in 000's)
------------------------------------------------------------------
Sales for the three months Sales for the six months
ended June 30, ended June 30,
------------------------------- -------------------------------
Project 2006 2007 Difference 2006 2007 Difference
---------------------------------- ------- ------- ---------- ------- ------- ----------
Sanctuary Cove at St. Andrews
Sound .......................... $ 3,577 $ -- $ (3,577) $ 6,478 $ -- $ (6,478)
Fairway Crossings ................. 228 -- (228) 426 12 (414)
Mountain Springs Ranch ............ 6,720 -- (6,720) 11,708 -- (11,708)
Big Country ....................... -- -- -- 7,000 -- (7,000)
Catawba Falls Preserve ............ 413 -- (413) 2,789 -- (2,789)
Brickshire ........................ 1,236 1,190 (46) 1,779 1,379 (400)
Yellow Stone Creek Ranch .......... 1,175 -- (1,175) 1,175 -- (1,175)
Miscellaneous ..................... 75 (145) (220) 828 (79) (907)
------- ------- -------- ------- ------- --------
Total ............................ $13,424 $ 1,045 $(12,379) $32,183 $ 1,312 $(30,871)
======= ======= ======== ======= ======= ========
Also contributing to lower sales in the three and six months ended June
30, 2007 as compared to 2006 was the net recognition of approximately $5.0
million and $9.5 million in 2006, respectively, of revenue previously deferred
as a result of the application of the percentage-of-completion method of
accounting as opposed to the net deferral of
31
$1.8 million and $2.1 million in the same periods of 2007. These decreases were
partially off-set in the six months ended June 30, 2007 by the recognition of
approximately $5.8 million of sales made in 2006 that were deferred pending
final platting.
As noted above, certain of our properties substantially sold out earlier
in 2006 than previously anticipated as a result of the strong demand for our
communities and our challenge to replace sold-out properties with new
communities with similar profit margins. Although there is no assurance that we
will be successful, we are continuing to pursue the possible acquisition of
properties in markets where we currently conduct business, and in new regions of
the country, in an attempt to maintain appropriate levels of properties in our
portfolio.
Bluegreen Communities' gross margin increased from 46% for the three
months ended June 30, 2006 to 48% for the three months ended June 30, 2007.
Bluegreen Communities' gross margin increased from 44% for the six months ended
June 30, 2006 to 49% for the six months ended June 30, 2007. 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 55% of sales and is expected to
approximate these percentages for the foreseeable future. In addition, during
the first half of 2006 our gross margin was negatively impacted by the bulk sale
of Big Country, which had a relatively low margin.
Selling and marketing expenses for Bluegreen Communities increased $1.6
million or 20% during the three months ending June 30, 2007, as compared to the
same period in 2006. Selling and marketing expenses for Bluegreen Communities
decreased $0.3 million or 2% during the six months ending June 30, 2007, as
compared to the same period in 2006. As a percentage of sales, selling and
marketing expenses for Bluegreen Communities was 25% and 15% during the three
months ended June 30, 2007 and 2006, respectively, and 20% and 15% during the
six months ended June 30, 2007 and 2006, respectively. The increase in the
second quarter of 2007 compared to the same period in 2006 is primarily a result
of higher advertising expenses in 2007 at our new developments as well as an
expanded focus on internet marketing, which has a longer lead time to generate
customer traffic. As a percentage of sales, the increase in selling an marketing
expenses during the second quarter and first half of 2007, as compared to the
same periods in 2006, was primarily as a result of the shift to internet based
marketing as well as bulk sale transactions in 2006, which generally carry a
lower commission expense than sales made on a retail basis.
Bluegreen Communities' general and administrative expenses increased $0.8
million or 41% for the three months ended June 30, 2007, as compared to the same
period in 2006. General and administrative expenses increased $0.9 million or
18% for the six months ended June 30, 2007, as compared to the same period in
2006. These increases in 2007 reflect the overall cost of operating additional
sales offices at our new locations.
As of December 31, 2006, Bluegreen Communities had $18.6 million of sales
and $7.7 million of Field Operating Profit deferred under
percentage-of-completion accounting. As of June 30, 2007, Bluegreen Communities
had $20.7 million of sales and $8.9 million of Field Operating Profit deferred
under percentage-of-completion accounting.
Corporate General and Administrative Expenses. Our corporate general and
administrative expenses consist primarily of expenses associated with
administering the various support functions at our corporate headquarters,
including accounting, human resources, information technology, resorts'
acquisition and development, mortgage servicing, treasury and legal. Such
expenses were $11.6 million and $13.1 million for the three months ended June
30, 2006 and 2007, respectively; and $21.6 million and $24.2 million for the six
months ended June 30, 2006 and 2007, respectively.
Corporate general and administrative expenses increased $1.5 million or 13%
during the three months ended June 30, 2007 as compared to the same period in
2006. Corporate general and administrative expenses increased $2.6 million or
12% during the six months ended June 30, 2007 as compared to the same period in
2006. These increases were primarily driven by increased overhead cost such as
accounting, information technology, human resources, and legal fees to support
the growth of Bluegreen Resorts, partially off-set by higher fees earned by our
mortgage servicing business. As previously discussed, we earn fees for servicing
the notes receivable that we have sold in term securitization transactions and
through our VOI receivables purchase facilities.
32
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 totaled $9.5 million and $12.1 million during the three months ended June
30, 2006 and June 30, 2007, respectively. Interest income totaled $17.7 million
and $22.0 million during the six months ended June 30, 2006 and June 30, 2007,
respectively. The increase in interest income during the three and six months
ended June 30, 2007, as compared to the same periods in 2006 was due primarily
to higher interest accretion on our retained interest in notes receivable sold
and more interest income earned on VOI notes receivable as a result of higher
average VOI notes receivable balances during 2007 as compared to the same
periods in 2006.
Gain on Sales of Notes Receivable. During the three months ended June 30, 2006,
we sold $16.6 million of VOI notes receivable that qualified for off-balance
sheet sales treatment under SFAS No. 140 and recognized gains on sales of notes
receivable of $2.7 million. As required under SFAS No. 152, approximately $2.6
million of the gains were recorded as an increase to VOI sales for the three
months ended June 30, 2006. No VOI notes receivable were sold during the three
months ended June 30, 2007 that qualified for off-balance sheet sales treatment.
During the six months ended June 30, 2006 and 2007, we sold $57.6 million and
$51.2 million, respectively, of VOI notes receivable that qualified for
off-balance sheet sales treatment under SFAS No. 140 and recognized gains on
sales of notes receivable of $9.7 million and $8.0 million, respectively. As
required under SFAS No. 152, approximately $9.2 million and $8.0 million of the
gains were recorded as an increase to VOI sales for the six months ended June
30, 2006 and 2007, respectively.
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 VOI receivables
purchase facility (as described further below) and management's discretion. The
generally accepted accounting principles governing our sale of receivable
transactions is evolving and achieving off-balance sheet accounting treatment is
becoming more difficult. Due to the complexity of the accounting rules
surrounding such transactions, we have decided to limit the use of off-balance
sheet structures. In 2006, we structured a VOI receivables purchase facility
that is used to accumulate receivables pending a term securitization transaction
in a manner so as to account for sales of receivables under such facilities as
on-balance sheet borrowings pursuant to SFAS No. 140. No gains are recognized on
the sales of receivables to this facility until the receivables are included in
an appropriately structured term securitization transaction. We expect to
continue this accounting treatment for similarly structured facilities for the
foreseeable future. As a result, we expect that the volatility of our quarterly
earnings will increase prospectively, but we do not anticipate that this will
materially impact annual earnings, assuming the continued availability of the
facilities and ultimate securitizations.
Interest Expense. Interest expense was $3.5 million and $5.9 million during the
three months ended June 30, 2006 and 2007, respectively. Interest expense was
$6.8 million and $11.0 million during the six months ended June 30, 2006 and
2007, respectively. The increase in interest expense during 2007 was primarily a
result of higher average debt outstanding and higher interest rates partially
offset by an increase in the amount of interest capitalized in connection with
current development activity as compared to 2006. Average debt outstanding
during 2007 increased in part as a result of the issuance of $36.1 million of
trust preferred debt since June 30, 2006.
Total interest expense capitalized to construction in progress was $3.5 million
and $3.9 million for the three months ended June 30, 2006 and 2007,
respectively. Total interest expense capitalized to construction in progress was
$5.8 million and $7.3 million for the six months ended June 30, 2006 and 2007,
respectively.
Provision for Loan Losses. We recorded provisions for loan losses totaling $15.3
million and $15.2 million during the three months ended June 30, 2006 and 2007,
respectively, and $25.9 million and $26.6 million during the six months ended
June 30, 2006 and 2007, respectively. The provision is based on our estimate of
losses on originated VOI receivables, excluding any benefit for the value of
future recoveries, and is reflected as a reduction of VOI sales. The provision
for loan losses fluctuates between periods based on the amount of financed VOI
sales as well as the timing of the recognition of revenue on the sales
transactions that created such receivables.
We determine the adequacy of our reserve for loan losses and review it on a
regular basis considering, among other factors, historical frequency of default,
loss experience, static pool analyses, estimated value of the underlying
33
collateral (communities notes receivable, only), present and expected economic
conditions, as well as other factors. Effective January 1, 2006, we changed our
accounting for loan losses on our VOI notes receivable in accordance with SFAS
No. 152. Under SFAS No. 152, we estimate uncollectibles based on historic
uncollectibles for similar VOI notes receivable. The average annual default
rates and delinquency rates on Bluegreen Resorts' and Bluegreen Communities'
receivables owned or serviced by us were as follows:
For the Twelve
Average Annual Default Rates Months Ended June 30,
---------------------------- ---------------------
Division 2006 2007
--------------------------- ------ ------
Bluegreen Resorts ......... 8.4% 7.2%
Bluegreen Communities ..... 4.6%(1) 3.7%
As of As of
Delinquency Rates December 31, June 30,
--------------------------- ------------ --------
Division 2006 2007
--------------------------- ------ ------
Bluegreen Resorts ......... 4.0% 3.2%
Bluegreen Communities ..... 7.8% 10.3%
(1) Excludes December 2005 default of a $1.3 million note
receivable, not made in the ordinary course of business.
Substantially all defaulted vacation ownership notes receivable result in
the holder of the note receivable acquiring the related VOI that secured the
note receivable. In cases where we have retained ownership of the vacation
ownership notes receivable, the VOI is reacquired and resold in the normal
course of business.
The allowance for loan losses by division as of December 31, 2006 and June 30,
2007 was as follows (in thousands):
Bluegreen Bluegreen
Resorts Communities Other Total
--------- ----------- ----- ---------
December 31, 2006:
Notes receivable .............. $ 150,649 $ 6,915 $ 186 $ 157,750
Allowance for loan losses ..... (13,140) (173) (186) (13,499)
--------- --------- ----- ---------
Notes receivable, net ......... $ 137,509 $ 6,742 $ -- $ 144,251
========= ========= ===== =========
Allowance as a % of gross notes
receivable ................... 9% 3% 100% 9%
========= ========= ===== =========
June 30, 2007:
Notes receivable .............. $ 231,951 $ 6,445 $ 186 $ 238,582
Allowance for loan losses ..... (23,527) (189) (186) (23,902)
--------- --------- ----- ---------
Notes receivable, net ......... $ 208,424 $ 6,256 $ -- $ 214,680
========= ========= ===== ---------
Allowance as a % of gross notes
receivable ................... 10% 3% 100% 10%
========= ========= ===== =========
Other Income (Expense), Net. Other income, net was $837,000 for the three months
ended June 30, 2006 as compared to Other expense, net of $246,000 for the three
months ended June 30, 2007. Other income, net was $690,000 for the six months
ended June 30, 2006 as compared to other expense, net of $1.2 million for the
six months ended June 30, 2007. The changes in other income/(expense), net,
during the six months ended June 30, 2007 compared to the same period in 2006
included a charge of approximately $526,000 for the loss on disposal of various
fixed assets.
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 $1.7 million and $1.6 million during the
three months ended June 30, 2006 and 2007, respectively,
34
before the cumulative effect of change in accounting principle. Minority
interest in income of consolidated subsidiary was $2.7 million and $3.3 million
during the six months ended June 30, 2006 and 2007, respectively, before the
cumulative effect of change in accounting principle.
Provision for Income Taxes. Based on our anticipated mix of taxable earnings
amongst states, we expect that our 2007 effective income tax rate will be
approximately 38.0%. Our effective income tax rate varies as our mix of taxable
earnings shifts amongst the various states in which we operate. Additionally, in
March of 2007, we received notice from the IRS that our 2004 and 2005 federal
income tax return had been selected for examination. Also, as previously noted,
in July 2007 the State of Michigan enacted a tax change effective January 1,
2008. Although we have not yet completed our evaluation of this change, it may
require us to increase our deferred tax liabilities for Michigan in the third
quarter of 2007, when the new tax law was enacted.
Cumulative Effect of Change in Accounting Principle from the Adoption of SFAS
No. 152. The adoption of SFAS No. 152 on January 1, 2006 resulted in a net
charge of $4.5 million, which is presented as a cumulative effect of change in
accounting principle. The cumulative effect of change in accounting principle
primarily consists of the deferral of VOI sales and related costs for sales that
were previously recognized but did not meet the required down payment threshold
at January 1, 2006, due to sales incentives provided to buyers and the treatment
of our Sampler Program, and the related tax benefit, net of the cumulative
effect of change in accounting principle charge, related to the minority
interest in the Subsidiary.
Summary. Based on the factors discussed above, our net income was $6.6 and $4.1
million during the three months ended June 30, 2006 and 2007, respectively. Net
income for the six months ended June 30, 2006 and 2007 was $6.1 and $9.4
million, respectively.
Changes in Financial Condition
The following table summarizes our cash flows for the six months ended
June 30, 2006 and 2007 (in thousands):
For the Six Months Ended
------------------------------
June 30, 2006 June 30, 2007
------------- -------------
(restated)
Cash flows used in operating activities ............ $ (52,072) $ (60,030)
Cash flows provided (used) by investing activities . 1,367 (2,843)
Cash flows provided by financing activities ........ 36,638 77,718
------------- -------------
Net (decrease) increase in cash and cash equivalents $ (14,067) $ 14,845
============= =============
Cash Flows From Operating Activities. Cash flows from operating activities
decreased $7.9 million or 15% during the six months ended June 30, 2007,
compared to the comparable prior year period. The decrease in cash flows from
operating activities was primarily the result of higher resort development
spending coupled with lower proceeds from the off balance-sheet sale of VOI
notes receivable as more receivables were transformed under on-balance sheet
facilities (see cash flows from financing activities below).
Cash Flows From Investing Activities. Cash flows from investing activities
decreased $4.2 million or 308% from an inflow of $1.3 million during the six
months ended June 30, 2006 to an outflow of $2.8 million during the six months
ended June 30, 2007. This decrease was due primarily to lower amounts of cash
received from our retained interests in notes receivable sold in 2007 compared
to 2006 coupled with higher 2007 spending on capital assets, including
information technology. The cash received on our retained interest varies based
on the total retained interest outstanding, whether or not a sufficient reserve
balance has been met (if required), and the timing of the actual cash
distribution. During the six months ended June 30, 2006, we received $7.8
million after a unique trigger in our 2004 Term Securitization transaction was
satisfied. At June 30, 2007, there were no similar triggers impacting our
retained interests in notes receivable sold.
Cash Flows From Financing Activities. Cash flows from financing activities
increased $41.1 million or 112% from a cash inflow of $36.6 million during the
six months ended June 30, 2006 to a cash inflow of $77.7 million during the six
months ended June 30, 2007. This increase was primarily related to higher net
borrowings from collateralized notes receivable and the receipt of $20.6 million
of proceeds in connection with our issuance of junior subordinated debentures as
compared to $15.5 million of proceeds during the same period of 2006. These
increases
35
were partially offset by higher net repayments made under our existing
lines-of-credit during the period ended June 30, 2007 as compared to net
borrowings in 2006.
Liquidity and Capital Resources
Our capital resources are provided from both internal and external
sources. Our primary capital resources from internal operations are: (i) cash
sales, (ii) down payments on homesite and VOI sales which are financed, (iii)
proceeds from the sale of, or borrowings collateralized by, notes receivable,
including cash received from our retained interests in notes receivable sold,
(iv) principal and interest payments received on the purchase money mortgage
loans arising from sales of VOIs and homesites and (v) net cash generated from
other resort services and other communities operations. Historically, external
sources of liquidity have included non-recourse sales of notes receivable,
borrowings under secured and unsecured lines-of-credit, seller and bank
financing of inventory acquisitions and the issuance of debt securities. Our
capital resources are used to support our operations, including (i) acquiring
and developing inventory, (ii) providing financing for customer purchases, (iii)
funding operating expenses and (iv) satisfying our debt and other obligations.
As we are continually selling and marketing real estate (VOIs and homesites), it
is necessary for us to acquire and develop new resorts and communities in order
to maintain adequate levels of inventory to support operations. We anticipate
that we will continue to require external sources of liquidity to support our
operations, satisfy our debt and other obligations and to provide funds for
growth.
Our level of debt and debt service requirements have several important
effects on our operations, including the following: (i) we have significant cash
requirements to service debt, reducing funds available for operations and future
business opportunities and increasing our vulnerability to adverse economic and
industry conditions; (ii) our leveraged position increases our vulnerability to
economic and competitive pressures; (iii) the financial covenants and other
restrictions contained in the indentures, the credit agreements and other
agreements relating to our indebtedness require us to meet certain financial
tests and restrict our ability to, among other things, borrow additional funds,
dispose of assets, make investments or pay cash dividends on or repurchase
preferred or common stock; and (iv) may limit funds available for working
capital, capital expenditures, acquisitions and general corporate purposes.
Certain of our competitors operate on a less leveraged basis and have greater
operating and financial flexibility than we do.
Subject to the continued availability of financing and liquidity, we
currently intend to continue to pursue a growth-oriented strategy, particularly
with respect to our Bluegreen Resorts business segment. In connection with this
strategy, we may from time to time acquire, among other things, additional
resort properties and completed but unsold VOIs; land upon which additional
resorts may be built; management contracts; loan portfolios of vacation
ownership mortgages; portfolios which include properties or assets which may be
integrated into our operations; interests in joint ventures; and operating
companies providing or possessing management, sales, marketing, development,
administration and/or other expertise with respect to our operations in the
vacation ownership industry. In addition, we have focused Bluegreen Communities'
activities on larger, more capital intensive projects particularly in those
regions where we believe the market for our products is strongest, such as new
golf communities in the Southeast and other areas and continued growth in our
successful regions in Texas.
The following is a discussion of our purchase and credit facilities that
were important sources of our liquidity as of June 30, 2007. These facilities do
not constitute all of our outstanding indebtedness as of June 30, 2007. Our
other indebtedness includes outstanding senior secured notes payable, junior
subordinated debentures, borrowings collateralized by real estate inventories
that were not incurred pursuant to an ongoing credit facility and capital
leases.
VOI 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 six months ended June 30, 2007,
approximated 63% of sales. Accordingly, having facilities available for the
hypothecation or sale of these VOI receivables is a critical factor to our
ability to meet our short and long-term cash needs.
The 2006 GE Purchase Facility. In March 2006, we executed agreements for a
VOI receivables purchase facility (the "2006 GE Purchase Facility") with General
Electric Capital Corporation ("GE"). The 2006 GE Purchase Facility utilizes an
owner's trust structure, pursuant to which we sell receivables to Bluegreen
Receivables
36
Finance Corporation XI, our wholly-owned, special purpose finance subsidiary
("BRFC XI"), and BRFC XI sells the receivables to an owner's trust (a qualified
special purpose entity) without recourse to us or BRFC XI except for breaches of
certain customary representations and warranties at the time of sale. We did not
enter into any guarantees in connection with the 2006 GE Purchase Facility. The
2006 GE Purchase Facility has detailed requirements with respect to the
eligibility of receivables for purchase, and fundings under the 2006 GE Purchase
Facility are subject to certain conditions precedent. Under the GE Purchase
Facility, a variable purchase price of approximately 90% of the principal
balance of the receivables sold, subject to adjustment under certain terms and
conditions, is paid at closing in cash. The balance of the purchase price is
deferred until such time as GE has received a specified return, a specified over
collateralization ratio is achieved, a cash reserve account is fully funded and
all servicing, custodial, agent and similar fees and expenses have been paid. GE
is entitled to receive a return equal to the applicable Swap Rate (which is
essentially a published interest swap arrangement rate as defined in the 2006 GE
Purchase Facility agreements) plus 2.35%, subject to use of alternate return
rates in certain circumstances. In addition, we paid GE a structuring fee of
approximately $437,500 in March 2006, which is being amortized on a
straight-line basis through March 2008. Subject to the terms of the agreements,
we act as servicer under the 2006 GE Purchase Facility for a fee.
The 2006 GE Purchase Facility includes various conditions to purchase,
covenants, trigger events and other provisions customary for a transaction of
this type. GE's obligation to purchase receivables under the 2006 GE Purchase
Facility may terminate earlier than the dates noted above upon the occurrence of
certain specified events set forth in the 2006 GE Purchase Facility agreements.
These specified events, some of which are subject to materiality qualifiers and
cure periods, include, without limitation, (i) the aggregate amount of all
advances under the 2006 GE Purchase Facility being limited to $125.0 million, in
the aggregate; (ii) our breach of the representations or warranties in the 2006
GE Purchase Facility; (iii) our failure to perform our covenants in the 2006 GE
Purchase Facility; (iv) our commencement of bankruptcy or similar proceedings;
(v) the amount of any advance under the 2006 GE Purchase Facility failing to
meet a specified overcollateralization amount; (vi) significant delinquencies or
defaults on the receivables sold, pursuant to the facility; (vii) recovery rates
falling below a pre-determined amount; (viii) a default or breach under any
other agreement beyond the applicable grace period if such default or breach (a)
involves the failure to make a payment in excess of 5% of our Tangible Net Worth
(as defined in the 2006 GE Purchase Facility agreements to include our
subordinated debentures) or (b) causes, or permits the holder of indebtedness to
cause, an amount in excess of 5% of our Tangible Net Worth to become due; (ix)
our Tangible Net Worth at the end of any calendar quarter not equaling at least
$303.3 million plus 50% of net income following December 31, 2005; (x) the ratio
of our debt (excluding our subordinated debentures and receivable-backed debt of
no more than $600 million) to Tangible Net Worth exceeding 2.50 to 1; (xi) the
ratio of our consolidated earnings before interest, taxes, depreciation and
amortization to our interest expense (net of interest income) falling below 2.00
to 1; (xii) the number of points available in the Bluegreen Vacation Club
falling below approximately 930.7 million points; (xiii) our ceasing to conduct
the VOI business or to originate VOI receivables or if certain changes in our
ownership or control occur; (xiv) the failure of certain of our resorts to be
part of the Bluegreen Vacation Club or be managed by us, one of our subsidiaries
or another entity acceptable to GE; (xv) operating budgets and reserve accounts
maintained by the property owners' associations responsible for maintaining
certain of our resorts failing to comply with applicable laws and governing
documents; (xvi) our failure to discharge, stay or bond pending appeal any final
judgments for the payment of an amount in excess of 2.5% of our Tangible Net
Worth in a timely manner; (xvii) our default under or breach of certain resort
management or marketing contracts; or (xviii) our failure to perform our
servicing obligations, otherwise have our servicing rights terminated or if we
do not exercise the Servicer Purchase Option pursuant to the terms of the 2006
GE Purchase Facility.
The 2006 GE Purchase Facility allows for sales of notes receivable for a
cumulative purchase price of up to $125.0 million through March 2008. During the
six months ended June 30, 2007, we sold $51.2 million in VOI receivables under
the 2006 GE Purchase Facility for an aggregate purchase price of $46.0 million.
As of June 30, 2007, the remaining availability under the 2006 GE Purchase
Facility was $14.2 million in cumulative purchase price, subject to eligibility
requirements and fulfillment of conditions precedent.
The 2006 GE Purchase Facility discussed above, the 2006 BB&T Purchase
Facility, the GMAC Receivables Facility, and the GE Bluegreen/Big Cedar Facility
discussed below under "Credit Facilities for Bluegreen Resorts' Receivables and
Inventories" are the only ongoing receivables facilities under which we
currently have the ability to monetize our VOI notes receivable. Factors which
could adversely impact our ability to obtain new or additional VOI 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 VOI companies; a deterioration in the performance of
our VOI notes receivable or in the performance of portfolios sold in prior
transactions, specifically increased delinquency,
37
default and loss severity rates; and a deterioration in our performance
generally. There can be no assurance that we will obtain new purchase facilities
or will be in a position to replace our existing purchase facilities when they
are fully funded or expire. As indicated above, our inability to sell VOI
receivables under a current or future facility could have a material adverse
impact on our liquidity. However, management believes that to the extent we
could not sell receivables under a purchase facility, we could potentially
mitigate the adverse impact on our liquidity by using our receivables as
collateral under existing or future credit facilities.
We have historically chosen to monetize our receivables through facilities
such as the 2006 GE Purchase Facility and through periodic term securitization
transactions, as these off-balance sheet arrangements provide us with cash
inflows both currently and in the future at what we believe to be competitive
rates without adding leverage to our balance sheet or retaining recourse for
losses on the receivables sold. In addition, these sale transactions have
generated gains on our income statement on a periodic basis, which would not be
realized under a traditional financing arrangement. There is no assurance that
these arrangements will be available in the future.
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
interest 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 2006 GE Purchase Facility and prior off-balance sheet, receivables purchase
facilities during the periods presented (in thousands):
December 31, June 30,
2006 2007
------------ ------------
On Balance Sheet:
Retained interests in notes receivable sold ........ $ 130,623 $ 128,442
Off Balance Sheet:
Notes receivable sold without recourse ............. 540,536 514,924
Principal balance owed to note receivable purchasers 503,854 481,394
38
Three Months Ended
----------------------------
June 30, 2006 June 30, 2007
------------- -------------
Income Statement:
Gain on sales of notes receivable (1) ........................... $ 2,696 $ --
Interest accretion on retained interests in notes receivable sold 2,606 4,278
Servicing fee income ............................................ 1,676 2,082
Six Months Ended
----------------------------
June 30, 2006 June 30, 2007
------------- -------------
Income Statement:
Gain on sales of notes receivable (1) ........................... $ 9,707 $ 7,967
Interest accretion on retained interests in notes receivable sold 5,184 8,512
Servicing fee income ............................................ 3,322 4,217
(1) Includes amounts classified as VOI sales, pursuant to SFAS No. 152.
In accordance with SFAS No. 152, approximately $2.6 million and $9.2
million of the gains on sales of notes receivable were recorded as an increase
to VOI sales for the three and six months ended June 30, 2006, respectively. The
remaining $47,000 and $552,000 of the gain has been recorded as a gain on the
sales of notes receivable on the accompanying statements of income for the three
and six months ended June 30, 2006, respectively. Approximately $8.0 million of
the gain on sales of notes receivable was recorded as an increase to VOI sales
for the six months ended June 30, 2007 and there were no sales of receivables
that qualified for off-balance sheet treatment during the three months ended
June 30, 2007.
Credit Facilities for Bluegreen's Receivables and Inventories
In addition to the VOI receivables purchase facilities discussed above, we
maintain various credit facilities with financial institutions that provide
receivable, acquisition and development financing for our operations. We had the
following credit facilities, as of June 30, 2007 (see further discussion below):
Outstanding
Borrowings Availability as Advance Period
as of June of June 30, Expiration; Borrowing Borrowing Current
Credit Facility 30, 2007 2007 Borrowing Maturity Limit Rate Rate
--------------------------------------------------------------------------------------------------------------------
The GMAC $13.7 million $61.3 million February 15, 2008; $75.0 million 30-day LIBOR 9.32%
Receivables February 15, 2015 + 4.00%
Facility
The GMAC $50.0 million $100.0 million February 15, 2008; $150.0 million 30-day LIBOR 9.82%
AD&C Facility August 15, 2013 + 4.50%
2006 BB&T $51.4 million $86.1 million May 25, 2008; $137.5 million 30-day LIBOR 6.57%
Purchase March 5, 2019 + 1.25%
Facility
The GMAC $46.4 million $28.6 million September 30, 2008; $75.0 million Prime + 1.00% 9.25%
Communities September 30, 2009
Facility
The GE $24.0 million $21.0 million April 16, 2009; $45.0 million 30-day LIBOR 7.07%
Bluegreen/Big April 16, 2016 + 1.75%
Cedar Facility
39
Credit Facilities for Bluegreen Resorts' Receivables and Inventories
The GMAC Receivables Facility. In February 2003, we entered into a revolving VOI
receivables credit facility (the "GMAC Receivables Facility") with Residential
Funding Corporation ("RFC"), an affiliate of GMAC. The GMAC Receivables Facility
has detailed requirements with respect to the eligibility of receivables for
inclusion and other conditions to funding. The borrowing base under the GMAC
Receivables Facility is 90% of the outstanding principal balance of eligible
notes arising from the sale of VOIs. The GMAC Receivables Facility includes
affirmative, negative and financial covenants and events of default. All
principal and interest payments received on pledged receivables are applied to
principal and interest due under the GMAC Receivables Facility. Interest
payments are due monthly. During the six months ended June 30, 2007, we did not
pledge any VOI receivables under the GMAC Receivables Facility.
The GMAC AD&C Facility. In September 2003, RFC also provided us with an
acquisition, development and construction revolving credit facility for
Bluegreen Resorts (the "GMAC AD&C Facility"). The borrowing period on the GMAC
AD&C Facility, as amended, expires on February 15, 2008, and outstanding
borrowings mature no later than August 15, 2013, although specific draws
typically are due four years from the borrowing date. Principal will be repaid
through agreed-upon release prices as VOIs are sold at the financed resorts,
subject to minimum required amortization. Interest payments are due monthly. We
borrowed $14.8 million under this facility during June 2007 to fund development
activities at The Fountains Resort in Orlando, Florida.
The 2006 BB&T Purchase Facility. In June 2006, we executed agreements for a VOI
receivables purchase facility (the "2006 BB&T Purchase Facility") with BB&T.
While ownership of the receivables is transferred for legal purposes, the
transfer of the receivables under the facility are accounted for as a financing
transaction for financial accounting purposes. Accordingly, the receivables will
continue to be reflected as assets and the associated obligations will be
reflected as liabilities on our balance sheet. The 2006 BB&T Purchase Facility
utilizes an owner's trust structure, pursuant to which we transfer receivables
to Bluegreen Timeshare Finance Corporation I, our wholly-owned, special purpose
finance subsidiary ("BTFC I"), and BTFC I subsequently transfers the receivables
to an owner's trust without recourse to us or BTFC I, except for breaches of
certain customary representations and warranties at the time of transfer. We did
not enter into any guarantees in connection with the BB&T Purchase Facility. The
2006 BB&T Purchase Facility has detailed requirements with respect to the
eligibility of receivables, and fundings under the BB&T Purchase Facility are
subject to certain conditions precedent. Under the 2006 BB&T Purchase Facility,
a variable purchase price of approximately 85% of the principal balance of the
receivables transferred, subject to certain terms and conditions, is paid at
closing in cash. The balance of the purchase price is deferred until such time
as BB&T and other liquidity providers arranged by BB&T have in aggregate
received a specified return (the "Specified Return") and all servicing,
custodial, agent and similar fees and expenses have been paid. The Specified
Return is equal to either the commercial paper rate or LIBOR rate plus 1.25%,
subject to use of alternate return rates in certain circumstances. In addition,
we will pay BB&T structuring and other fees totaling $1.7 million over the term
of the facility and we will act as servicer under the 2006 BB&T Purchase
Facility for a fee. The BB&T Purchase Facility allows for transfers of notes
receivable for a cumulative purchase price of up to $137.5 million, on a
revolving basis, through May 2008.
In April 2007, we transferred $20.4 million of VOI notes receivable to the 2006
BB&T Purchase Facility and received $17.3 million in cash proceeds. In June
2007, we transferred an additional $40.7 million of VOI notes receivable to the
facility and received $34.6 million in cash proceeds. As of June 30, 2007, we
had $86.1 million of remaining availability under the BB&T Purchase Facility. In
August 2007, we transferred $32.0 million of VOI notes receivable to the 2006
BB&T Purchase Facility and received $27.2 million in cash proceeds. Immediately
following the funding the remaining availability under the 2006 BB&T Purchase
Facility, subject to the terms and conditions of the facility, was $58.9
million.
The GE Bluegreen/Big Cedar Facility. In April 2007, the Subsidiary entered into
a $45.0 million revolving VOI receivables credit facility (the "GE Bluegreen/Big
Cedar Receivables Facility") with GE. Bluegreen Corporation has guaranteed the
full payment and performance of the Subsidiary in connection with the GE
Bluegreen/Big Cedar Receivables Facility. The facility allows for advances on a
revolving basis through April 16, 2009 and all outstanding borrowings mature no
later than April 16, 2016. The facility has detailed requirements with respect
to the eligibility of receivables for inclusion and other conditions to funding.
The borrowing base under the facility ranges from 97% - 90% (based on the spread
between the weighted average note receivable coupon and GE's interest rate) of
the outstanding principal balance of eligible notes receivable arising from the
sale of VOIs. The 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
facility. Indebtedness
40
under the facility bears interest adjusted monthly at the one month LIBOR plus
1.75%. The Subsidiary was required to pay an upfront loan commitment fee of
$225,000 in connection with the GE Bluegreen/Big Cedar Receivables Facility. In
April 2007, the Subsidiary pledged $26.8 million in aggregate principal balance
of notes receivable under the facility and received $25.7 million in cash
proceeds, net of issuance costs.
The Foothill Facility. We are currently seeking to renew a $30.0 million
revolving credit facility with Wells Fargo Foothill, Inc. ("Foothill") primarily
used for borrowings collateralized by Bluegreen Communities receivables and
inventory, but under which we could also borrow up to $10.0 million of the
facility collateralized by the pledge of VOI receivables. For further details on
this facility, see "Credit Facilities for Bluegreen Communities' Receivables and
Inventories" below. There is no assurance that the facility will be renewed.
Credit Facilities for Bluegreen Communities' Receivables and Inventories
The Foothill Facility. We are currently seeking to renew a $30.0 million
revolving credit facility with Foothill secured by the pledge of Bluegreen
Communities' receivables, with up to $10.0 million of the total facility
available for Bluegreen Communities' inventory borrowings and, as indicated
above, up to $10.0 million of the total facility available for the pledge of
Bluegreen Resorts' receivables (the "Foothill Facility"). The Foothill Facility
requires principal payments based on agreed-upon release prices as homesites in
the encumbered communities are sold and bears interest at the prime lending rate
plus 1.25% (9.5% at June 30, 2007). Interest payments are due monthly. Subject
to a minimum monthly interest charge of $15,000, the interest rate charged on
outstanding receivable borrowings under the Foothill Facility, as amended, is
the prime lending rate plus 0.25% (8.5% at June 30, 2007) when the average
monthly outstanding loan balance is greater than or equal to $15.0 million. If
the average monthly outstanding loan balance is less than $15.0 million, the
interest rate is the greater of 4.00% or the prime lending rate plus 0.50%
(8.75% at June 30, 2007). All principal and interest payments received on
pledged receivables are applied to principal and interest due under the Foothill
Facility. There can be no assurances that we will renew the Foothill Facility on
favorable terms, if at all.
The GMAC Communities Facility. We have a revolving credit facility with RFC (the
"GMAC Communities Facility") for the purpose of financing our Bluegreen
Communities real estate acquisitions and development activities. The GMAC
Communities Facility is secured by the real property homesites (and personal
property related thereto) at the following Bluegreen Communities projects, as
well as any Bluegreen Communities projects acquired by us with funds borrowed
under the GMAC Communities Facility (the "Secured Projects"): Brickshire (New
Kent County, Virginia); Mountain Lakes Ranch (Bluffdale, Texas); Ridge Lake
Shores (Magnolia, Texas); Riverwood Forest (Fulshear, Texas); Waterstone
(Boerne, Texas); Catawba Falls Preserve (Black Mountain, North Carolina); Lake
Ridge at Joe Pool Lake (Cedar Hill and Grand Prairie, Texas); Mystic Shores at
Canyon Lake (Spring Branch, Texas); Yellowstone Creek Ranch (Walsenburg,
Colorado); Havenwood at Hunter's Crossing (New Braunfels, Texas); The Bridges at
Preston Crossing (Grayson County, Texas); King Oaks (College Station, Texas);
Vintage Oaks at the Vineyard (New Braunfels, Texas); and Sanctuary River Club at
St. Andrews Sound (St. Simons Island, Georgia). 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. The period during which we can add additional projects
to the GMAC Communities Facility expires on September 30, 2007, although we can
continue to borrow on projects approved prior to that date until September 30,
2008. We are currently seeking to extend and expand the GMAC Communities
Facility, although there can be no assurance that we will be successful.
Principal payments are effected through agreed-upon release prices paid to RFC,
as homesites in the Secured Projects are sold. Interest payments are due
monthly. The GMAC Communities Facility includes customary conditions to funding,
acceleration and event of default provisions and certain financial affirmative
and negative covenants. We use the proceeds from the GMAC Communities Facility
to finance the acquisition and development of Bluegreen Communities projects.
In February 2007, we acquired 350 acres near St. Simons Island, Georgia,
for $18.0 million for a new community to be called Sanctuary River Club at St.
Andrews Sound. We borrowed $12.6 million under the GMAC Communities Facility in
connection with the acquisition of this property. In February of 2007, we also
borrowed $12.5 million under the GMAC Communities Facility to fund development
activities on various communities.
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
41
financing at attractive interest rates. No assurances can be given that local
banks will continue to provide such customer financing.
Historically, we have funded development for road and utility
construction, amenities, surveys and engineering fees from internal operations
and have financed the acquisition of Bluegreen Communities properties through
seller, bank or financial institution loans. Terms for repayment under these
loans typically call for interest to be paid monthly and principal to be repaid
through homesite releases. The release price is usually an amount based on a
pre-determined percentage (typically 25% to 55%) of the gross selling price of
the homesites in the subdivision. In addition, the agreements generally call for
minimum cumulative amortization periodically. When we provide financing to our
customers (and therefore the release price is not available in cash at closing
to repay the lender), we are required to pay the lender with cash derived from
other operating activities, principally from cash sales or the pledge of
receivables originated from earlier property sales.
Trust Preferred Securities
We have formed statutory business trusts (collectively, the "Trusts") and
each issued trust preferred securities and invested the proceeds thereof in our
junior subordinated debentures. The Trusts are variable interest entities in
which we are not the primary beneficiary as defined by FASB Interpretation No.
46R. Accordingly, we do not consolidate the operations of the Trusts; instead,
the Trusts are accounted for under the equity method of accounting. In each of
these transactions, the applicable Trust issued trust preferred securities as
part of a larger pooled trust securities offering which was not registered under
the Securities Act of 1933. The applicable Trust then used the proceeds from
issuing the trust preferred securities to purchase an identical amount of junior
subordinated debentures from us. Interest on the junior subordinated debentures
and distributions on the trust preferred securities are payable quarterly in
arrears at the same interest rate. Distributions on the trust preferred
securities are cumulative and based upon the liquidation value of the trust
preferred security. The trust preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the junior subordinated
debentures at maturity or their earlier redemption. The junior subordinated
debentures are redeemable in whole or in part at our option at any time after
five years from the issue date or sooner following certain specified events. In
addition, we made an initial equity contribution to each Trust in exchange for
its common securities, all of which are owned by us, and those proceeds were
also used to purchase an identical amount of junior subordinated debentures from
us. The terms of each Trust's common securities are nearly identical to the
trust preferred securities.
In February 2007, one of the Trusts, Bluegreen Statutory Trust VI ("BST
VI") issued $20.0 million of trust preferred securities. BST VI used the
proceeds from issuing the trust preferred securities to purchase an identical
amount of junior subordinated debentures from us. Interest on the junior
subordinated debentures and distributions on the trust preferred securities will
be payable quarterly in arrears at a fixed rate of 9.842% through April 2012,
and thereafter at a variable rate of interest, per annum, reset quarterly, equal
to the 3-month LIBOR plus 4.80% until the scheduled maturity date of April 30,
2037. Distributions on the trust preferred securities will be cumulative and
based upon the liquidation value of the trust preferred security. The trust
preferred securities will be subject to mandatory redemption, in whole or in
part, upon repayment of the junior subordinated debentures at maturity or their
earlier redemption. The junior subordinated debentures are redeemable five years
from the issue date or sooner following certain specified events. In addition,
we contributed $619,000 to BST VI in exchange for its common securities, all of
which are owned by us. Those proceeds were also used by BST VI to purchase an
identical amount of junior subordinated debentures from us. The terms of BST
VI's common securities are nearly identical to the trust preferred securities.
42
We had the following junior subordinated debentures outstanding at June
30, 2007 (dollars in thousands):
Outstanding Initial
Amount of Equity Fixed Beginning
Junior To Interest Variable Optional
Subordinated Trust Issue Rate Interest Rate Redemption Maturity
Trust Debentures (3) Date (1) (2) Date Date
--------------------------------------------------------------------------------------------------------------------------
3-month
Bluegreen Statutory Trust I ..... $ 23,196 $ 696 3/15/05 9.160% LIBOR 3/30/10 3/30/35
+ 4.90%
3-month
Bluegreen Statutory Trust II .... 25,774 774 5/04/05 9.158% LIBOR 7/30/10 7/30/35
+ 4.85%
3-month
Bluegreen Statutory Trust III ... 10,310 310 5/10/05 9.193% LIBOR 7/30/10 7/30/35
+ 4.85%
3-month
Bluegreen Statutory Trust IV .... 15,464 464 4/24/06 10.130% LIBOR 6/30/11 6/30/36
+ 4.85%
3-month
Bluegreen Statutory Trust V ..... 15,464 464 7/21/06 10.280% LIBOR 9/30/11 9/30/36
+ 4.85%
3-month
Bluegreen Statutory Trust VI .... 20,619 619 2/26/07 9.842% LIBOR 4/30/12 4/30/37
+ 4.80%
------------------------
$ 110,827 $ 3,327
========================
(1) Both the trust preferred securities and junior subordinated
debentures bear interest at a fixed interest rate from the issue
date through the beginning optional redemption date.
(2) Both the trust preferred securities and junior subordinated
debentures bear interest at a variable interest rate from the
beginning optional redemption date through the maturity date.
(3) Initial equity in trust is recorded as part of Other assets in our
Condensed Consolidated Balance Sheets.
Unsecured Credit Facility
In August 2007, we executed agreements to renew our unsecured
line-of-credit with Wachovia Bank, N.A. and increase it from $15.0 million to
$20 million. Amounts borrowed under the line bear interest at 30-day LIBOR plus
1.75.%. Interest is due monthly and all outstanding amounts are due on July 30,
2009. We can only borrow an amount under the line-of-credit which is less than
the remaining availability under our current, active VOI 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
June 30, 2007, no borrowings were outstanding under the line. However, an
aggregate of $35,000 of irrevocable letters of credit were provided under this
line-of-credit. This line-of-credit is an available source of short-term
liquidity for us.
Commitments
Our material commitments as of June 30, 2007 include 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 tables summarize the contractual minimum principal payments
and interest obligations 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 June 30, 2007, by period due (in
thousands):
43
Payments Due by Period
---------------------------------------------------
Contractual Obligations Less than 1 -- 3 4 -- 5 After 5
and Outstanding Debt 1 year Years Years Years Total
----------------------------------- --------- -------- ------ -------- --------
Receivable-backed notes payable $ 15 $ 3,355 $ -- $ 89,138 $ 92,508
Lines-of-credit and notes payable 31,700 90,611 551 3,350 126,212
10.50% senior secured notes payable 55,000 -- -- -- 55,000
Junior subordinated debentures -- -- -- 110,827 110,827
Noncancelable operating leases 10,151 15,000 8,269 1,126 34,546
--------- -------- ------ -------- --------
Total contractual obligations $ 96,866 $108,966 $8,820 $204,441 $419,093
========= ======== ====== ======== ========
Payments Due by Period
----------------------------------------------------
Less than 1 -- 3 4 -- 5 After 5
Interest Obligations (1) 1 year Years Years Years Total
----------------------------------- --------- -------- ------- -------- --------
Receivable-backed notes payable $ 5,796 $ 11,070 $10,987 $ 15,458 $ 43,311
Lines-of-credit and notes payable 9,842 9,873 528 4,566 24,809
10.50% senior secured notes payable 5,775 -- -- -- 5,775
Junior subordinated debentures 10,618 21,236 21,236 269,326 322,416
--------- -------- ------- -------- --------
Total contractual obligations $ 32,031 $ 42,179 $32,751 $289,350 $396,311
========= ======== ======= ======== ========
(1) For interest on variable rate debt, we have assumed that the
interest rate remains the same as the rate at June 30, 2007.
We intend to use cash flow from operations, including cash received from
the sale of VOI notes receivable, and cash received from new borrowings under
existing or future debt facilities in order to satisfy the principal payments
due on the contractual obligations. While we believe that we will be able to
meet required debt payments when due, there can be no assurance that this will
be the case.
As noted above, we have $35,000 in letters-of-credit outstanding at June
30, 2007, all of which were issued under the unsecured line-of-credit with
Wachovia Bank, N.A.
We estimate that the 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 $21.2 million as of June 30, 2007.
We estimate that the total cash required to complete our Bluegreen Communities
projects in which sales have occurred to be approximately $80.3 million as of
June 30, 2007. These amounts assume that we are not obligated to develop any
building, project or amenity in which a commitment has not been made through a
sales contract to a customer; however, we anticipate that we will incur such
obligations in the future. We plan to fund these expenditures over the next five
years primarily with available capacity on existing or proposed credit
facilities and cash generated from operations. There can be no assurance that we
will be able to obtain the financing or generate the cash from operations
necessary to complete the foregoing plans or that actual costs will not exceed
those estimated.
We believe that our existing cash, anticipated cash generated from
operations, anticipated new permitted borrowings under existing or proposed
credit facilities and anticipated future sales of notes receivable under the
purchase facilities, and one or more replacement facilities we will seek to put
in place will be sufficient to meet our anticipated working capital, capital
expenditures and debt service requirements for the foreseeable future. We will
be required to renew or replace credit and receivables purchase facilities that
have expired or that will expire in the near term. We will, in the future, also
require additional credit facilities or will be required to issue corporate debt
or equity securities. 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.
44
Our credit facilities, indentures, and other outstanding debt instruments,
and receivables purchase facilities include customary conditions to funding,
eligibility requirements for collateral, cross-default and other acceleration
provisions, certain financial and other affirmative and negative covenants,
including, among others, limits on the incurrence of indebtedness, limits on the
repurchase of securities, 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 June
30, 2007. 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 that is
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 June 30, 2007, that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
45
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Bluegreen Southwest One, L.P., ("Southwest"), a subsidiary of Bluegreen
Corporation, is the developer of the Mountain Lakes subdivision in Texas. In
Cause No. 28006; styled Betty Yvon Lesley et a1 v. Bluff Dale Development
Corporation, Bluegreen Southwest One. L.P.et al. in the 266th Judicial District
Court, Erath County, Texas, the Plaintiffs filed a declaratory judgment action
against Southwest in which they seek to develop their reserved mineral interests
in, on and under the Mountain Lakes subdivision. Plaintiffs' claims are based on
property law, oil and gas law, contract and tort theories. The property owners
association and some of the individual landowners have filed cross actions
against Bluegreen, Southwest and individual directors of the property owners
association related to the mineral rights and related to certain amenities in
the subdivision as described below. On January 17, 2007, the court ruled that
the restrictions placed on the development that prohibited oil and gas
production and development were invalid and not enforceable as a matter of law,
that such restrictions do not prohibit the prior reserved mineral interests of
the Plaintiffs from being developed and that a duty to exercise the right to
lease the minerals to third parties for development exists and has been
breached. The Court further ruled, that Southwest is the sole holder of the
right to lease the minerals to third parties. The order granting the Plaintiffs
motion was severed into a new cause styled Cause No. 28769 Betty Yvon Lesley et
a1 v. Bluff Dale Development Corporation, Bluegreen Southwest One. L.P.et al. in
the 266th Judicial District Court, Erath County, Texas. Southwest has appealed
the trial court's ruling but, at this time, is unable to predict the ultimate
resolution of the litigation. The appeal is styled Bluegreen Southwest One, LP
et al. v. Betty Yvon Lesley et al.; in the 11th Court of Appeals, Eastland,
Texas. Bluegreen does not believe that it has material exposure to the property
owners association based on the cross claim relating to the mineral rights other
than the potential claim for legal fees incurred by the property owners
association. As of June 30, 2007, Bluegreen established a reserve of $1.3
million in connection with the issues raised related to the mineral rights
claims. Separately, one of the amenity lakes in the Mountain Lakes development
did not reach the expected level after construction was completed. Owners of
homesites within the Mountain Lakes subdivision and the Property Owners
Association of Mountain Lakes have asserted claims against Southwest and
Bluegreen regarding such failure as part of the Lesley litigation referenced
above as well as in Cause No. 067-223662-07; Property Owners Association of
Mountain Lakes Ranch, Inc. v. Bluegreen Southwest One, L. P., et al.; in the
67TH Judicial District Court of Tarrant County, Texas. Southwest has been and
continues to investigate the causes and circumstances for the delay of the lake
to fill and currently estimates that the cost of remediating the condition will
be approximately $3.0 million, which was accrued during the year ended December
31, 2006. Additional claims may be pursued against us in the future in
connection with these matters, but it is not possible at this time to estimate
the likelihood of loss or amount of potential exposure with respect to any such
matters.
We filed suit against the general contractor with regard to alleged construction
defects at our Shore Crest Vacation Villas resort in South Carolina; styled
Shore Crest Vacation Villas II Owners Association, Inc., Bluegreen Corporation
vs. Welbro Constructors, S.C., Inc. et al. Case No.: 04-CP-26-500 and Shore
Crest Vacation Villas Owners Association, Inc., Bluegreen Vacations Unlimited,
Inc., as successor to Patten Resorts, Inc. and as successor to Bluegreen
Resorts, Inc. vs. Welbro Constructors Inc. et al. Case No. 04-CP-26-499. Whether
the matter is settled by litigation or by negotiation, it is possible that we
may need to participate financially in some way to correct the construction
deficiencies. We estimate that the total cost of repairs to correct the defects
will range from $4 million to $6 million. We can not predict the extent of the
financial obligation that we may incur.
In Michelle Alamo, Ernest Alamo, Toniann Quinn and Terrance Quinn v. Vacation
Station, LLC, LeisurePath Vacation Club, LeisurePath, Inc., Bluegreen
Corporation, Superior Court of New Jersey, Bergen County, Docket No. L-6716-05,
Civil Action, Plaintiffs filed a purported "Class Action Complaint" on September
23, 2005. The Complaint raises allegations concerning the marketing of the
LeisurePath Travel Services Network product to the public, and, in particular,
New Jersey residents by Vacation Station, LLC, an independent distributor of
travel products. Vacation Station, LLC purchased LeisurePath membership kits
from LeisurePath, Inc.'s Master Distributor, Mini Vacations, Inc. and then sold
the memberships to consumers. The initial Plaintiffs (none of whom actually
bought the Leisure Path product) assert claims for violations of the New Jersey
Consumer Fraud Act, fraud, nuisance, negligence and for equitable relief all
stemming from the sale and marketing by Vacation Station, LLC of the LeisurePath
Travel Services Network. Plaintiffs are seeking the gifts and prizes they were
allegedly told by Vacation Station, LLC that they won as part of the sales
promotion, and that they be given the opportunity to rescind their agreement
with LeisurePath along with a full refund. Plaintiffs further seek punitive
damages, compensatory damages, attorney's fees and treble damages of unspecified
amounts. In February of 2007, the Plaintiffs amended the complaint to add two
additional Plaintiffs/proposed class representatives, Bruce Doxey and Karen
Smith-Doxey.
46
Unlike the initial Plaintiffs who were first contacted by Vacation Station, LLC
some seven (7) months after LeisurePath terminated its relationship with
Vacation Station, LLC and did not purchase LeisurePath products, the Doxeys
purchased a participation in the LeisurePath Travel Services Network. On March
16, 2007, the Court denied a motion filed by Leisure Path and Bluegreen
Corporation to dismiss the Doxeys as parties to the lawsuit. Leisure Path and
Bluegreen Corporation intend to vigorously contest this action. Vacation
Station, LLC and its owner have each filed for bankruptcy protection.
Item 1A. Risk Factors.
There has been a material deterioration in the sub-prime lending markets which
could adversely impact our liquidity and our earnings - We do not perform credit
checks or obtain FICO(R) scores of the purchasers of our VOIs in connection with
our financing of their purchases. However, from time to time we obtain FICO(R)
scores in connection with the sale of certain of our VOI notes receivable, or
otherwise, and we are aware that a significant portion of the vacation ownership
customers we finance are considered "sub-prime borrowers." We believe that as of
May 2007, approximately 30% of VOI borrowers in our serviced loan portfolio had
a FICO score below 620. Although to date we have not experienced an increase in
defaults or delinquencies in our loan portfolio, conditions in the sub-prime
mortgage industry have been deteriorating. If default rates for our borrowers
were to rise, it may increase the provision for loan losses and reduce the value
of our retained interests in notes receivable sold. In addition, it may cause
buyers of, or lenders collateralized by, our VOI notes receivable to reduce the
amount of availability of receivables purchase and credit facilities, or to
increase the interest costs associated with such facilities. In such an event,
the cost of financing may increase and we may not be able to secure financing on
terms acceptable to us, which could adversely affect our earnings, financial
position, and cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not repurchase any of our equity securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934. Our Board of Directors has
adopted and publicly announced a share repurchase program. Repurchases under
such programs from time to time 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 June 30, 2007, 694,500 shares
remained available for purchase under our current repurchase program.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 15, 2007, the Company held its annual meeting of shareholders.
Results of votes with respect to proposals submitted at that meeting are as
follows:
a) The election of three directors for a term of three years expiring
at the 2010 annual meeting of shareholders. Votes recorded, by
nominee, were as follows:
Shares Voted
---------------------------------------------
Nominee For Against Abstain Total
------------------- ---------- ------- --------- ----------
Alan B. Levan 26,149,522 -- 3,672,799 29,822,321
Lawrence A. Cirillo 27,321,425 -- 2,500,896 29,822,321
Mark A. Nerenhausen 27,320,618 -- 2,501,703 29,822,321
The Company's Board of Directors is divided into three classes that
have terms expiring at the Company's Annual Meeting of Shareholders
over the next three years.
Item 6. Exhibits.
Exhibits:
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.
47
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.
48
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: August 9, 2007 By:/s/ JOHN M. MALONEY, JR.
----------------------------------------------------
John M. Maloney, Jr.,
President and Chief Executive Officer
Date: August 9, 2007 By:/s/ ANTHONY M. PULEO
----------------------------------------------------
Anthony M. Puleo,
Senior Vice President, Chief Financial Officer
and Treasurer
Principal Financial Officer)
Date: August 9, 2007 By:/s/ RAYMOND S. LOPEZ
----------------------------------------------------
Raymond S. Lopez,
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
49