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, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-19292
[LOGO]
Bluegreen Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 03-0300793
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4960 Conference Way North, Suite 100,
Boca Raton, Florida 33431
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(Address of principal (Zip Code)
executive offices)
(561) 912-8000
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(Registrant's telephone number, including area code)
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(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. [X] Yes [ ] 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 [ ]
Indicated the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of August 4, 2006, there
were 30,548,385 shares of the registrant's common stock, $.01 par value,
outstanding.
BLUEGREEN CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Balance Sheets at December 31, 2005 and June 30, 2006................... 3
Condensed Consolidated Statements of Income - Three months ended June 30, 2005 and 2006........ 4
Condensed Consolidated Statements of Income - Six months ended June 30, 2005 and 2006.......... 5
Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2005 and 2006...... 6
Notes to Condensed Consolidated Financial Statements........................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 22
Item 4. Controls and Procedures........................................................................ 42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.................................... 43
Item 4. Submission of Matters to a Vote of Security Holders............................................ 43
Item 6. Exhibits....................................................................................... 44
Signatures................................................................................................ 45
TRADEMARKS
The terms "Bluegreen(R)," "Bluegreen Communities(R)," and "Bluegreen
Vacation Club(R)" "Colorful Places To Live And Play(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) at Big Cedar(R)," "The Lodge Alley Inn(TM),"
"Carolina Grande(TM)" "Harbour Lights(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 Crossing(TM),
"Vintage Oaks at the Vineyard(TM), "The Bridges at Preston Crossing(TM): "Saddle
Creek Forest(TM)," "The Settlement at Patriot Ranch(TM)," "Carolina
National(TM)," "Brickshire(TM)," "Golf Club at Brickshire(TM)," and "Preserve at
Jordan Lake(TM)" are trademarks or service marks of Bluegreen Corporation in the
United States.
The term "Big Cedar(R)" is registered in the U.S. Patent and Trademark
Office by Bass Pro Trademarks, LP.
The term "Bass Pro Shops(R)" is 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.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, June 30,
2005 2006
------------ ------------
ASSETS (Unaudited)
Cash and cash equivalents (including restricted cash of approximately $18,321
and $26,818 at December 31, 2005 and June 30, 2006, respectively) ............. $ 84,704 $ 70,637
Contracts receivable, net ........................................................ 27,473 40,654
Notes receivable (net of allowance of approximately $10,869 and $17,518 at
December 31, 2005 and June 30, 2006, respectively) ............................ 127,783 173,231
Prepaid expenses ................................................................. 6,500 11,109
Other assets ..................................................................... 17,156 24,236
Inventory, net ................................................................... 240,969 331,826
Retained interests in notes receivable sold ...................................... 105,696 100,395
Property and equipment, net ...................................................... 79,634 90,479
Intangible assets and goodwill ................................................... 4,328 4,326
------------ ------------
Total assets ........................................................... $ 694,243 $ 846,893
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable ................................................................. $ 11,071 $ 17,566
Accrued liabilities and other .................................................... 43,801 47,139
Deferred income .................................................................. 29,354 45,091
Deferred income taxes ............................................................ 75,404 78,482
Receivable-backed notes payable .................................................. 35,731 56,637
Lines-of-credit and notes payable ................................................ 61,428 141,528
10.50% senior secured notes payable .............................................. 55,000 55,000
Junior subordinated debentures ................................................... 59,280 74,744
------------ ------------
Total liabilities ............................................................. 371,069 516,187
Minority interest ................................................................ 9,508 11,043
Commitments and contingencies
Shareholders' Equity
Preferred stock, $.01 par value, 1,000 shares authorized; none issued ............ -- --
Common stock, $.01 par value, 90,000 shares authorized; 33,193 and 33,298 shares
issued at December 31, 2005 and June 30, 2006, respectively ................... 333 333
Additional paid-in capital ....................................................... 169,684 170,768
Treasury stock, 2,756 common shares at both December 31, 2005 and
June 30, 2006, at cost ........................................................ (12,885) (12,885)
Accumulated other comprehensive income, net of income taxes ...................... 8,575 7,371
Retained earnings ................................................................ 147,959 154,076
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Total shareholders' equity .................................................. 313,666 319,663
------------ ------------
Total liabilities and shareholders' equity ............................. $ 694,243 $ 846,893
============ ============
Note: The condensed consolidated balance sheet at December 31, 2005 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.
3
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
June 30,
---------------------------
2005 2006
------------ ------------
Revenues:
Sales of real estate .......................................................... $ 159,328 $ 141,947
Other resort and communities operations revenue ............................... 18,648 13,620
Interest income ............................................................... 8,282 9,499
Gain on sales of notes receivable ............................................. 4,878 47
Other income, net ............................................................. -- 368
------------ ------------
191,136 165,481
Costs and expenses:
Cost of real estate sales ..................................................... 51,109 49,022
Cost of other resort and communities operations ............................... 19,363 12,937
Selling, general and administrative expenses .................................. 81,117 87,620
Interest expense .............................................................. 4,053 3,526
Provision for loan losses ..................................................... 7,476 --
Other expense, net ............................................................ 2,826 --
------------ ------------
165,944 153,105
------------ ------------
Income before minority interest and provision for income taxes ................... 25,192 12,376
Minority interest in income of consolidated subsidiary ........................... 948 1,677
------------ ------------
Income before provision for income taxes ......................................... 24,244 10,699
Provision for income taxes ....................................................... 9,334 4,119
------------ ------------
Net income ....................................................................... $ 14,910 $ 6,580
============ ============
Net income per common share:
Basic ........................................................................ $ 0.49 $ 0.22
============ ============
Diluted ...................................................................... $ 0.48 $ 0.21
============ ============
Weighted average number of common and common equivalent shares:
Basic ........................................................................ 30,346 30,526
============ ============
Diluted ...................................................................... 31,188 31,054
============ ============
See accompanying notes to condensed consolidated financial statements.
4
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Six Months Ended
June 30,
---------------------------
2005 2006
------------ ------------
Revenues:
Sales of real estate .......................................................... $ 263,349 $ 263,707
Other resort and communities operations revenue ............................... 36,692 30,287
Interest income ............................................................... 16,148 17,672
Gain on sales of notes receivable ............................................. 9,598 552
------------ ------------
325,787 312,218
Costs and expenses:
Cost of real estate sales ..................................................... 83,996 94,244
Cost of other resort and communities operations ............................... 38,999 29,717
Selling, general and administrative expenses .................................. 142,939 161,205
Interest expense .............................................................. 7,634 6,832
Provision for loan losses ..................................................... 12,164 --
Other expense, net ............................................................ 3,684 267
------------ ------------
289,416 292,265
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Income before minority interest and provision for income taxes ................... 36,371 19,953
Minority interest in income of consolidated subsidiary ........................... 1,721 2,699
------------ ------------
Income before provision for income taxes and change in accounting principle ...... 34,650 17,254
Provision for income taxes ....................................................... 13,340 6,643
------------ ------------
Income before cumulative effect of change in accounting principle ................ 21,310 10,611
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 ....................................................................... $ 21,310 $ 6,117
============ ============
Income before cumulative effect of change in accounting principle per common
share:
Basic ......................................................................... $ 0.70 $ 0.35
============ ============
Diluted ....................................................................... $ 0.68 $ 0.34
============ ============
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 ......................................................................... $ 0.70 $ 0.20
============ ============
Diluted ....................................................................... $ 0.68 $ 0.20
============ ============
Weighted average number of common and common equivalent shares:
Basic ......................................................................... 30,332 30,519
============ ============
Diluted ....................................................................... 31,246 31,089
============ ============
See accompanying notes to condensed consolidated financial statements.
5
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------------
2005 2006
------------ ------------
Operating activities:
Net income .................................................................... $ 21,310 $ 6,117
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Cumulative effect of change in accounting principle, net ................ -- 5,678
Non-cash stock compensation expense ..................................... 288 917
Minority interest in income of consolidated subsidiary .................. 1,721 1,515
Depreciation and amortization ........................................... 10,003 8,101
Gain on sales of notes receivable ....................................... (9,623) (9,707)
Loss on disposal of property and equipment .............................. 6 76
Provision for loan losses ............................................... 12,164 25,922
Provision for deferred income taxes ..................................... 13,340 6,643
Interest accretion on retained interests in notes receivable sold ....... (4,362) (5,184)
Proceeds from sales of notes receivable ................................. 76,388 51,789
Proceeds from borrowings collateralized by notes receivable ............. 20,459 29,732
Payments on borrowings collateralized by notes receivable ............... (31,302) (9,989)
Change in operating assets and liabilities:
Contracts receivable ....................................................... (26,311) (12,944)
Notes receivable ........................................................... (85,349) (121,332)
Inventory ................................................................... 21,832 (15,287)
Prepaid expenses and other assets ........................................... (2,266) (9,761)
Accounts payable, accrued liabilities and other ............................ 16,882 15,385
------------ ------------
Net cash provided (used) by operating activities ................................. 35,180 (32,329)
------------ ------------
Investing activities:
Purchases of property and equipment ........................................... (9,719) (13,138)
Installment payments on business acquisition .................................. (500) --
Investments in statutory business trusts ...................................... (1,780) (464)
Cash received from retained interests in notes receivable sold ................ 4,936 14,969
------------ ------------
Net cash (used) provided by investing activities ................................. (7,063) 1,367
------------ ------------
Financing activities:
Borrowings under line-of-credit facilities and other notes payable ............ 11,219 35,169
Payments under line-of-credit facilities and other notes payable .............. (48,081) (31,225)
Payments on 10.50% senior secured notes payable ............................... (55,000) --
Proceeds from issuance of junior subordinated debentures ...................... 59,280 15,464
Payments of debt issuance costs ............................................... (2,629) (2,686)
Proceeds from exercise of stock options ....................................... 746 173
------------ ------------
Net cash (used) provided by financing activities ................................. (34,465) 16,895
------------ ------------
Net decrease in cash and cash equivalents ........................................ (6,348) (14,067)
Cash and cash equivalents at beginning of period ................................. 100,565 84,704
------------ ------------
Cash and cash equivalents at end of period ....................................... 94,217 70,637
Restricted cash and cash equivalents at end of period ............................ (20,877) (26,818)
------------ ------------
Unrestricted cash and cash equivalents at end of period .......................... $ 73,340 $ 43,819
============ ============
See accompanying notes to condensed consolidated financial statements.
6
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------------
2005 2006
------------ ------------
Supplemental schedule of non-cash operating, investing
and financing activities:
Inventory acquired through financing ....................................... $ 11,710 $ 71,447
============ ============
Inventory acquired through foreclosure or deedback in lieu of
foreclosure .............................................................. $ 5,560 $ --
============ ============
Property and equipment acquired through financing .......................... $ 279 $ 4,460
============ ============
Retained interests in notes receivable sold ................................ $ 14,449 $ 6,479
============ ============
Change in net unrealized gains in retained interests in notes
receivable sold .......................................................... $ 39 $ (1,995)
============ ============
See accompanying notes to condensed consolidated financial statements.
7
BLUEGREEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(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 six months
ended June 30, 2006, are not necessarily indicative of the results to be
expected for the year ending December 31, 2006. For further information, refer
to our audited consolidated financial statements for the year ended December 31,
2005, which are included in our 2005 Annual Report on Form 10-K.
Organization
We provide leisure products and lifestyle choices 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 many of our resorts
entitle the buyer to use resort accommodations through an annual or biennial
allotment of "points" which represent their ownership and beneficial rights in
perpetuity in our Bluegreen Vacation Club (supported by an underlying deeded
vacation ownership interest being 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 by a third-party, worldwide vacation ownership exchange network.
We are currently marketing and selling VOIs in 21 resorts located in the United
States and Aruba, 19 of which have active sales offices. We also sell VOIs at
seven off-site sales offices located in the United States. Our residential
communities business ("Bluegreen Communities") acquires, develops and subdivides
property and markets residential land homesites, the majority of which are sold
directly to retail customers who seek to build a home in a high quality
residential setting, in some cases on properties featuring a golf course and
other related amenities. During the six months ended June 30, 2006, sales
generated by Bluegreen Resorts comprised approximately 63% of our total sales of
real estate while sales generated by Bluegreen Communities comprised
approximately 37% of our total sales of real estate. Our other resort and
communities operations revenues consist primarily of mini-vacation package
sales, vacation ownership tour sales, resort property management services,
resort title services, resort amenity operations, 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.
Principles of Consolidation
Our condensed consolidated financial statements include the accounts of
all of our wholly-owned subsidiaries and entities in which we hold a controlling
financial interest. The only non-wholly owned subsidiary that we consolidate is
Bluegreen/Big Cedar Vacations, LLC (the "Joint Venture"), as we hold a 51%
equity interest in the Joint Venture, have an active role as the day-to-day
manager of the Joint Venture's activities and have majority voting control of
the Joint Venture's management committee. Additionally, we do not consolidate
our wholly-owned statutory business trusts formed to issue trust preferred
securities as these entities are each variable interest entities in which we are
not the primary beneficiary as defined by Financial Accounting Standards Board
("FASB") Interpretation No. 46R. The statutory business trusts are accounted for
under the equity method of accounting. We have eliminated all significant
intercompany balances and transactions.
Use of Estimates
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.
8
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.
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. There were no anti-dilutive stock options
during the three and six months ended June 30, 2005.
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,
------------------ -----------------
2005 2006 2005 2006
------- ------- ------- -------
Basic and diluted earnings per share - numerator:
Net income ....................................... $14,910 $ 6,580 $21,310 $ 6,117
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted-average shares .......................... 30,346 30,526 30,332 30,519
------- ------- ------- -------
Effect of dilutive securities:
Stock options .................................... 842 528 914 570
------- ------- ------- -------
Denominator for diluted earnings per share - adjusted
weighted-average shares .......................... 31,188 31,054 31,246 31,089
======= ======= ======= =======
Basic earnings per common share ...................... $ 0.49 $ 0.22 $ 0.70 $ 0.20
======= ======= ======= =======
Diluted earnings per common share .................... $ 0.48 $ 0.21 $ 0.68 $ 0.20
======= ======= ======= =======
Retained Interests in Notes Receivable Sold
When we sell our notes receivable either pursuant to our vacation
ownership receivables purchase facilities (more fully described in Note 2) or
through term securitizations, we evaluate whether or not such transfers should
be accounted for as a sale pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, ("SFAS No. 140") and related
interpretations. The evaluation of sale treatment under SFAS No. 140 involves
legal assessments of the transactions, which include determining whether the
transferred assets have been isolated from us (i.e. put presumptively beyond our
reach and our creditors, even in bankruptcy or other receivership), determining
whether each transferee has the right to pledge or exchange the assets it
received, and ensuring that we do not maintain effective control over the
transferred assets through either an agreement that (1) both entitles and
obligates us to repurchase or redeem the assets before their maturity or (2)
provides us with the ability to unilaterally cause the holder to return the
assets (other than through a cleanup call).
In connection with such transactions, we retain subordinated tranches,
rights to excess interest spread and servicing rights, all of which are retained
interests in the notes receivable sold. Gain or loss on the sale of the
receivables depends in part on the allocation of the previous carrying amount of
the financial assets involved in the transfer between the assets sold and the
retained interests based on their relative fair value at the date of transfer.
We consider our retained interests in notes receivable sold as
available-for-sale investments and, accordingly, carry them at fair value in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." 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.
9
Stock-Based Compensation
Effective January 1, 2006, we adopted the provisions of SFAS No. 123
(revised 2004), Share-Based Payment, ("SFAS No. 123R") for our share-based
compensation plans. We previously accounted for these plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, ("APB 25") and related
interpretations and disclosure requirements established by SFAS No. 123,
Accounting for Stock-based Compensation, as amended by SFAS No. 148, Accounting
for Stock Based Compensation--Transition and Disclosure. Under APB 25,
compensation expense was generally not recorded in earnings for our stock-based
options granted under the Bluegreen Corporation 1995 Stock Incentive Plan, 1998
Non-Employee Director Stock Option Plan, or the Bluegreen Corporation 2005 Stock
Incentive Plan (collectively, the "Plans"). The pro forma effects on net income
and earnings per share for the awards issued under the Plans were instead
previously disclosed in a footnote to the financial statements. Under SFAS No.
123R, all share-based compensation is measured at the grant date, based on the
fair value of the award, and is recognized as an expense in earnings over the
requisite service period.
We adopted SFAS No. 123R using the modified prospective method. Under this
transition method, for all share-based awards granted prior to January 1, 2006
that were outstanding as of that date, compensation cost is recognized for the
unvested portion over the remaining requisite service period, using the
grant-date fair value measured under the original provisions of SFAS No. 123 for
pro forma disclosure purposes. Compensation costs will also be recognized for
any awards issued, modified, repurchased, or canceled after January 1, 2006.
We utilized the Black-Scholes model for calculating the fair value pro
forma disclosures under SFAS No. 123 and will continue to use this model, which
is an acceptable valuation approach under SFAS No. 123R. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, this model requires the input of subjective assumptions, including the
expected price volatility of the underlying stock. Projected data related to the
expected volatility and expected life of stock options is based upon historical
and other information. Changes in these subjective assumptions can materially
affect the fair value of the estimate, and therefore, the existing valuation
models do not provide a precise measure of the fair value of our employee stock
options.
SFAS No. 123R also requires us to estimate forfeitures in calculating the
expense relating to stock-based compensation as opposed to accounting for
forfeitures as they occur, which was allowed under SFAS No. 123. We adjusted for
this effect with respect to unvested options as of January 1, 2006 in the
stock-based compensation expense recognized, which is recorded within selling,
general and administrative expense on our condensed consolidated statement of
income. This adjustment was not recorded as a cumulative effect adjustment
because no compensation cost was recognized prior to the adoption of SFAS No.
123R. In addition, SFAS No. 123R requires us to reflect the tax savings
resulting from tax deductions in excess of expense reflected in its financial
statements as a financing cash flow rather than as an operating cash flow as in
prior periods.
Total compensation costs related to stock-based compensation charged
against income during the three and six months ended June 30, 2006 were $0.4
million and $0.9 million, respectively. There were no stock options granted to
our employees or non-employee directors during the six months ended June 30,
2005 or 2006. On July 3, 2006, stock options to acquire an aggregate of
approximately 43,000 shares of our common stock were granted to certain of our
non-employee directors at an exercise price of $11.43, which was equal to the
closing price of our common stock on the date of grant. On July 19, 2006 our
Board of Directors granted stock options for 540,000 shares of our common stock
to our Chairman and Vice Chairman and the Company's senior management at an
exercise price of $12.07, which was equal to the closing price of our common
stock on the date of grant.
SFAS No. 123R requires companies to continue to provide the pro forma
disclosures required by SFAS No. 123 for all periods presented in which
share-based payments were accounted for under the intrinsic value method of APB
25. The following table illustrates the effect on net income and earnings per
share as if we had applied the fair-value recognition provisions of SFAS No. 123
to all of our share-based compensation awards for periods prior to the adoption
of SFAS No. 123R (in thousands, except per share data):
10
Three Months Six Months
Ended Ended
June 30, 2005 June 30, 2005
------------- -------------
(Pro Forma) (Pro Forma)
Net income .............................................. $ 14,910 $ 21,310
Add: Total stock-based compensation expense included in
the determination of reported net income, net of
related tax effects .................................. 177 177
Deduct: Total stock-based compensation expense
determined under the fair value-based method for
all awards, net of related tax effects ............... (238) (299)
------------- -------------
Pro forma net income $ 14,849 $ 21,188
============= =============
Earnings per share:
Basic .................................................. $ 0.49 $ 0.70
------------- -------------
Diluted ................................................ $ 0.48 $ 0.68
============= =============
Pro forma earnings per share:
Basic .................................................. $ 0.49 $ 0.70
============= =============
Diluted ................................................ $ 0.48 $ 0.68
============= =============
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,
-------------------- -------------------
2005 2006 2005 2006
-------- -------- -------- --------
Net income ................................................ $ 14,910 $ 6,580 $ 21,310 $ 6,117
Change in net unrealized gains on retained interests
in notes receivable sold, net of income taxes ............. (434) (2,058) 24 (1,204)
-------- -------- -------- --------
Total comprehensive income ................................ $ 14,476 $ 4,522 $ 21,334 $ 4,913
======== ======== ======== ========
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. This statement amends SFAS No. 66, Accounting
for Sales of Real Estate, and SFAS No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, in association with the issuance of
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 04-2, Accounting for Real Estate Time-Sharing Transactions.
SFAS No. 152 was issued to address the diversity in practice resulting from a
lack of guidance specific to the timeshare industry. Among other things, the new
standard addresses the treatment of sales incentives provided by a seller to a
buyer to consummate a transaction, the calculation of and presentation of
uncollectible notes receivable, the recognition of changes in inventory cost
estimates, recovery or repossession of VOIs, selling and marketing costs,
operations during holding periods, developer subsidies to property owners'
associations and upgrade and reload transactions. Restatement of previously
reported financial statements is not permitted. Accordingly, as a result of the
adoption of SFAS No. 152, our financial statements for periods beginning on or
after January 1, 2006 are not comparable, in all respects, with those prepared
for periods ending prior to January 1, 2006.
Many sellers of timeshare interests provide incentives to customers in
connection with the purchase of a VOI. Under SFAS No. 152, the value of such
incentives and other similarly treated items is separated from revenue from the
sale of VOIs and recorded on a different line item within the statements of
income, in our case other resort and communities operations revenue.
Furthermore, SFAS No. 152 requires that incentives and other similarly treated
items such as cash credits earned through our Sampler program be considered in
calculating the buyer's down payment toward the buyer's commitment, as defined
in SFAS No. 152, in purchasing the VOI. Our Sampler Program provides purchasers
with an opportunity to utilize our vacation ownership product during a one year
trial period. In the event the Sampler purchaser subsequently purchases a
vacation ownership interest from us, a portion of the amount paid for their
Sampler Package is credited toward the down payment on the subsequent purchase.
Under SFAS No. 152, the credit given is treated similarly
11
to a sales incentive. If after considering the sales incentive the required
buyer's commitment amount, defined as 10% of sales value, is not met, the VOI
revenue and related cost of sales and direct selling costs are deferred and
recognized under the installment method until the buyer's commitment test is
satisfied, generally through the receipt of required mortgage note payments from
the buyer. The net deferred VOI revenue and related costs are recorded as a
component of deferred income in the accompanying balance sheet as of June 30,
2006. Prior to the adoption of SFAS No. 152, sales incentives were not recorded
apart from VOI revenue and were not considered in determining the customer down
payment required in the buyer's commitment in purchasing the VOIs.
SFAS No. 152 also amends the relative sales value method of recording VOI
cost of sales. Specifically, consideration is now given not only to the costs to
build or acquire a project and the total revenue expected to be earned on a
project, but also to the sales of recovered vacation ownership interests
reacquired on future cancelled or defaulted sales. The cost of VOI sales is
calculated by estimating these future costs and recoveries. Prior to the
adoption of SFAS No. 152, we did not include the recovery of VOIs in our
projected revenues in determining the related cost of the VOIs sold.
SFAS No. 152 changes the treatment of losses on vacation ownership notes
and contracts receivable and provides specific guidance on methods to estimate
losses. Specifically, SFAS No. 152 requires that the estimated losses on
originated mortgages exclude an estimate for the value of recoveries as the
recoveries are to be considered in inventory costing, as described above. In
addition, the standard requires a change in the classification of our provision
for loan losses for vacation ownership receivables that were historically
recorded as an expense, requiring that such amount be reflected as a reduction
of VOI sales. Furthermore, if we sell our vacation ownership notes receivables
in a transaction that qualifies for off-balance sheet sales treatment under SFAS
No. 140, the associated allowance for loan losses related to the sold
receivables is reversed and reflected as an increase to VOI sales. Prior to the
adoption of SFAS No. 152, the allowance on sold receivables was recorded as a
component of the gain on sale.
Under SFAS No.152, rental operations, including the usage of our Sampler
program, are accounted for as incidental operations whereby incremental costs in
excess of incremental revenue are charged to expense as incurred. Conversely,
incremental revenue in excess of incremental costs is recorded as a reduction to
the cost of unsold VOIs. Incremental costs include costs that have been incurred
by us during the holding period of the unsold VOIs, such as developer subsidies
and maintenance fees. During the three and six months ended June 30, 2006, all
of our rental revenue and Sampler revenue recognized was recorded as an off-set
to cost of other resort and communities operations revenue as such amounts were
less than the incremental cost. Prior to the adoption of SFAS No. 152, rental
revenues were separately presented in the consolidated statements of income as a
component of other resort and communities operations revenue and a portion of
Sampler proceeds were deferred until the buyer purchased a VOI or the Sampler
usage period expired.
The adoption of SFAS No. 152 on January 1, 2006 resulted in a net charge
of $4.5 million, which is presented as a cumulative effect of change in
accounting principle, net of the related tax benefit and the charge related to
minority interest.
Recent Accounting Pronouncements
In March 2006, the Financial Accounting Standards Board issued SFAS No.
156, Accounting for Servicing of Financial Assets an amendment of FASB Statement
No. 140, which amends SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, ("SFAS No. 140"). SFAS No.
156 changes SFAS No. 140 by requiring that Mortgage Servicing Rights ("MSRs") be
initially recognized at their fair value and by providing the option to either:
(1) carry MSRs at fair value with changes in fair value recognized in earnings;
or (2) continue recognizing periodic amortization expense and assess the MSRs
for impairment as originally required by SFAS No. 140. This option may be
applied by class of servicing asset or liability. SFAS No. 156 is effective for
all separately recognized servicing assets and liabilities acquired or issued
after the beginning of an entity's fiscal year that begins after September 15,
2006, with early adoption permitted. The Company will adopt SFAS No. 156
effective January 1, 2007. We have not yet completed our analysis of the impact
this Interpretation will have on our financial condition, results of operations,
cash flows or disclosures.
In July 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes. This
Interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This Interpretation also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The Interpretation is effective for fiscal
years beginning after December 15, 2006. We have not yet completed our analysis
of the impact this Interpretation will have on our financial condition, results
of operations, cash flows or disclosures.
12
2. Sales of Notes Receivable
On December 28, 2005, BB&T Capital Markets, a division of Scott &
Stringfellow, Inc., consummated a $203.8 million private offering and sale of
vacation ownership receivable-backed securities (the "2005 Term
Securitization"). In addition, the 2005 Term Securitization allowed for us to
sell an additional $35.3 million in aggregate principal of our qualifying
vacation ownership receivables (the "Pre-funded Receivables"). On December 29,
2005, we sold $16.7 million in Pre-funded Receivables. On March 1, 2006, we sold
the $18.6 million balance of Pre-funded Receivables.
On March 28, 2006, we sold $22.3 million in vacation ownership receivables
pursuant to a vacation ownership receivables purchase facility (the "2006-A GE
Purchase Facility") with General Electric Real Estate ("GE"). In connection with
this transaction, we recognized an aggregate gain of $3.4 million. On May 23,
2006, we sold an additional $16.6 million in vacation ownership receivables
pursuant to the 2006-A GE Purchase Facility. In connection with this
transaction, we recognized an aggregate gain of $2.7 million. 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 essentially
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, 2006, the remaining availability under the 2006-A GE Purchase
Facility was $89.9 million, subject to eligibility requirements and fulfillment
of conditions precedent.
Sales of notes receivable under the above mentioned transactions were as
follows (in millions):
Aggregate Principal
Balance of Notes Initial Fair Value of
Sale Facility Receivable Purchase Price Gain Recognized Retained 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
====== ====== ===== =====
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 ranging from 14.0%
to 9.0% per annum as the portfolios mature; loss severity rates ranging from
35.0% to 71.3%; default rates ranging from 10.0% to 1.0% per annum as the
portfolios mature; and a discount rate of 9.0%.
As a result of adopting 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 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.
3. Lines-of-Credit and Receivable-Backed Notes Payable
In February 2006, we increased our revolving acquisition, development and
construction credit facility for Bluegreen Resorts ("The GMAC AD&C Facility")
with GMAC Residential Funding Corporation ("GMAC RFC") from $75.0 million to
$150.0 million. The borrowing period 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. Indebtedness under
the $150.0 million facility bears interest at 30-day LIBOR plus 4.50% (9.80% at
June 30, 2006).
In February 2006, GMAC RFC extended the borrowing period to February 15,
2008 and the maturity date to February 15, 2015 on Bluegreen's existing $75.0
million revolving vacation ownership receivables credit facility ("The GMAC
Receivables Facility"). This facility is used to borrow funds collateralized by
our eligible vacation ownership receivables.
In March 2006, we borrowed $18.2 million under an existing acquisition and
development credit facility with GMAC RFC ("The GMAC Communities Facility") in
connection with the acquisition by Bluegreen Communities of approximately 1,580
acres of land in Grayson County, Texas, for a total purchase price of $26.1
million. In addition to the funds borrowed in connection with the land purchase,
we borrowed an additional $9.0 million for general corporate purposes. In April
2006, we borrowed $19.0 million under the same facility in connection with the
acquisition by Bluegreen Communities of approximately 3,100 acres of land in
Comal, Texas, for a total purchase price of $27.3 million. In addition to the
funds borrowed in connection with the land purchase, we borrowed an additional
$9.0 million for general corporate purposes.
13
In May 2006, we borrowed $4.6 million from Wachovia Bank, NA in connection
with Bluegreen Resorts' acquisition of an existing building to be converted into
a sales preview center in Sevierville, Tennessee, for a total purchase price of
$5.5 million. We also borrowed $13.7 million under the GMAC AD&C Facility in
connection with the acquisition by Bluegreen Resorts of land in Las Vegas,
Nevada, for a total purchase price of $16.1 million, for development of a new
resort.
In June 2006, we executed agreements for a $137.5 million vacation
ownership receivables purchase facility (the "BB&T Purchase Facility") with
Branch Banking and Trust Company ("BB&T"). While ownership of the receivables
was transferred for legal purposes, the transfer of the receivables under the
facility will be 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 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 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 BB&T Purchase Facility, a variable
purchase price of approximately 85.0% 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 the 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 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 through May 2008, subject to
eligibility requirements and satisfaction of conditions precedent.
In June 2006, we borrowed $15.0 million under the GMAC Communities
Facility for general corporate purposes. We also borrowed $2.0 million and
$875,000 under the GMAC AD&C Facility in connection with the development of
Fountains Resort and Carolina Grande Resort, respectively. We also financed
$12.9 million of the total $15.2 million purchase price of the first phase of a
resort property in Williamsburg, Virginia.
Total interest expense capitalized to construction in progress was $2.4
million and $4.7 million for the three and six months ended June 30, 2005,
respectively, and $3.5 million and $5.8 million for the three and six months
ended June 30, 2006, 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 April 24, 2006, one of the Trusts, Bluegreen Statutory Trust IV ("BST
IV") issued $15.0 million of trust preferred securities. BST IV 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 10.13% through June 30, 2011,
and thereafter at a variable rate of interest, per annum, reset quarterly, equal
to the 3-month LIBOR plus 4.85% until the scheduled maturity date of June 30,
2036. 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 invested $464,000 to BST IV in exchange for its common securities, all of
which are owned by us. Those proceeds were also used to purchase an identical
amount of junior subordinated debentures from us. The terms of BST IV's common
securities are nearly identical to the trust preferred securities. The issuances
of trust preferred securities were part of a larger pooled trust securities
offering which was not registered under the Securities Act of 1933. Proceeds
were used for general corporate purposes and debt repayment.
14
We had the following junior subordinated debentures outstanding at June
30, 2006 (dollars in thousands):
Outstanding
Amount of Initial Fixed Variable Beginning
Junior Equity Interest Interest Optional
Subordinated To Issue Rate Rate Redemption Maturity
Trust Debentures Trust Date (1) (2) Date Date
-----------------------------------------------------------------------------------------------------
Bluegreen Statutory 3-month
Trust I LIBOR
$23,196 $ 696 3/15/05 9.160% + 4.90% 3/30/10 3/30/35
Bluegreen Statutory 3-month
Trust II LIBOR
25,774 774 5/04/05 9.158% + 4.85% 7/30/10 7/30/35
Bluegreen Statutory 3-month
Trust III LIBOR
10,310 310 5/10/05 9.193% + 4.85% 7/30/10 7/30/35
Bluegreen Statutory 3-month
Trust IV LIBOR
15,464 464 4/24/06 10.130% + 4.85% 6/30/11 6/30/36
----------------------
$74,744 $ 2,244
======================
(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.
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 June 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 June 26, 2005 of approximately $1.4 million.
At June 30, 2006, $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
Bluegreen/Big Cedar Vacations, LLC, Bluegreen Properties N.V., Resort Title
Agency, Inc., any special purpose finance subsidiary, any subsidiary which is
formed and continues to operate for the limited purpose of holding a real estate
license and acting as a broker, and certain other subsidiaries which have
individually less than $50,000 of assets (collectively, "Non-Guarantor
Subsidiaries"). Each of the note guarantees covers the full amount of the Notes
and each of the Subsidiary Guarantors is 100% owned, directly or indirectly by
us. Supplemental financial information for Bluegreen Corporation, its combined
Non-Guarantor Subsidiaries and its combined Subsidiary Guarantors is presented
below:
15
CONDENSED CONSOLIDATING BALANCE SHEETS
(In thousands)
December 31, 2005
----------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents ........................ $ 55,708 $ 15,443 $ 13,553 $ -- $ 84,704
Contracts receivable, net ........................ -- 1,801 25,672 -- 27,473
Intercompany receivable .......................... 92,641 -- -- (92,641) --
Notes receivable, net ............................ -- 48,294 79,489 -- 127,783
Inventory, net ................................... -- 17,857 223,112 -- 240,969
Retained interests in notes receivable sold ...... -- 105,696 -- -- 105,696
Property and equipment, net ...................... 14,569 1,330 63,735 -- 79,634
Investments in subsidiaries ...................... 265,023 -- 3,230 (268,253) --
Other assets ..................................... 4,028 4,666 19,290 -- 27,984
----------- ------------- ---------- ------------ ------------
Total assets ................................. $ 431,969 $ 195,087 $ 428,081 $ (360,894) $ 694,243
=========== ============= ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other . $ 20,214 $ 15,077 $ 48,935 $ -- $ 84,226
Intercompany payable ............................ -- 4,563 88,078 (92,641) --
Deferred income taxes ........................... (21,798) 41,824 55,378 -- 75,404
Lines-of-credit and notes payable ............... 5,607 27,064 64,488 -- 97,159
10.50% senior secured notes payable ............. 55,000 -- -- -- 55,000
Junior subordinated debentures .................. 59,280 -- -- -- 59,280
----------- ------------- ---------- ------------ ------------
Total liabilities ............................ 118,303 88,528 256,879 (92,641) 371,069
Minority interest ............................... -- -- -- 9,508 9,508
Total shareholders' equity ...................... 313,666 106,559 171,202 (277,761) 313,666
----------- ------------- ---------- ------------ ------------
Total liabilities and shareholders' equity ... $ 431,969 $ 195,087 $ 428,081 $ (360,894) $ 694,243
=========== ============= ========== ============ ============
June 30, 2006
(Unaudited)
----------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
ASSETS
Cash and cash equivalents ........................ $ 32,332 $ 16,934 $ 21,371 $ -- $ 70,637
Contracts receivable, net ........................ -- 2,112 38,542 -- 40,654
Intercompany receivable .......................... 148,685 2,085 -- (150,770) --
Notes receivable, net ............................ -- 85,475 87,756 -- 173,231
Inventory, net ................................... -- 16,537 315,289 -- 331,826
Retained interests in notes receivable sold ...... -- 100,395 -- -- 100,395
Property and equipment, net ...................... 16,782 1,119 72,578 -- 90,479
Investments in subsidiaries ...................... 266,063 -- 3,230 (269,293) --
Other assets ..................................... 6,533 7,666 25,472 -- 39,671
----------- ------------- ---------- ------------ ------------
Total assets ................................. $ 470,395 $ 232,323 $ 564,238 $ (420,063) $ 846,893
=========== ============= ========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities and other . $ 34,790 $ 20,614 $ 54,392 $ -- $ 109,796
Intercompany payable ............................ -- -- 150,770 (150,770) --
Deferred income taxes ........................... (18,633) 43,647 53,468 -- 78,482
Lines-of-credit and notes payable ............... 4,831 52,142 141,192 -- 198,165
10.50% senior secured notes payable ............. 55,000 -- -- -- 55,000
Junior subordinated debentures .................. 74,744 -- -- -- 74,744
----------- ------------- ---------- ------------ ------------
Total liabilities ............................ 150,732 116,403 399,822 (150,770) 516,187
Minority interest ............................... -- -- -- 11,043 11,043
Total shareholders' equity ...................... 319,663 115,920 164,416 (280,336) 319,663
----------- ------------- ---------- ------------ ------------
Total liabilities and shareholders' equity ... $ 470,395 $ 232,323 $ 564,238 $ (420,063) $ 846,893
=========== ============= ========== ============ ============
16
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three Months Ended June 30, 2005
----------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................ $ -- $ 13,491 $ 145,837 $ -- $ 159,328
Other resort and communities operations revenue . -- 3,270 15,378 -- 18,648
Management fees ................................. 16,772 -- -- (16,772) --
Equity income from subsidiaries ................. 13,008 -- -- (13,008) --
Interest income ................................. 529 4,259 3,494 -- 8,282
Gain on sales of notes receivable ............... -- 4,878 -- -- 4,878
----------- ------------- ---------- ------------ ------------
30,309 25,898 164,709 (29,780) 191,136
----------- ------------- ---------- ------------ ------------
COSTS AND EXPENSES
Cost of real estate sales ....................... -- 3,847 47,262 -- 51,109
Cost of other resort and communities operations . -- 1,311 18,052 -- 19,363
Management fees ................................. -- 301 16,471 (16,772) --
Selling, general and administrative expenses .... 10,941 6,843 63,333 -- 81,117
Interest expense ................................ 1,487 1,135 1,431 -- 4,053
Provision for loan losses ....................... -- 5,210 2,266 -- 7,476
Other expense, net .............................. 1,798 892 136 -- 2,826
----------- ------------- ---------- ------------ ------------
14,226 19,539 148,951 (16,772) 165,944
----------- ------------- ---------- ------------ ------------
Income before minority interest and provision
for income taxes .............................. 16,083 6,359 15,758 (13,008) 25,192
Minority interest in income of consolidated
subsidiary ...................................... -- -- -- 948 948
----------- ------------- ---------- ------------ ------------
Income before provision for income taxes ........ 16,083 6,359 15,758 (13,956) 24,244
Provision for income taxes ...................... 1,173 2,088 6,073 -- 9,334
----------- ------------- ---------- ------------ ------------
Net income ...................................... $ 14,910 $ 4,271 $ 9,685 $ (13,956) $ 14,910
=========== ============= ========== ============ ============
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) (411) -- 368
----------- ------------- ---------- ------------ ------------
19,211 22,875 141,297 (17,902) 165,481
----------- ------------- ---------- ------------ ------------
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 69,283 -- 87,620
Interest expense ................................ 28 779 2,719 -- 3,526
----------- ------------- ---------- ------------ ------------
10,793 13,355 143,213 (14,256) 153,105
----------- ------------- ---------- ------------ ------------
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 .................................. 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
=========== ============= ========== ============ ============
17
Six Months Ended June 30, 2005
----------------------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Eliminations Consolidated
----------- ------------- ---------- ------------ ------------
REVENUES
Sales of real estate ............................ $ -- $ 23,047 $ 240,302 $ -- $ 263,349
Other resort and communities operations revenue . -- 6,470 30,222 -- 36,692
Management fees ................................. 28,310 -- -- (28,310) --
Equity income from subsidiaries ................. 19,091 -- -- (19,091) --
Interest income ................................. 735 8,491 6,922 -- 16,148
Gain on sales of notes receivable ............... -- 9,598 -- -- 9,598
----------- ------------- ---------- ------------ ------------
48,136 47,606 277,446 (47,401) 325,787
----------- ------------- ---------- ------------ ------------
COSTS AND EXPENSES
Cost of real estate sales ....................... -- 6,427 77,569 -- 83,996
Cost of other resort and communities operations . -- 2,418 36,581 -- 38,999
Management fees ................................. -- 565 27,745 (28,310) --
Selling, general and administrative expenses .... 21,043 11,674 110,222 -- 142,939
Interest expense ................................ 2,661 2,045 2,928 -- 7,634
Provision for loan losses ....................... -- 9,898 2,266 -- 12,164
Other expense (income), net ..................... 1,752 1,687 245 -- 3,684
----------- ------------- ---------- ------------ ------------
25,456 34,714 257,556 (28,310) 289,416
----------- ------------- ---------- ------------ ------------
Income before minority interest and provision
for income taxes .............................. 22,680 12,892 19,890 (19,091) 36,371
Minority interest in income of consolidated
subsidiary .................................... -- -- -- 1,721 1,721
----------- ------------- ---------- ------------ ------------
Income before provision for income taxes ........ 22,680 12,892 19,890 (20,812) 34,650
Provision for income taxes ...................... 1,370 4,305 7,665 -- 13,340
----------- ------------- ---------- ------------ ------------
Net income ...................................... $ 21,310 $ 8,587 $ 12,225 $ (20,812) $ 21,310
=========== ============= ========== ============ ============
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
----------- ------------- ---------- ------------ ------------
29,390 42,265 268,977 (28,414) 312,218
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 13,376 127,734 -- 161,205
Interest expense ................................ 1,016 1,549 4,267 -- 6,832
Other expense (income), net ..................... (1,003) 383 887 -- 267
----------- ------------- ---------- ------------ ------------
20,108 25,576 273,932 (27,351) 292,265
----------- ------------- ---------- ------------ ------------
Income before minority interest and provision
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
=========== ============= ========== ============ ============
18
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, 2005
-------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------- ---------- ------------
Operating activities:
Net cash (used) provided by operating activities ............... $ (16,930) $ 1,462 $ 50,648 $ 35,180
----------- ------------- ---------- ------------
Investing activities:
Purchases of property and equipment ........................... (442) (53) (9,224) (9,719)
Installment payments on business acquisition .................. -- -- (500) (500)
Investment in statutory business trust ........................ (1,780) -- -- (1,780)
Cash received from retained interests in notes receivable sold -- 4,936 -- 4,936
----------- ------------- ---------- ------------
Net cash (used) provided by investing activities ............... (2,222) 4,883 (9,724) (7,063)
----------- ------------- ---------- ------------
Financing activities:
Borrowings under line-of-credit facilities and notes payable .. -- -- 11,219 11,219
Payments under line-of-credit facilities and notes payable .... (466) (851) (46,764) (48,081)
Redemption of 10.50% senior secured notes payable ............. (55,000) -- -- (55,000)
Proceeds from issuance of junior subordinated debentures ...... 59,280 -- -- 59,280
Payment of debt issuance costs ................................ (1,814) (37) (778) (2,629)
Proceeds from exercise of stock options ....................... 746 -- -- 746
----------- ------------- ---------- ------------
Net cash provided (used) by financing activities ............... 2,746 (888) (36,323) (34,465)
----------- ------------- ---------- ------------
Net(decrease)increase in cash and cash equivalents ............. (16,406) 5,457 4,601 (6,348)
Cash and cash equivalents at beginning of period ............... 70,256 18,793 11,516 100,565
----------- ------------- ---------- ------------
Cash and cash equivalents at end of period ..................... 53,850 24,250 16,117 94,217
Restricted cash and cash equivalents at end of period .......... (173) (6,709) (13,995) (20,877)
----------- ------------- ---------- ------------
Unrestricted cash and cash equivalents at end of period ........ $ 53,677 $ 17,541 $ 2,122 $ 73,340
=========== ============= ========== ============
Six Months Ended June 30, 2006
-------------------------------------------------------
Combined Combined
Bluegreen Non-Guarantor Subsidiary
Corporation Subsidiaries Guarantors Consolidated
----------- ------------- ---------- ------------
Operating activities:
Net cash (used) provided by operating activities ............... $ (32,689) $ (11,855) $ 12,215 $ (32,329)
----------- ------------- ---------- ------------
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:
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 (1,593) 4,154 16,895
----------- ------------- ---------- ------------
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
=========== ============= ========== ============
19
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 sold, typically on a retail basis as homesites. Disclosures for our business
segments are as follows (in thousands):
Bluegreen Bluegreen
Resorts Communities Totals
--------- ----------- --------
For the three months ended June 30, 2005
Sales of real estate .......................... $ 97,019 $ 62,309 $159,328
Other resort and communities operations revenue 15,656 2,992 18,648
Depreciation expense .......................... 1,731 425 2,156
Field operating profit ........................ 17,288 17,955 35,243
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 ........................ 2,976 14,577 17,553
For the six months ended June 30, 2005
Sales of real estate .......................... $ 162,663 $ 100,686 $263,349
Other resort and communities operations revenue 32,218 4,474 36,692
Depreciation expense .......................... 3,407 843 4,250
Field operating profit ........................ 27,674 25,688 53,362
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 ........................ 6,112 24,356 30,468
Net inventory by business segment:
December 31, 2005 June 30, 2006
----------------- ------------------
Bluegreen Resorts ... ........ $173,338 $215,690
Bluegreen Communities ........ 67,631 116,136
-------- --------
Total $240,969 $331,826
======== ========
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,
---------------------- ----------------------
2005 2006 2005 2006
---------- ---------- ---------- ----------
Field operating profit for reportable segments . $ 35,243 $ 17,553 $ 53,362 $ 30,468
Interest income ................................ 8,282 9,499 16,148 17,672
Gain on sales of notes receivable .............. 4,878 47 9,598 552
Other (expense) income, net .................... (2,826) 368 (3,684) (267)
Corporate general and administrative expenses .. (8,856) (11,565) (19,255) (21,640)
Interest expense ............................... (4,053) (3,526) (7,634) (6,832)
Provision for loan losses ...................... (7,476) -- (12,164) --
---------- ---------- ---------- ----------
Consolidated income before minority interest and
provision for income taxes ................... $ 25,192 $ 12,376 $ 36,371 $ 19,953
========== ========== ========== ==========
20
7. Contingencies
In March 2006, the Tennessee Audit Division (the "Division") advised us
that rather than follow through with its previously stated intention to impose a
sales tax on the sale of VOIs in Tennessee, it intends to seek to impose a sales
tax on the use of accommodations in our Tennessee properties by owners who
became members through the purchase of non-Tennessee timeshare interests. The
Division is auditing the period from December 1, 2001 through December 21, 2004.
The Division has not formally assessed any accommodations or sales tax as of
yet, nor has it estimated any assessment. While in the past the timeshare
industry has been successful in avoiding the imposition by various states of
sales tax on the reservation and use of accommodations by timeshare owners,
there is no assurance that such taxes will not be assessed. We intend to
vigorously oppose any assessment of accommodations or sales taxes by the
Division.
Bluegreen Southwest One, L.P. ("Southwest"), one of our subsidiaries, is
the developer of the Mountain Lakes subdivision in Texas. One of the lakes that
is an amenity in the development has not filled to the expected level. This
condition has resulted in consumer complaints from property owners. We are
reviewing the possible causes for the failure of the lake to fill. We are unable
to predict the cause, the potential cost to correct the condition or the
consequences in the event that the condition cannot be corrected.
Also related to the Mountain Lakes subdivision is litigation related to
the development of mineral rights within the subdivision. In April 2006, in
Lesley, et al v. Bluegreen Southwest One, L.P. acting through its General
Partner Bluegreen Southwest Land, Inc., et al, Cause No. 28006 District Court of
the 266th Judicial District, Erath County, Texas, plaintiffs filed a First
Amended Original Petition (April 2006). Pursuant to this First Amended Original
Petition Plaintiffs seek to develop mineral interests in the Mountain Lakes
subdivision and to recover damages from Southwest, alleging breach of contract,
breach of fiduciary duty, tortious interference with existing and prospective
relationships and intentional invasion or interference with property rights by
Southwest, for allegedly interfering with the development of mineral rights held
by plaintiffs. Plaintiffs' claims against Southwest total in the aggregate $25
million. The property owners association has officially filed a cross complaint
against the Company, Southwest and individual directors of the property owners
association asserting various tort claims. While no assurances can be given with
respect to the outcome of litigation, based on information currently available,
the Company believes that the claims lack merit and intends to vigorously defend
itself in this matter.
8. Subsequent Events
On July 21, 2006, a newly-formed wholly-owned statutory business trust,
Bluegreen Statutory Trust V ("BST V"), issued $15.0 million of trust preferred
securities. BST V 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
10.28% through September, 2011 and thereafter at a floating rate of 4.85% over
the 3-month LIBOR until the scheduled maturity date of September 30, 2036.
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 $464,000 to BST V in exchange for its common securities, all of
which are owned by us, and those proceeds were also used to purchase an
identical amount of junior subordinated debentures from us. The terms of BST V's
common securities are nearly identical to the trust preferred securities.
On July 26, 2006, we executed agreements to renew our $15.0 million
unsecured line-of-credit with Wachovia Bank, N.A. Amounts borrowed under the
line bear interest at 30-day LIBOR plus 2.0%. Interest is due monthly and all
outstanding amounts are due on June 30, 2007. We are only allowed to borrow
under the line-of-credit in amounts less than the remaining availability under
our current, active vacation ownership receivables purchase facilities plus
availability under certain receivables warehouse facilities, less any
outstanding letters of credit. The line-of-credit agreement contains certain
covenants and conditions typical of arrangements of this type. As of July 28,
2006 the Company had approximately $523,000 of outstanding letters of credit.
The line of credit agreement contains certain covenants and conditions typical
of arrangements of this type.
On July 27, 2006, The Board of Directors declared a dividend distribution
of one Preferred Share Purchase Right (the "Rights") on each outstanding share
of the Company's common stock. See the Company's Current Report on Form 8-K and
registration statement on Form 8-A, both of which were filed on August 2, 2006,
for further discussion of the Rights.
21
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 efficiently.
o Increased fuel prices 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 are
incorrect.
o Changes in United States generally accepted accounting principles,
especially those related to the sales of notes receivable and
accounting for real estate time-sharing transactions, could have a
material adverse impact on our results of operations.
o We are subject to the risks of the real estate market and the risks
associated with real estate development, including the risk and
uncertainties relating to the cost and availability of land, labor and
construction materials.
o We may not successfully execute our growth strategy.
o We may face a variety of risks when we expand our operations.
o Claims for development-related defects could adversely affect our
financial condition and operating results.
o We may face additional risks as we expand into new markets.
o The limited resale market for VOIs could adversely affect our
business.
o 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.
22
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, 2005.
Executive Overview
We operate through two business segments. Bluegreen Resorts develops,
markets and sells VOIs in our Bluegreen Vacation Club resorts, and provides
resort management services to resort property owners associations. Bluegreen
Communities acquires large tracts of real estate, which are subdivided, improved
(in some cases to include a golf course on the property) and sold, typically on
a retail basis, as homesites.
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
152, Accounting for Real Estate Time-Sharing Transactions, which changes the
rules for many aspects of timeshare accounting, including revenue recognition,
inventory costing and incidental operations (See Note 1 of the Notes to
Condensed Consolidated Financial Statements for more information on SFAS No. 152
and its impact on our financial statements). The adoption of SFAS No. 152,
reduced income before cumulative effect of change in accounting principle by
$6.1 million or $0.20 per diluted share, and $7.8 million or $0.25 per diluted
share for the three and six months ended June 30, 2006, respectively. In
addition, the Company recognized a $4.5 million or $0.14 per diluted share
charge for the cumulative effect of a change in accounting principle in the six
months ended June 30, 2006, for the adoption of SFAS No. 152. Therefore, on a
pro forma basis excluding the impact of SFAS 152, net income would have been
$12.7 million or $0.41 per diluted share for the three months ended June 30,
2006. On the same pro forma basis, net income would have been $18.4 million or
$0.59 per diluted share for the six months ended June 30, 2006. See "Results of
Operations" below for a discussion of the impact of the adoption of SFAS 152 on
the Resort Division.
We have historically experienced and expect to continue to experience
seasonal fluctuations in our gross revenues and net earnings. This seasonality
may cause significant fluctuations in our quarterly operating results, with the
majority of our gross revenues and net earnings historically occurring in the
quarters ending in June and September each year. However, as a result of the
required adoption of SFAS No. 152, we anticipate that prospectively the majority
of our gross revenues and net earnings will be recognized in the quarters ending
in September and December of each year, primarily due to the deferral and
subsequent recognition of VOI sales revenue. Also, as SFAS No. 152 does not
allow the restatement of prior year results of operations, the Company's 2006
quarterly Statements of Income are not easily comparable to the respective 2005
quarterly Statements of Income. Other material fluctuations in operating results
may occur due to the timing of development and the requirement that we use the
percentage-of-completion method of accounting. Under this method of income
recognition, income is recognized as work progresses. Measures of progress are
based on the relationship of costs incurred to date to expected total costs. We
expect that we will continue to invest in projects that will require substantial
development (with significant capital requirements), and as a consequence, our
results of operations may fluctuate significantly between quarterly and annual
periods as a result of the required use of the percentage-of-completion method
of accounting.
We believe that inflation and changing prices have materially impacted our
revenues and results of operations, specifically due to periodic increases in
the sales prices of our VOIs and homesites and continued increases in
construction and development costs. We expect construction and development costs
to continue to increase for the foreseeable future. There is no assurance that
we will be able to continue to increase our sales prices or that increased
construction costs will not have a material adverse impact on our gross margin.
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. The
provisions of SFAS No. 152 require that incentives and other similarly treated
items such as customer down payment equity earned through our Sampler program be
considered in calculating the required down payment for our VOI sales. If, after
considering the value of sales incentives provided, the required 10% of sales
price down payment threshold is not met, the VOI sale and the related cost of
sale and direct selling costs are deferred and not recognized until the buyer's
commitment test is satisfied, generally through the receipt of required mortgage
note payments from the buyer. Further, in cases where all development has not
been completed, recognition of income is subject to the percentage-of-completion
method of accounting.
23
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, default
rates, loss severity rates, discount rates and other considerations in light of
then-current conditions. If actual prepayments with respect to loans occur more
quickly than we projected at the time such loans were sold, as can occur when
interest rates decline, interest would be less than expected and may cause a
decline in the fair value of the retained interests and a charge to operations.
If actual defaults or other factors discussed above with respect to loans sold
are greater than estimated, charge-offs would exceed previously estimated
amounts and the cash flow from the retained interests in notes receivable sold
would decrease. Also, to the extent the portfolio of receivables sold fails to
satisfy specified performance criteria (as may occur due to, for example, an
increase in default rates or loan loss severity) or certain other events occur,
the funds received from obligors must be distributed on an accelerated basis to
investors. If the accelerated payment formula were to become applicable, the
cash flow to us from the retained interests in notes receivable sold would be
reduced until the outside investors were paid or the regular payment formula was
resumed. If these situations were to occur on a material basis, it could cause a
decline in the fair value of the retained interests and a charge to earnings
currently. There is no assurance that the carrying value of our retained
interests in notes receivable sold will be fully realized or that future loan
sales will be consummated or, if consummated, result in gains. See "Vacation
Ownership Receivables Purchase Facilities - Off Balance Sheet Arrangements,"
below.
In addition, we have historically sold vacation ownership receivables to
financial institutions through warehouse purchase facilities to monetize the
receivables while accumulating receivables for a future term securitization
transaction. We have structured our current warehouse purchase facility with
Branch Banking & Trust Company ("BB&T") so that sales of vacation ownership
receivables through this facility will be accounted for as on-balance sheet
borrowings rather than as off-balance sheet sales. Therefore, we will not
recognize a gain on the sales of receivables sold to BB&T until such receivables
are subsequently included in a properly structured term securitization
transaction. We expect this may impact future quarterly earnings patterns as
compared to comparable prior periods.
We continue to spend a substantial amount of management time and resources
to comply with changing laws, regulations and standards relating to accounting,
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new Securities and Exchange Commission regulations and New York Stock
Exchange rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002
requires management's annual review and evaluation of our internal control
systems, and attestations as to the effectiveness of these systems by our
independent registered accounting firm. We expect to continue to expend
significant management time and resources documenting and testing our internal
control systems and procedures. If we fail to maintain the adequacy of our
internal controls, as such standards are modified, supplemented or amended from
time to time, we may not be in a position to conclude on an ongoing basis that
we have effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act of 2002. Failure to maintain an effective
internal control environment could have a material adverse effect on the market
price of our stock.
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
24
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, 2005.
Results of Operations
We review financial information, allocate resources and manage our
business as two segments, Bluegreen Resorts and Bluegreen Communities. The
information reviewed is based on internal reports and excludes general and
administrative expenses attributable to corporate overhead. The information
provided is based on a management approach and is used by us for the purpose of
tracking trends and changes in results. It does not reflect the actual economic
costs, contributions or results of operations of the segments as stand alone
businesses. If a different basis of presentation or allocation were utilized,
the relative contributions of the segments might differ but the relative trends,
in our view, would likely not be materially impacted. The table below sets forth
net revenue and income from operations by segment.
25
Bluegreen Bluegreen
Resorts Communities Total
--------- ----------- -----
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
---------- ---------- --------- ---------- ---------- ----------
(dollars in thousands)
Three months ended June 30, 2005
Sales of real estate................ $ 97,019 100% $ 62,309 100% $ 159,328 100%
Cost of real estate sales........... (19,895) (21) (31,214) (50) (51,109) (32)
---------- --------- ----------
Gross profit........................ 77,124 79 31,095 50 108,219 68
Other resort and communities
operations revenue.............. 15,656 16 2,992 5 18,648 12
Cost of other resort and
communities operations.......... (16,995) (18) (2,368) (4) (19,363) (12)
Selling and marketing expenses...... (53,114) (55) (10,447) (17) (63,561) (40)
Field general and
administrative expenses (1)....... (5,383) (6) (3,317) (5) (8,700) (5)
---------- --------- ----------
Field operating profit.............. $ 17,288 18% $ 17,955 29% $ 35,243 22%
========== ========= ==========
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 revenue.............. 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...... (59,423) (65) (7,832) (15) (67,255) (47)
Field general and
administrative expenses (1)....... (6,796) (7) (2,004) (4) (8,800) (6)
---------- --------- ----------
Field operating profit.............. $ 2,976 3% $ 14,577 29% $ 17,553 12%
========== ========= ==========
Six months ended June 30, 2005
Sales of real estate................ $ 162,663 100% $ 100,686 100% $ 263,349 100%
Cost of real estate sales........... (33,090) (20) (50,906) (51) (83,996) (32)
---------- --------- ----------
Gross profit........................ 129,573 80 49,780 49 179,353 68
Other resort and communities
operations revenue.............. 32,218 20 4,474 4 36,692 14
Cost of other resort and
communities operations.......... (35,094) (22) (3,905) (4) (38,999) (15)
Selling and marketing expenses...... (89,823) (55) (18,484) (18) (108,307) (41)
Field general and
administrative expenses (1)....... (9,200) (6) (6,177) (6) (15,377) (6)
---------- --------- ----------
Field operating profit.............. $ 27,674 17% $ 25,688 26% $ 53,362 20%
========== ========= ==========
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 revenue.............. 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...... (106,856) (65) (14,812) (15) (121,668) (46)
Field general and
administrative expenses (1)....... (12,997) (8) (4,900) (5) (17,897) (7)
---------- --------- ----------
Field operating profit.............. $ 6,112 4% $ 24,356 25% $ 30,468 12%
========== ========= ==========
(1) General and administrative expenses attributable to corporate overhead
have been excluded from the tables. Corporate general and administrative
expenses totaled $8.9 million for the three months ended June 30, 2005 and
$11.6 million for the three months ended June 30, 2006. Corporate general
and administrative expenses totaled
26
$19.3 million for the six months ended June 30, 2005 and $21.6 million for
the six months ended June 30, 2006. (See "Corporate General and
Administrative Expenses," below, for further discussion).
Sales and Field Operations. Consolidated sales decreased $17.3 million from
$159.3 million during the three months ended June 30, 2005 to $142.0 million
during the three months ended June 30, 2006. Consolidated sales increased $0.4
million from $263.3 million during the six months ended June 30, 2005 to $263.7
million during the six months ended June 30, 2006. Excluding the impact of
adopting SFAS No. 152, consolidated sales during the three and six months ended
June 30, 2006 would have totaled $163.9 and $289.7 million, respectively.
Bluegreen Resorts. We will use the pro forma presentations below to discuss
Bluegreen Resorts results of operations for the 2006 periods, as the pro forma
results are more comparable to 2005 than our GAAP results of operations under
SFAS No. 152.
Three months ended
Three months ended June 30, 2006 June 30, 2005
--------------------------------------------------------------------------
Pro Forma Excluding
Impact of SFAS No. 152
----------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
---------- ---------- --------- ---------- ---------- ----------
Sales of real estate................ $ 91,386 100% $ 113,359 100% $ 97,019 100%
Cost of real estate sales........... (21,928) (24) (23,904) (21) (19,895) (21)
---------- --------- ----------
Gross profit........................ 69,458 76 89,455 79 77,124 79
Other resort and communities
operations revenue.............. 9,624 11 11,813 10 15,656 16
Cost of other resort and
communities operations.......... (9,887) (11) (12,870) (11) (16,995) (18)
Selling and marketing
expenses........................ (59,423) (65) (61,570) (54) (53,114) (55)
Field general and administrative
expenses........................ (6,796) (7) (6,796) (6) (5,383) (6)
---------- --------- ----------
Field operating profit.............. $ 2,976 3% $ 20,032 18% $ 17,288 18%
========== ========= ==========
Six months ended
Six months ended June 30, 2006 June 30, 2005
--------------------------------------------------------------------------
Pro Forma Excluding
Impact of SFAS No. 152
----------------------
Percentage Percentage Percentage
Amount of Sales Amount of Sales Amount of Sales
---------- ---------- --------- ---------- ---------- ----------
Sales of real estate................ $ 165,521 100% $ 191,498 100% $ 162,663 100%
Cost of real estate sales........... (38,975) (24) (41,299) (22) (33,090) (20)
---------- --------- ----------
Gross profit........................ 126,546 76 150,199 78 129,573 80
Other resort and communities
operations revenue.............. 23,955 14 27,764 14 32,218 20
Cost of other resort and
communities operations.......... (24,536) (15) (30,188) (16) (35,094) (22)
Selling and marketing
expenses........................ (106,856) (65) (108,978) (57) (89,823) (55)
Field general and administrative
expenses........................ (12,997) (8) (12,997) (7) (9,200) (6)
---------- --------- ----------
Field operating profit.............. $ 6,112 4% $ 25,800 13% $ 27,674 17%
========== ========= ==========
During the three months ended June 30, 2005 and June 30, 2006, sales of
VOIs contributed $97.0 million (61%) and $91.4 million (64%) of our total
consolidated sales, respectively. During the six months ended June 30, 2005 and
June 30, 2006, sales of VOIs contributed $162.7 million (62%) and $165.5 million
(63%) of our total consolidated sales, respectively. Excluding the impact of
SFAS No. 152, sales of VOIs during the three and six months ended June 30, 2006
would have contributed $113.4 million (69%) and $191.5 million (66%) of our
total consolidated sales, respectively.
27
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,
------------------ -------------------
2005 2006 2005 2006
------- ------- -------- -------
Number of VOI sales transactions 10,169 11,438 16,858 19,119
Average sales price per transaction $ 9,898 $10,344 $ 9,992 $10,472
Gross margin 79% 79% 80% 78%
Bluegreen Resorts' sales decreased $5.6 million or 6% during the three
months ended June 30, 2006, as compared to the three months ended June 30, 2005.
Excluding the impact of SFAS No. 152, sales would have increased $16.3 million
or 17% during the three months ended June 30, 2006 compared to the same period
in 2005. The pro forma increase was due primarily to same-resort sales increases
at many of our sales offices. Same-resort sales increased by approximately 12%
during the three months ended June 30, 2006, as compared to the three months
ended June 30, 2005. This increase was also due to our continued focus on
marketing to our growing Bluegreen Vacation Club owner base. Sales to owners
increased by 46% and accounted for approximately 32% of Resort sales during the
three months ended June 30, 2006, compared to 25% during the three months ended
June 30, 2005. This, combined with a 6% overall increase in the number of sales
prospects seen by Bluegreen Resorts from approximately 81,000 prospects during
the three months ended June 30, 2005 to approximately 86,000 prospects during
the three months ended June 30, 2006 and a relatively consistent, overall
sale-to-tour conversion ratio of 13% during these periods, significantly
contributed to the overall sales increase during the three months ended June 30,
2006 as compared to the three months ended June 30, 2005. Our sale-to-tour
conversion ratio for new prospects (i.e., excluding sales to our existing
owners) was approximately 11% and 10% for the three months ended June 30, 2005
and 2006, respectively. The increase in the number of prospects seen by
Bluegreen Resorts and the associated increase in sales was partially due to our
four new sales sites opened subsequent to June 30, 2005: an offsite sales office
in Atlanta, Georgia (opened in November 2005), an offsite sales office in
Chicago, Illinois (opened in February 2006), and sales offices located at two of
our new resorts: the Carolina Grande in Myrtle Beach, South Carolina (opened in
March 2006), and Daytona Seabreeze in Daytona Beach Shores, Florida (opened in
December 2005). The increase in the average sales price per transaction,
primarily due to a system-wide price increase effective January 1, 2006,
reflected in the above table also contributed to the increase in sales.
Bluegreen Resorts' sales increased $2.9 million or 2% during the six
months ended June 30, 2006, as compared to the six months ended June 30, 2005.
Excluding the impact of SFAS No. 152, sales would have increased $28.8 million
or 18% during the six months ended June 30, 2006 compared to the same period in
2005. The pro forma increase was due primarily to same-resort sales increases at
many of our sales offices. Same-resort sales increased by approximately 13%
during the six months ended June 30, 2006, as compared to the six months ended
June 30, 2005. This increase was also due to our continued focus on marketing to
our growing Bluegreen Vacation Club owner base. Sales to owners increased by 51%
and accounted for 33% of Resort sales during the six months ended June 30, 2006,
compared to 25% during the six months ended June 30, 2005. This, combined with a
10% overall increase in the number of sales prospects seen by Bluegreen Resorts
from approximately 134,000 prospects during the six months ended June 30, 2005
to approximately 148,000 prospects during the six months ended June 30, 2006,
and a relatively consistent, overall sale-to-tour conversion ratio of 13% during
these periods, significantly contributed to the overall sales increase during
the six months ended June 30, 2006 as compared to the six months ended June 30,
2005. Our sale-to-tour conversion ratio for new prospects (i.e., excluding sales
to our existing owners) was approximately 11% and 10% for the six months ended
June 30, 2005 and 2006, respectively. The increase in the number of prospects
seen by Bluegreen Resorts and consequently the increase in sales was partially
due to our four new sales sites, as described above. The increase in the average
sales price per transaction reflected in the above table also contributed to the
increase in sales.
Bluegreen Resorts' gross margin 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, 2006, our gross margin was
impacted by the application of SFAS No. 152 and the sale of vacation ownership
interests in higher cost resorts as a result of rising construction costs,
partially offset by increased sales of vacation ownership interests in The
Fountains resort, which has a relatively low associated product cost, and the
previously discussed price increase. We expect that Bluegreen Resorts' gross
margin will remain within the 75-77% range during 2006.
Other resort operations revenue decreased $6.0 million or 39% during the
three months ended June 30, 2006 as compared to the three months ended June 30,
2005. Other resort operations revenue decreased $8.3 million or 26% during the
six months ended June 30, 2006 as compared to the six months ended June 30,
2005. The adoption of SFAS No. 152 had the impact of decreasing other resort
operations revenue due to the reclassification of rental proceeds from other
resort
28
operations revenue to net against cost of other resort operations, partially
offset by the classification of revenue for sales incentives to other resort
operations revenue. Excluding the impact of SFAS No. 152, other resort
operations revenue would have decreased $3.8 million or 25% and $4.5 million or
14% during the three and six months ended June 30, 2006, respectively, as
compared to the same periods in the prior year. These pro forma decreases
represent lower sales of mini-vacation packages on behalf of third parties
partially offset by increases in fees earned by our wholly-owned title company
as well as higher resort management fees earned by our resort management
company. Resort management fees increased in the aggregate due to an increase in
the number of resorts to which such services are provided.
Cost of other resort operations decreased $7.1 million or 42% during the
three months ended June 30, 2006 as compared to the three months ended June 30,
2005. Cost of other resort operations decreased $10.6 million or 30% during the
six months ended June 30, 2006 as compared to the six months ended June 30,
2005. The adoption of SFAS No. 152 had the impact of decreasing cost of other
resort operations due primarily to the reclassification of rental proceeds from
other resort operations revenue and reclassification of the net proceeds of the
Sampler program from selling and marketing expenses to a reduction to cost of
other resort operations. Excluding the impact of SFAS No. 152, cost of other
resort operations would have decreased $4.1 million or 24% and $4.9 million or
14% during the three and six months ended June 30, 2006, respectively, as
compared to the same periods in the prior year. These pro forma decreases
represent lower cost of mini-vacations sold on behalf of third parties, due to
the reduction in related revenues, partially offset by higher subsidies incurred
relative to the property owners' associations that maintain our resorts.
Selling and marketing expenses for Bluegreen Resorts increased $6.3
million or 12% during the three months ended June 30, 2006 as compared to the
three months ended June 30, 2005. Selling and marketing expenses for Bluegreen
Resorts increased $17.0 million or 19% during the six months ended June 30, 2006
as compared to the six months ended June 30, 2005. As a percentage of sales,
selling and marketing expenses increased from 55% during the three months ended
June 30, 2005 to 65% during the three months ended June 30, 2006. The adoption
of SFAS No. 152 had the impact of increasing selling and marketing expenses as a
percentage of sales as a result of the immediate recognition of marketing
expenses associated with certain VOI sales that have not yet been recognized,
and due to the reclassification of the net profits of the Sampler program from
selling and marketing expenses to a reduction of cost of other resort operations
revenue. Excluding the impact of SFAS No. 152, selling and marketing expense
would have increased $8.5 million or 16% and $19.2 million or 21% during the
three and six months ended June 30, 2006 as compared to the same periods in
2005. As a percentage of sales, on a pro forma basis, selling and marketing
expenses decreased from 55% during the three months ended June 30, 2005 to 54%
during the three months ended June 30, 2006 and increased from 55% during the
six months ended June 30, 2005 to 57% during the six months ended June 30, 2006.
The increase in selling and marketing expense during the six months ended June
30, 2006 as compared to the same period in 2005 reflects a general increase in
overall marketing expenses, including start-up costs related to new marketing
alliances and higher marketing expenses as a percentage of sales at our newly
opened 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
$1.4 million or 26% during the three months ended June 30, 2006, as compared to
the three months ended June 30, 2005. Field general and administrative expenses
for Bluegreen Resorts increased $3.8 million or 41% during the six months ended
June 30, 2006, as compared to the six months ended June 30, 2005. These
increases were due primarily to the incremental cost of opening and operating
our new sales offices.
Approximately $37.0 million and $20.8 million of sales and field operating
profit, respectively, were deferred under SFAS No. 152, as of June 30, 2006.
Bluegreen Communities. During the three months ended June 30, 2005 and June 30,
2006, Bluegreen Communities generated $62.3 million (39%) and $50.6 million
(36%) of our total consolidated sales, respectively. During the six months ended
June 30, 2005 and June 30, 2006, Bluegreen Communities generated $100.7 million
(38%) and $98.2 million (37%) of our total consolidated sales, respectively.
The table below sets forth the number of homesites sold by Bluegreen
Communities and the average sales price per homesite for the periods indicated,
before giving effect to the percentage-of-completion method of accounting and
excluding sales of bulk parcels.
Three Months Ended Six Months Ended
------------------ -------------------
June 30, June 30, June 30, June 30,
2005 2006 2005 2006
------- ------- -------- -------
Number of homesites sold 776 520 1,411 954
Average sales price per homesite $83,159 $92,690 $ 79,711 $82,785
Gross margin 50% 46% 49% 44%
29
Bluegreen Communities' sales decreased $11.7 million or 19% during the
three months ended June 30, 2006, as compared to the three months ended June 30,
2005. This was due to the substantial sell-out of six of our communities
subsequent to June 30, 2005, primarily Traditions of Braselton, our golf course
community in Braselton, Georgia, and Sanctuary Cove at St. Andrews Sound, an
approximately 500-acre golf course community in Brunswick, Georgia. There were
no sales at Traditions of Braselton during the three months ended June 30, 2006
as compared to $15.2 million during the three months ended June 30, 2005. Sales
recognized at Sanctuary Cove decreased by $4.2 million, due to the substantial
sellout of all three phases of the community. Additionally, we experienced sales
decreases at Catawba Falls (Black Mountain, NC), Saddle Creek Forest (near
Houston, TX), Silver Lakes Ranch (Sunset, TX) and Sugar Tree on the Brazos
(outside Fort Worth, TX) of $1.0 million, $2.0 million, $1.0 million, and $1.7
million, respectively. The decrease in Communities sales was partially offset by
sales increases at certain of our existing communities and sales at communities
which opened for sales after June 30, 2005 (the "New Communities"). The New
Communities were: The Settlement at Patriot Ranch, located near San Antonio,
which commenced sales in August 2005, and recognized sales of $2.1 million
during the second quarter of 2006; and, Havenwood at Hunter's Crossing, located
near San Antonio, Texas, which was purchased in July 2005 and recognized sales
of $1.8 million in the second quarter of 2006. In addition to the New
Communities, we experienced sales increases at Mystic Shores (Canyon Lake, TX),
Lake Ridge at Joe Pool Lake (Cedar Hill, TX), Mountain Springs Ranch (Canyon
Lake, TX), and Chapel Ridge (Chapel Hill, NC) of $1.2 million, $2.8 million,
$4.7 million, and $3.1 million, respectively.
Bluegreen Communities' sales decreased $2.5 million or 2% during the six
months ended June 30, 2006 as compared to the six months ended June 30, 2005.
The decrease was primarily due to the substantial sell-out of Traditions of
Braselton and Sanctuary Cove. There were no sales at Traditions of Braselton
during the six months ended June 30, 2006 as compared to $21.6 million during
the six months ended June 30, 2005. Sales at Sanctuary Cove decreased by $13.9
million for the six months ended June 30, 2006 as compared to the six months
ended June 30, 2005. In addition, Brickshire (New Kent, VA), Quail Springs
(Weatherford, TX), Silver Lakes Ranch (Sunset, TX) and Ridgelake Shores
(Magnolia, TX) were substantially sold out prior to 2006. Sales also decreased
at Sugar Tree on the Brazos. These sales decreases were partially offset by
sales at the New Communities. The New Communities, The Settlement at Patriot
Ranch and Havenwood at Hunter's Crossing, both recognized an increase of $3.1
million each in the period ended June 30, 2006 as compared to 2005. In addition
to the New Communities, we recognized increased sales at Fairway Crossing
(Huffman, TX), Lake Ridge (Cedar Hill, TX), Mystic Shores (Canyon Lake, TX),
Mountain Springs (Canyon Lake, TX), Catawba Falls (Black Mountain, NC), Saddle
Creek Forest (Magnolia, TX) and Chapel Ridge (Chapel Hill, NC) of $1.2 million,
$4.2 million, $3.8 million, $6.3 million, $2.9 million, $3.8 million, and $3.9
million respectively. Sales in 2006 also benefited from a $7.0 million bulk sale
of property near San Diego, California.
In March 2006, we purchased The Bridges at Preston Crossings, an
approximately 1,580-acre planned golf community in Grayson County, Texas, which
is located just outside of Dallas, for $26.1 million. Additionally, in April
2006, we purchased Vintage Oaks at the Vineyards, a 3,300 acre parcel in New
Braunfels, Texas, which is located just outside San Antonio, for $27.3 million.
We also acquired 130 acres in April 2006 for $0.7 million for Saddle Creek Ranch
in Magnolia, TX, a follow-on community from our successful Saddle Creek Forest.
In June 2006, we completed the purchase of a 953 acre parcel in College Station,
Texas, located northwest of Houston. It was purchased for $3.1 million and is
expected be developed into a community with 432 homesites. Based on our
assessment of current estimated retail prices and the expected number of
homesites to be offered, we currently believe that these recent acquisitions
will, in the aggregate, generate estimated life-of-project sales of
approximately $318.2 million over an eight year period. Sales at these new
properties are expected to commence in the fourth quarter of 2006.
As noted above, certain of our properties substantially sold out earlier
in 2005 than previously anticipated as a result of the continued strong demand
for our communities. We have acquired the New Properties and, although there is
no assurance that we will be successful, we are continuing to pursue the
acquisition of properties in markets where we currently conduct business and in
new regions of the country, in order to maintain appropriate levels of
properties in our portfolio.
Bluegreen Communities' gross margin decreased from 50% during the three
months ended June 30, 2005 to 46% during the three months ended June 30, 2006.
Additionally, gross margin decreased from 49% during the six months ended June
30, 2005 to 44% during the six months ended June 30, 2006. Variations in cost
structures and the market pricing of projects available for sale as well as the
opening of phases of projects which include premium homesites (e.g., water
frontage, preferred views, larger acreage homesites, etc.) impact the gross
margin of Bluegreen Communities from period to period. These factors, as well as
the impact of percentage-of-completion accounting, will cause variations in
gross margin between periods, although the gross margin of Bluegreen Communities
has historically been between 45% and 55% of sales and is expected to
approximate these percentages for the foreseeable future. In addition, during
the six months
30
ended June 30, 2006, gross margin was negatively impacted by the bulk sale of
property near San Diego, California, which had a relatively low margin,
resulting in a 44% gross margin at Bluegreen Communities during the period.
Selling and marketing expenses for Bluegreen Communities decreased $2.6
million or 25% during the three months ending June 30, 2006 as compared to the
same period in 2005. Selling and marketing expenses decreased $3.7 million or
20% during the three months ending June 30, 2006 as compared to the same period
in 2005. Selling and marketing expenses for Bluegreen Communities decreased as a
percentage of sales from 17% to 15% during the three months ended June 30, 2005
and 2006, and from 18% to 15% during the six months ended June 30, 2005 and June
30, 2006, respectively. These expenditures decreased due to lower sales for the
three and six months ended June 30, 2006 as compared to the three and six months
ended June 30, 2005. In addition, these expenses were lower as a result of a
relatively lower commission on the bulk sale of property near San Diego,
California in the six months ended June 30, 2006.
Bluegreen Communities' general and administrative expenses decreased $1.3
million or 40% during the three months ended June 30, 2006 as compared to the
three months ended June 30, 2005, and decreased $1.2 million or 21% during the
six months ended June 30, 2006 as compared to the six months ended June 30,
2005. This decrease in general and administrative expenses was due to the
closure of five sales offices in the second half of 2005. The offices at Silver
Lakes Ranch, Mountain Lakes Ranch, Quail Springs Ranch, Brickshire, and the
Traditions of Braselton were closed as a result of the substantial sell out of
these locations.
Corporate General and Administrative Expenses. Our corporate general and
administrative expenses consist primarily of expenses associated with
administering the various, centralized support functions at our corporate
headquarters, including accounting, human resources, information technology,
mergers and acquisitions, mortgage servicing, treasury and legal. Such expenses
were $8.9 million and $11.6 million during the three months ended June 30, 2005
and June 30, 2006, respectively. As a percentage of sales of real estate,
corporate general and administrative expenses were 6% and 8% during the three
months ended June 30, 2005 and June 30, 2006, respectively. Corporate general
and administrative expenses were $19.3 million and $21.6 million for the six
months ended June 30, 2005 and June 30, 2006, respectively. As a percentage of
sales of real estate, corporate general and administrative expenses were
approximately 7% and 8% during the six months ended June 30, 2005 and June 30,
2006, respectively.
The increase in corporate general and administrative expenses during the
three and six months ended June 30, 2006, as compared to the three and six
months ended June 30, 2005, reflects the continued expansion of our corporate
facilities and increases in personnel and other expenses incurred in our
information technology, accounting and acquisition and development areas to
support our growth. Also contributing to higher corporate general and
administrative expenses in 2006 is the recognition of stock-based compensation
as a result of adopting the provisions of SFAS No. 123R. During the three and
six months ended June 30, 2006, expense recognized under SFAS No. 123R was $0.4
million and $0.9 million, respectively.
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 $8.3 million and $9.5 million during the three months ended June
30, 2005 and June 30, 2006, respectively. Interest income totaled $16.1 million
and $17.7 million during the six months ended June 30, 2005 and June 30, 2006,
respectively. The increase in interest income during the three and six months
ended June 30, 2006 as compared to the same period in 2005 was due to higher
average vacation ownership notes receivable balance during 2006 as compared to
2005.
Gain on Sales of Notes Receivable. During the three months ended June 30, 2005
and June 30, 2006, we sold $45.0 million and $16.6 million, respectively, of
notes receivable pursuant to our off-balance sheet vacation ownership
receivables purchase facilities in place during the respective periods. In
connection with these sales, we recognized gains on sales of notes receivable of
$4.8 million and $2.7 million during the three months ended June 30, 2005 and
June 30, 2006, respectively. As a result of adopting SFAS No. 152, approximately
$2.6 million of the gain was reflected as an increase to VOI sales during the
three months ended June 30, 2006.
During the six months ended June 30, 2005 and June 30, 2006, we sold $89.9
million and $57.5 million, respectively, of notes receivable and recognized
gains totaling $9.6 million and $9.7 million, respectively. As a result of
adopting SFAS No. 152, approximately $9.2 million of the gain was reflected as
an increase to VOI sales during the six months ended June 30, 2006.
The amount of gain recognized on sales of notes receivable during a period
depends on several factors, including the amount of availability, if any, under
receivables purchase facilities that qualify for off-balance sheet (or "sales")
treatment under SFAS No. 140, the amount of eligible receivables available for
sale, our cash requirements, the
31
covenants and other provisions of the applicable vacation ownership receivables
purchase facility (as described further below) and management's discretion as it
relates to the timing and amount of receivables to sell as well as management's
selection of which facility to utilize for such sale. The United States
generally accepted accounting principles governing the accounting for our sale
of receivable transactions is evolving and achieving off-balance sheet
accounting treatment is becoming more difficult. Due to the complexity of the
accounting rules surrounding such transactions, we have decided to limit the use
of off-balance sheet structures in the future. We currently intend to structure
certain of our vacation ownership receivables purchase facilities, specifically
those that are 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. Accordingly,
no gains or losses will be recognized on the sales of receivables to such
facilities until the receivables are included in an appropriately structured
term securitization transaction. This accounting treatment is expected to
increase the volatility of our quarterly earnings prospectively, but is not
anticipated to materially impact annual earnings.
Interest Expense. Interest expense was $4.1 million and $3.5 million during the
three months ended June 30, 2005 and June 30, 2006, respectively. Interest
expense was $7.6 million and $6.8 million during the six months ended June 30,
2005 and June 30, 2006, respectively. The decrease in interest expense during
the three and six months ended June 30, 2006 as compared to the comparable
period ended June 30, 2005 was primarily as a result of increased capitalized
interest on current development activity offset by the impact of higher average
debt outstanding and rising interest rates.
Total interest expense capitalized to construction in progress was $2.4
million and $4.7 million for the three and six months ended June 30, 2005,
respectively, and $3.5 million and $5.8 million for the three and six months
ended June 30, 2006, respectively.
Provision for Loan Losses. During the three and six months ended June 30, 2005
we recorded a provision for loan losses of $7.5 million and $12.2 million,
respectively. This provision was based on the Company's estimate of the expected
performance of our vacation ownership notes receivable, reduced by the value of
the underlying inventory that is anticipated to be recovered upon default.
Effective January 1, 2006, SFAS No. 152 requires that the estimated losses on
originated mortgages exclude an estimate for the value of recoveries and further
requires that the provision for loan losses for vacation ownership receivables
be reflected as a reduction of VOI sales. During the three and six months ended
June 30, 2006, we recorded provisions for loan losses of $15.3 million and $25.9
million, respectively, as a reduction to VOI sales.
The allowance for loan losses by division as of December 31, 2005 and June
30, 2006 was as follows:
Bluegreen Bluegreen
Resorts Communities Other Total
--------- ----------- --------- ---------
(dollars in thousands)
December 31, 2005:
Notes receivable .............. $ 131,058 $ 7,408 $ 186 $ 138,652
Allowance for loan losses ..... (10,466) (217) (186) (10,869)
--------- --------- --------- ---------
Notes receivable, net ......... $ 120,592 $ 7,191 $ -- $ 127,783
========= ========= ========= =========
Allowance as a % of gross notes
receivable .................. 8% 3% 100% 8%
========= ========= ========= =========
June 30, 2006:
Notes receivable .............. $ 183,353 $ 7,210 $ 186 $ 190,749
Allowance for loan losses ..... (17,173) (159) (186) (17,518)
--------- --------- --------- ---------
Notes receivable, net ......... $ 166,180 $ 7,051 $ -- $ 173,231
========= ========= ========= =========
Allowance as a % of gross notes
receivable .................. 9% 2% 100% 9%
========= ========= ========= =========
The allowance for loan losses for Bluegreen Resorts increased as a
percentage of the notes receivable balance at June 30, 2006 compared to December
31, 2005 due to the implementation of SFAS 152, which requires that the
estimated losses on originated mortgages exclude an estimate for the value of
the recovered inventory as such recoveries are required to be considered in
inventory costing.
Other Income and Expense, Net. Other expense, net was $2.8 million for the three
months ended June 30, 2005 as compared to other income, net of $368,000 for the
three months ended June 30, 2006. Other expense, net was $3.7 million and
$267,000 for the six month periods ended June 30, 2005 and 2006, respectively.
The decrease in other income and expense, net, during the six months ended June
30, 2006 and the increase in other income, net during the three months ended
June 30, 2006 as compared to the comparable prior year periods was primarily a
result of the 2005 recognition of a
32
$1.7 million loss on early extinguishment of $55.0 million of our 10.5% Senior
Secured Notes and higher amortization of legal and other expenses related to our
vacation ownership receivables purchase facilities.
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 $948,000 and $1.7 million during the three
months ended June 30, 2005 and June 30, 2006, respectively. Minority interest in
income of consolidated subsidiary was $1.7 million $2.7 million during the six
months ended June 30, 2005 and June 30, 2006, respectively.
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 $14.9 million
and $6.6 million during the three months ended June 30, 2005 and June 30, 2006,
respectively. Net income for the six months ended June 30, 2005 and 2006 was
$21.3 million and $6.1 million, respectively.
Changes in Financial Condition
The following table summarizes our cash flows for the six months ended
June 30, 2005 and June 30, 2006 (in thousands):
Six months ended
June 30, 2005 June 30, 2006
------------- -------------
Cash flows provided (used) by operating activities...... $ 35,180 $ (32,329)
Cash flows (used) provided by investing activities...... (7,063) 1,367
Cash flows (used) provided by financing activities...... (34,465) 16,895
----------- ----------
Net decrease in cash.................................... $ (6,348) $ (14,067)
=========== ==========
Cash Flows From Operating Activities. Cash flows provided by operating
activities decreased $67.5 million or 192% from an inflow of $35.2 million
during the six months ended June 30, 2005 to an outflow of $32.3 million during
the six months ended June 30, 2006. The decrease in cash flows provided by
operating activities during the six months ended June 30, 2006 compared to the
same period the prior year was primarily driven by higher inventory acquisition
and development spending and an increase in notes receivable due to increased
VOI sales. Offsetting the decrease in cash flows from operations was higher
proceeds from the sale of and borrowings collateralized by notes receivable, net
of payments, during the six months ended June 30, 2006 as compared to the same
period in 2005.
We report cash flows from borrowings collateralized by notes receivable
and sales of notes receivable as operating activities in the consolidated
statements of cash flows. The majority of Bluegreen Resorts' sales result in the
origination of notes receivable from its customers. We believe that accelerating
the conversion of such notes receivable into cash, either through the pledge or
sale of our notes receivable, on a regular basis is an integral function of our
operations, and have therefore classified such activities as operating
activities.
Cash Flows From Investing Activities. Cash flows provided by investing
activities increased $8.4 million or 119% from an outflow of $7.1 million during
the six months ended June 30, 2005 to an inflow of $1.4 million during the six
months ended June 30, 2006, respectively. This increase was due primarily to
higher amounts of cash received from our retained interests in notes receivable
sold partially off-set by higher cash expenditures for property and equipment
during the six months ended June 30, 2005 as compared to the six months ended
June 30, 2006. In addition, during the six months ended June 30, 2006, we
capitalized investments of $464,000 as compared to $1.8 million during the six
months ended June 30, 2005, into statutory business trusts for the purpose of
issuing trust preferred securities and investing the proceeds thereof in our
junior subordinated debentures (see "Liquidity and Capital Resources").
33
Cash Flows From Financing Activities. Cash flows provided by financing
activities increased $51.4 million or 149% from a cash outflow of $34.5 million
during the six months ended June 30, 2005 to a cash inflow of $16.9 million
during the six months ended June 30, 2006. This increase was due primarily to
the redemption of $55.0 million of our 10.5% Senior Secured Notes as well as
lower borrowings, net of re-payments, under our credit facilities during the six
months ended June 30, 2005 as compared to the six months ended June 30, 2006.
These increases were partially offset by the receipt of $59.3 million of
proceeds in connection with our issuance of the junior subordinated debentures
in the six months ended June 30, 2005, as compared to only $15.5 million of such
proceeds in the six months ended June 30, 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 on the purchase money mortgage loans and
contracts for deed owned arising from sales of VOIs and homesites and (v) net
cash generated from other resort services and other communities operations.
Historically, external sources of liquidity have included non-recourse sales of
notes receivable, borrowings under secured and unsecured lines-of-credit, seller
and bank financing of inventory acquisitions and the issuance of debt
securities. Our capital resources are used to support our operations, including
(i) acquiring and developing inventory, (ii) providing financing for customer
purchases, (iii) funding operating expenses and (iv) satisfying our debt and
other obligations. As we are continually selling and marketing real estate (VOIs
and homesites), it is necessary for us to continually acquire and develop new
resorts and communities in order to maintain adequate levels of inventory to
support operations. We anticipate that we will continue to require external
sources of liquidity to support our operations, satisfy our debt and other
obligations and to provide funds for growth.
Our level of debt and debt service requirements have several important
effects on our operations, including the following: (i) we have significant cash
requirements to service debt, reducing funds available for operations and future
business opportunities and increasing our vulnerability to adverse economic and
industry conditions; (ii) our leveraged position increases our vulnerability to
economic and competitive pressures; (iii) the financial covenants and other
restrictions contained in the indentures, the credit agreements and other
agreements relating to our indebtedness require us to meet certain financial
tests and restrict our ability to, among other things, borrow additional funds,
dispose of assets, make investments or pay cash dividends on, or repurchase,
preferred or common stock; and (iv) funds available for working capital, capital
expenditures, acquisitions and general corporate purposes may be limited.
Certain of our competitors operate on a less leveraged basis and have greater
operating and financial flexibility than we do.
We currently intend to continue to pursue a growth-oriented strategy,
particularly with respect to our Bluegreen Resorts business segment. In
connection with this strategy, we may from time to time acquire, among other
things, additional resort properties and completed but unsold VOIs; land upon
which additional resorts may be built; management contracts; loan portfolios of
vacation ownership mortgages; portfolios which include properties or assets
which may be integrated into our operations; interests in joint ventures; and
operating companies providing or possessing management, sales, marketing,
development, administration and/or other expertise with respect to our
operations in the vacation ownership industry. In addition, we intend to
continue to focus Bluegreen Communities' activities on larger, more capital
intensive projects particularly in those regions where we believe the market for
our products is strongest, such as new golf communities in the Southeast and
other areas and continued growth in our successful regions in Texas.
The following is a discussion of our purchase and credit facilities that
were important sources of our liquidity as of June 30, 2006. These facilities do
not constitute all of our outstanding indebtedness as of June 30, 2006. Our
other indebtedness includes outstanding senior secured notes payable, junior
subordinated debentures, and borrowings collateralized by real estate
inventories that were not incurred pursuant to an ongoing credit facility and
capital leases.
Vacation Ownership Receivables Purchase Facilities - Off-Balance Sheet
Arrangements
Our ability to monetize 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 down payment of 10% of the purchase price 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, 2006,
approximated 64% of sales. Accordingly, having facilities available for the
hypothecation or sale of these vacation ownership receivables is a critical
factor to our ability to meet our short and long-term cash needs.
The GE Purchase Facility. In March 2006, we executed agreements for a vacation
ownership receivables purchase facility (the "GE Purchase Facility") with
General Electric Capital Corporation ("GE"). The GE Purchase Facility utilizes
an owner's trust structure, pursuant to which we sell receivables to Bluegreen
Receivables Finance Corporation XI, our wholly-owned, special purpose finance
subsidiary ("BRFC XI"), and BRFC XI sells the receivables to an owner's trust (a
34
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 GE Purchase
Facility. The GE Purchase Facility has detailed requirements with respect to the
eligibility of receivables for purchase, and fundings under the GE Purchase
Facility are subject to certain conditions precedent. Under the GE Purchase
Facility, a variable purchase price of approximately 90% of the principal
balance of the receivables sold, subject to adjustment under certain terms and
conditions, is paid at closing in cash. The balance of the purchase price is
deferred until such time as GE has received a specified return, a specified
overcollateralization ratio is achieved, a cash reserve account is fully funded
and all servicing, custodial, agent and similar fees and expenses have been
paid. GE is entitled to receive a return equal to the applicable Swap Rate
(which is essentially a published interest swap arrangement rate as defined in
the GE Purchase Facility agreements) plus 2.35%, subject to use of alternate
return rates in certain circumstances. In addition, we paid GE a structuring fee
of approximately $437,500 in March 2006. Subject to the terms of the agreements,
we will act as servicer under the GE Purchase Facility for a fee.
The GE Purchase Facility includes various conditions to purchase,
covenants, trigger events and other provisions customary for a transaction of
this type. GE's obligation to purchase under the GE Purchase Facility may
terminate earlier than the dates noted above upon the occurrence of certain
specified events set forth in the GE Purchase Facility agreements. These
specified events, some of which are subject to materiality qualifiers and cure
periods, include, without limitation, (i) the aggregate amount of all advances
under the GE Purchase Facility equaling $125.0 million; (ii) our breach of the
representations or warranties in the GE Purchase Facility; (iii) our failure to
perform our covenants in the GE Purchase Facility; (iv) our commencement of a
bankruptcy or similar proceedings; (v) the amount of any advance under the GE
Purchase Facility failing to meet a specified overcollateralization amount; (vi)
significant delinquencies or defaults on the receivables sold; (vii) recovery
rates falling below a pre-determined amount; (viii) a default or breach under
any other agreement beyond the applicable grace period if such default or breach
(a) involves the failure to make a payment in excess of 5% of our Tangible Net
Worth (as defined in the GE Purchase Facility agreements to include our
subordinated debentures) or (b) causes, or permits the holder of indebtedness to
cause, an amount in excess of 5% of our Tangible Net Worth to become due; (ix)
our Tangible Net Worth at the end of any calendar quarter not equaling at least
$303.3 million plus 50% of net income following December 31, 2005; (x) the ratio
of our debt (excluding our subordinated debentures and receivable-backed debt of
no more than $600 million) to Tangible Net Worth exceeding 2.50 to 1; (xi) the
ratio of our consolidated earnings before interest, taxes, depreciation and
amortization to our interest expense (net of interest income) falling below 2.00
to 1; (xii) the number of points available in the Bluegreen Vacation Club
falling below approximately 930.7 million points; (xiii) our ceasing to conduct
the vacation ownership business or to originate vacation ownership receivables
or if certain changes in our ownership or control occur; (xiv) the failure of
certain of our resorts to be part of the Bluegreen Vacation Club or be managed
by us, one of our subsidiaries or another entity acceptable to GE; (xv)
operating budgets and reserve accounts maintained by the property owners'
associations responsible for maintaining certain of our resorts failing to
comply with applicable laws and governing documents; (xvi) our failure to
discharge, stay or bond pending appeal any final judgments for the payment of an
amount in excess of 2.5% of our Tangible Net Worth in a timely manner; (xvii)
our default under or breach of certain resort management or marketing contracts;
or (xviii) our failure to perform our servicing obligations, otherwise have our
servicing rights terminated or if we do not exercise the Servicer Purchase
Option pursuant to the terms of the GE Purchase Facility.
The GE Purchase Facility allows for sales of notes receivable for a
cumulative purchase price of up to $125.0 million through March 2008. On March
28, 2006, the Company sold $22.3 million in vacation ownership receivables under
the GE Purchase Facility. On May 23, 2006, we sold an additional $16.6 million
in vacation ownership receivables pursuant to the GE Purchase Facility. As of
June 30, 2006, the remaining availability under the GE Purchase Facility was
$89.9 million, subject to eligibility requirements and fulfillment of conditions
precedent.
We have chosen to monetize our receivables through the GE Purchase
Facility and through periodic term securitization transactions historically, as
these off-balance sheet arrangements provide us with cash inflows both currently
and in the future at what we believe to be competitive rates without adding
leverage to our balance sheet or retaining recourse for losses on the
receivables sold. In addition, these sale transactions have generated gains on
our income statement on a quarterly basis, which would not be realized under a
traditional financing arrangement.
The GE Purchase Facility discussed above and the BB&T Purchase Facility
discussed under "Credit Facilities for Bluegreen Resorts' Receivables and
Inventories" are the only ongoing receivables purchase facilities under which we
currently have the ability to sell receivables. Factors which could adversely
impact our ability to obtain new or additional vacation ownership receivable
purchase facilities include a downturn in general economic conditions; negative
trends in the commercial paper or LIBOR markets; increases in interest rates; a
decrease in the number of financial institutions or other entities willing to
enter into facilities with vacation ownership companies; a deterioration in the
performance of our vacation ownership notes receivable or in the performance of
portfolios sold in prior transactions, specifically increased delinquency,
default and loss severity rates; and a deterioration in our performance
generally. There can be no assurance that we will obtain new purchase facilities
or will be in a position to replace our existing purchase facilities when they
are
35
fully funded or expire. As indicated above, our inability to sell vacation
ownership receivables under a current or future facility could have a material
adverse impact on our liquidity. However, management believes that to the extent
we could not sell receivables under a purchase facility, we could potentially
mitigate the adverse impact on our liquidity by using our receivables as
collateral under existing or future credit facilities.
Historically, we have also been a party to a number of securitization-type
transactions, all of which in our opinion utilize customary structures and terms
for transactions of this type. In each securitization-type transaction, we sold
receivables to a wholly-owned special purpose entity which, in turn, sold the
receivables either directly to third parties or to a trust established for the
transaction. In each transaction, the receivables were sold on a non-recourse
basis (except for breaches of certain representations and warranties) and the
special purpose entity has a retained interest in the receivables sold. We have
acted as servicer of the receivables pools in each transaction for a fee, with
the servicing obligations specified under the applicable transaction documents.
Under the terms of the applicable securitization transaction, the cash payments
received from obligors on the receivables sold are distributed to the investors
(which, depending on the transaction, may acquire the receivables directly or
purchase an interest in, or make loans secured by the receivables to, a trust
that owns the receivables), parties providing services in connection with the
facility, and our special purpose subsidiary as the holder of the retained
interests in the receivables according to specified formulas. In general,
available funds are applied monthly to pay fees to service providers, make
interest and principal payments to investors, fund required reserves, if any,
and pay distributions in respect of the retained interests in the receivables.
Pursuant to the terms of the transaction documents, however, to the extent the
portfolio of receivables fails to satisfy specified performance criteria (as may
occur due to an increase in default rates or loan loss severity) or other
trigger events, the funds received from obligors are distributed on an
accelerated basis to investors. In effect, during a period in which the
accelerated payment formula is applicable, funds go to outside investors until
they receive the full amount owed to them and only then are payments made to our
subsidiary in its capacity as the holder of the retained interests. Depending on
the circumstances and the transaction, the application of the accelerated
payment formula may be permanent or temporary until the trigger event is cured.
If the accelerated payment formula were to become applicable, the cash flow on
the retained interests in the receivables would be reduced until the outside
investors were paid or the regular payment formula was resumed. Such a reduction
in cash flow could cause a decline in the fair value of our retained interests
in the receivables sold. Declines in fair value that are determined to be other
than temporary are charged to operations in the current period. In each
facility, the failure of the pool of receivables to comply with specified
portfolio covenants can create a trigger event, which results in the use of the
accelerated payment formula (in certain circumstances until the trigger event is
cured and in other circumstances permanently) and, to the extent there was any
remaining commitment to purchase receivables from our special purpose
subsidiary, the suspension or termination of that commitment. In addition, each
securitization facility provides that upon 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 GE Purchase Facility and prior off-balance sheet, receivables purchase
facilities during the periods presented (in thousands):
December 31,
2005 June 30, 2006
------------- -------------
On Balance Sheet:
Retained interests in notes receivable sold ....................... $ 105,696 $ 100,395
Off Balance Sheet:
Notes receivable sold without recourse ............................ 429,403 424,459
Principal balance owed to note receivable purchasers .............. 396,679 397,089
Three months ended
June 30, 2005 June 30, 2006
------------- -------------
Income Statement:
Gain on sales of notes receivable ................................. $ 4,878 $ 47
Interest accretion on retained interests in notes receivable sold . 2,354 2,606
Servicing fee income .............................................. 1,107 1,676
Six months ended
June 30, 2005 June 30, 2006
------------- -------------
Income Statement:
Gain on sales of notes receivable ................................. $ 9,598 $ 552
Interest accretion on retained interests in notes receivable sold . 4,362 5,184
Servicing fee income .............................................. 2,298 3,322
36
Credit Facilities for Bluegreen's Receivables and Inventories
In addition to the vacation ownership receivables purchase facilities
discussed above, we maintain various credit facilities with financial
institutions that provide receivable, acquisition and development financing for
our operations. We had the following credit facilities, as of June 30, 2006 (see
further discussion below):
Borrowings
Outstanding During the Advance Period
Borrowings as Six Months Expiration; Rate as
of June 30, Ended June Borrowing Borrowing Borrowing of June
Credit Facility 2006 30, 2006 Maturity Limit Rate 30, 2006
--------------------------------------------------------------------------------------------------------------------------
The GMAC $ 20.5 million -- February 15, 2008; $ 75.0 million 30-day LIBOR 9.33%
Receivables February 15, 2015 + 4.00%
Facility
The GMAC $ 56.6 million $ 36.4 million February 15, 2008; $ 150.0 million 30-day LIBOR 9.83%
AD&C Facility August 15, 2013 + 4.50%
The RFL A&D -- -- January 10, 2007; $ 50.0 million 30-day LIBOR 9.23%
Facility January 10, 2008 + 3.90% (Min.
6.90%)
The Foothill $ 2.4 million -- December 31, 2006; $ 30.0 million Prime + 0.25% 8.50%
Facility December 31, 2008 (Min. 4.00%); to
to 9.50%
Prime + 1.25%
The GMAC $ 58.6 million $ 70.2 million September 30, 2008; $ 75.0 million Prime + 1.00% 9.25%
Communities September 30, 2009
Facility
The BB&T $ 29.7 million $ 29.7 million May 25, 2008; $ 137.5 million LIBOR + 6.58%
Receivable March 5, 2019 1.25%
Facility
Credit Facilities for Bluegreen Resorts' Receivables and Inventories
The GMAC Receivables Facility. In February 2003, we entered into a revolving
vacation ownership receivables credit facility (the "GMAC Receivables Facility")
with Residential Funding Corporation ("RFC"), an affiliate of GMAC. The
borrowing limit under the GMAC Receivables Facility, as increased by amendment,
is $75.0 million. The borrowing period on the GMAC Receivables Facility, as
amended, expires on February 15, 2008, and outstanding borrowings mature no
later than February 15, 2015. The GMAC Receivables Facility has detailed
requirements with respect to the eligibility of receivables for inclusion and
other conditions to funding. The borrowing base under the GMAC Receivables
Facility is 90% of the outstanding principal balance of eligible notes arising
from the sale of VOIs. The GMAC Receivables Facility includes affirmative,
negative and financial covenants and events of default. All principal and
interest payments received on pledged receivables are applied to principal and
interest due under the GMAC Receivables Facility. Indebtedness under the
facility bears interest at 30-day LIBOR plus 4.00% (9.33% at June 30, 2006).
Interest payments are due monthly. During the six months ended June 30, 2006, we
did not pledge any vacation ownership receivables under the GMAC Receivables
Facility. As of June 30, 2006, $20.5 million was outstanding under the GMAC
Receivables Facility.
The GMAC AD&C Facility. In September 2003, RFC also provided us with a $75.0
million acquisition, development and construction revolving credit facility for
Bluegreen Resorts, which was increased to $150.0 million in February 2006 (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
37
resorts, subject to minimum required amortization. Indebtedness under the
facility, as amended in February 2006, bears interest at 30-day LIBOR plus 4.50%
(9.83% at June 30, 2006). Interest payments are due monthly. During the six
months ended June 30, 2006, we borrowed $36.4 million under the GMAC AD&C
Facility to fund the development of VOIs at The Fountains and the Carolina
Grande resorts and to finance the acquisition of property in Las Vegas, Nevada
and Williamsburg, Virginia. As of June 30, 2006, $56.6 million was outstanding
under the GMAC AD&C Facility.
The RFL A&D Facility. In January 2005, we entered into a $50.0 million revolving
credit facility with Resort Finance, LLC ("RFL") (the "RFL A&D Facility"). We
use the proceeds from the RFL A&D Facility to finance the acquisition and
development of vacation ownership resorts. The RFL A&D Facility is secured by
the following: 1) a first mortgage and lien on all assets purchased with the RFL
A&D Facility; 2) a first assignment of all construction contracts, related
documents, building permits and completion bond; 3) a negative pledge of our
interest in any management, marketing, maintenance or service contracts; and 4)
a first assignment of all operating agreements, rents and other revenues at the
vacation ownership resorts which serve as collateral for the RFL A&D Facility,
subject to any requirements of the respective property owners' associations.
Borrowings under the RFL A&D Facility can be made through January 10, 2007.
Principal payments will be effected through agreed-upon release prices paid to
RFL as vacation ownership interests in the resorts that serve as collateral for
the RFL A&D Facility are sold. The outstanding principal balance of any
borrowings under the RFL A&D Facility must be repaid by January 10, 2008.
Indebtedness under the facility bears interest at 30-day LIBOR plus 3.90%,
subject to a 6.90% floor (9.23% at June 30, 2006). Interest payments are due
monthly. We are required to pay a commitment fee equal to 1.00% of the $50.0
million facility amount, which is paid at the time of each borrowing under the
RFL A&D Facility as 1.00% of each borrowing with the balance being paid on the
unutilized facility amount on January 10, 2007. In addition, we are required to
pay a program fee equal to 0.125% of the $50.0 million facility amount per
annum, payable monthly. The RFL A&D Facility documents include customary
conditions to funding, acceleration provisions and certain financial affirmative
and negative covenants. There were no outstanding amounts due under this
facility as of June 30, 2006.
The Foothill Facility. Under an existing $30.0 million revolving credit facility
with Wells Fargo Foothill, Inc. ("Foothill") primarily used for borrowings
collateralized by Bluegreen Communities receivables and inventory, we can also
borrow up to $10.0 million of the facility collateralized by the pledge of
vacation ownership receivables. For further details on this facility, see
"Credit Facilities for Bluegreen Communities' Receivables and Inventories"
below.
The BB&T Purchase Facility. In June 2006, we executed agreements for a $137.5
million vacation ownership receivables purchase facility (the "BB&T Purchase
Facility") with BB&T. While ownership of the receivables was transferred for
legal purposes, the transfer of the receivables under the facility will be
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 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 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 BB&T Purchase Facility, a variable purchase price of
approximately 85.0% 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 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 through May 2008.
Credit Facilities for Bluegreen Communities' Receivables and Inventories
The Foothill Facility. We have a $30.0 million revolving credit facility with
Foothill secured by the pledge of Bluegreen Communities' receivables, with up to
$10.0 million of the total facility available for Bluegreen Communities'
inventory borrowings and, as indicated above, up to $10.0 million of the total
facility available for the pledge of Bluegreen Resorts' receivables (the
"Foothill Facility"). The Foothill Facility requires principal payments based on
agreed-upon release prices as homesites in the encumbered communities are sold
and bears interest at the prime lending rate plus 1.25% (9.5% at June 30, 2006).
Interest payments are due monthly. The interest rate charged on outstanding
receivable borrowings under the Foothill Facility, as amended, is the prime
lending rate plus 0.25% (8.5% at June 30, 2006) when the average monthly
outstanding loan balance is greater than or equal to $15.0 million. If the
average monthly outstanding loan balance is less
38
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, 2006). All principal and interest
payments received on pledged receivables are applied to principal and interest
due under the Foothill Facility. Borrowings under the Foothill Facility are
available through December 31, 2006. Outstanding indebtedness collateralized by
receivables is due December 31, 2008. At June 30, 2006, the outstanding
principal balance under the facility was $2.4 million, approximately $1.7
million of which relates to Bluegreen Communities' receivables borrowings and
approximately $674,000 of which relate to Bluegreen Resorts' receivables
borrowings under the Foothill Facility.
The GMAC Communities Facility. In May 2005 and again in March 2006, we amended
our existing $75.0 million revolving credit facility with RFC (the "GMAC
Communities Facility"). The GMAC Communities Facility is secured by the real
property homesites (and personal property related thereto) at the following
Bluegreen Communities projects, as well as any Bluegreen Communities projects
acquired by us with funds borrowed under the GMAC Communities Facility (the
"Secured Projects"): Brickshire (New Kent County, Virginia); Mountain Lakes
Ranch (Bluffdale, Texas); Ridge Lake Shores (Magnolia, Texas); Riverwood Forest
(Fulshear, Texas); Waterstone (Boerne, Texas); Catawba Falls Preserve (Black
Mountain, North Carolina); Lake Ridge at Joe Pool Lake (Cedar Hill and Grand
Prairie, Texas); Mystic Shores at Canyon Lake (Spring Branch, Texas);
Yellowstone Creek Ranch (Walsenburg, Colorado); Havenwood at Hunters' Crossing
(New Braunfels, Texas); The Bridges of Preston Crossings (Grayson County,
Texas); and Vintage Oaks at the Vineyards (New Braunfels, Texas). In addition,
the GMAC Communities Facility is secured by our Carolina National and The
Preserve at Jordan Lake golf courses in Southport, North Carolina and Chapel
Hill, North Carolina, respectively. Borrowings can be drawn in conjunction with
these projects through September 30, 2008. Principal payments are effected
through agreed-upon release prices paid to RFC, as homesites in the Secured
Projects are sold. The outstanding principal balance of any borrowings under the
GMAC Communities Facility must be repaid by September 30, 2009. The interest
charged on outstanding borrowings is at the prime lending rate plus 1.00% (9.25%
at June 30, 2006). Interest payments are due monthly. The GMAC Communities
Facility includes customary conditions to funding, acceleration and event of
default provisions and certain financial affirmative and negative covenants. We
use the proceeds from the GMAC Communities Facility to repay outstanding
indebtedness on Bluegreen Communities projects, finance the acquisition and
development of Bluegreen Communities projects and for general corporate
purposes. In March 2006, we borrowed $18.2 million under the GMAC Communities
Facility for the acquisition of The Bridges of Preston Crossings and an
additional $9.0 million for general corporate purposes. In April of 2006, we
borrowed $19.0 million for the purchase of Vintage Oaks at the Vineyards, and
$9.0 million for general corporate purposes. In June 2006, we borrowed $15.0
million for general corporate purposes. As of June 30, 2006, $58.6 million was
outstanding under the GMAC Communities Facility.
Over the past several years, substantially all of our homesite sales have
been for cash and we have not provided a significant amount of financing to
homesite purchasers. Accordingly, in recent years we have reduced the borrowing
capacity under credit agreements secured by Bluegreen Communities' receivables.
We attribute the significant volume of cash sales to an increased willingness on
the part of banks to extend direct customer homesite financing at attractive
interest rates. No assurances can be given that local banks will continue to
provide such customer financing.
Historically, we have funded development for road and utility
construction, amenities, surveys and engineering fees from internal operations
and have financed the acquisition of Bluegreen Communities properties through
seller, bank or financial institution loans. Terms for repayment under these
loans typically call for interest to be paid monthly and principal to be repaid
through homesite releases. The release price is usually an amount based on a
pre-determined percentage (typically 25% to 55%) of the gross selling price of
the homesites in the subdivision. In addition, the agreements generally call for
minimum cumulative annual amortization. When we provide financing for our
customers (and therefore the release price is not available in cash at closing
to repay the lender), we are required to pay the lender with cash derived from
other operating activities, principally from cash sales or the pledge of
receivables originated from earlier property sales.
Trust Preferred 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
39
redeemable in whole or in part at the Company's option at any time after five
years from the issue date or sooner following certain specified events. In
addition, we made an initial equity contribution to each Trust in exchange for
its common securities, all of which are owned by us, and those proceeds were
also used to purchase an identical amount of junior subordinated debentures from
us. The terms of each Trust's common securities are nearly identical to the
trust preferred securities.
We had the following junior subordinated debentures outstanding at June
30, 2006 (dollars in thousands):
Outstanding
Amount of Initial Fixed Variable Beginning
Junior Equity Interest Interest Optional
Subordinated To Issue Rate Rate Redemption Maturity
Trust Debentures Trust Date (1) (2) Date Date
------------------------------------------------------------------------------------------------------
Bluegreen Statutory LIBOR
Trust I $ 23,196 $ 696 3/15/05 9.160% + 4.90% 3/30/10 3/30/35
Bluegreen Statutory LIBOR
Trust II 25,774 774 5/04/05 9.158% + 4.85% 7/30/10 7/30/35
Bluegreen Statutory LIBOR
Trust III 10,310 310 5/10/05 9.193% + 4.85% 7/30/10 7/30/35
Bluegreen Statutory LIBOR
Trust IV 15,464 464 4/24/06 10.130% + 4.85% 6/30/11 6/30/36
-----------------------
$ 74,744 $ 2,244
=======================
(1) Both the trust preferred securities and junior subordinated
debentures bear interest at a fixed interest rate from the issue
date through the beginning optional redemption date.
(2) Both the trust preferred securities and junior subordinated
debentures bear interest at a variable interest rate from the
beginning optional redemption date through the maturity date.
On July 21, 2006 another of our wholly-owned statutory business trusts,
BST V, issued $15.0 million of trust preferred securities. BST V 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 10.28% through September,
2011 and thereafter at a floating rate of 4.85% over the 3-month LIBOR until the
scheduled maturity date of September 30, 2036. 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 $464,000 to BST
V in exchange for its common securities, all of which are owned by us, and those
proceeds were also used to purchase an identical amount of junior subordinated
debentures from us. The terms of BST V's common securities are nearly identical
to the trust preferred securities.
The issuances of trust preferred securities were part of larger pooled
trust securities offerings which were not registered under the Securities Act of
1933. Proceeds will be used for general corporate purposes and debt repayment.
We currently intend to seek to create similar trusts and to participate in
other pooled trust preferred securities transactions in the future as a source
of additional financing, subject to market conditions and other considerations.
Unsecured Credit Facility
We have a $15.0 million unsecured line-of-credit with Wachovia Bank, N.A.
Amounts borrowed under the line bear interest at 30-day LIBOR plus 2.00% (7.33%
at June 30, 2006). Interest is due monthly and all outstanding amounts are due
on June 30, 2007. We can only borrow an amount under the line-of-credit which is
less than the remaining availability under our current, active vacation
ownership receivables purchase facilities plus availability under certain
receivables warehouse facilities, less any outstanding letters of credit. The
line-of-credit agreement contains certain covenants and conditions typical of
arrangements of this type. As of June 30, 2006, no borrowings were outstanding
under the line. However, an aggregate of $530,000 of irrevocable letters of
credit were provided under this line-of-credit which were required in connection
with the obtaining of plats for one of our Bluegreen Communities projects. These
letters of credit expire on December 31, 2006. This line-of-credit is an
available source of short-term liquidity for us, although we have not drawn any
borrowings under this facility recently.
40
Commitments
Our material commitments as of June 30, 2006 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, 2006, by period due (in
thousands):
Payments Due by Period
-----------------------------------------------------
Less than 1 -- 3 4 -- 5 After 5
Contractual Obligations 1 year Years Years Years Total
----------------------------------- --------- -------- -------- -------- --------
Receivable-backed notes payable $ 18 $ 6,370 $ -- $ 50,249 $ 56,637
Lines-of-credit and notes payable 15,569 63,383 59,116 3,460 141,528
10.50% senior secured notes payable -- 55,000 -- -- 55,000
Junior subordinated debentures -- -- -- 74,744 74,744
Noncancelable operating leases 9,177 14,841 9,787 4,132 37,937
--------- -------- -------- -------- --------
Total contractual obligations $ 24,764 $139,594 $ 68,903 $132,585 $365,846
========= ======== ======== ======== ========
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 $ 4,915 $ 9,491 $ 8,734 $ 13,755 $ 36,895
Lines-of-credit and notes payable 12,356 16,607 1,925 5,024 35,912
10.50% senior secured notes payable 5,775 7,218 -- -- 12,993
Junior subordinated debentures 7,000 14,000 14,000 169,302 204,302
--------- -------- -------- -------- --------
Total contractual obligations $ 30,046 47,316 $ 24,659 $188,081 $290,102
========= ======== ======== ======== ========
(1) For interest on variable rate debt we have assumed that the interest
rate remains the same as the rate at June 30, 2006.
We intend to use cash flow from operations, including cash received from
the sale of vacation ownership notes receivable, and cash received from new
borrowings under existing or future debt facilities in order to satisfy the
principal payments in the Contractual Obligations. While we believe that we will
be able to meet all required debt payments when due, there can be no assurance
that this will be the case.
As noted above, we have $530,000 in letters-of-credit outstanding at June
30, 2006, all of which were issued under the unsecured line-of-credit with
Wachovia Bank, N.A. These letters-of-credit, which expire December 31, 2006,
were required in connection with obtaining governmental approval of plats for
one of our Bluegreen Communities projects.
We estimate that the total cash required to complete resort buildings in
which sales have occurred and resort amenities and other common costs in
projects in which sales have occurred to be approximately $18.8 million as of
June 30, 2006. We estimate that the total cash required to complete our
Bluegreen Communities projects in which sales have occurred to be approximately
$53.9 million as of June 30, 2006. These amounts assume that we are not
obligated to develop any building, project or amenity in which a commitment has
not been made through a sales contract to a customer; however, we anticipate
that we will incur such obligations in the future. We plan to fund these
expenditures over the next five years primarily with available capacity on
existing or proposed credit facilities and cash generated from operations. There
can be no assurance that we will be able to obtain the financing or generate the
cash from operations necessary to complete the foregoing plans or that actual
costs will not exceed those estimated.
We believe that our existing cash, anticipated cash generated from
operations, anticipated future permitted borrowings under existing or proposed
credit facilities and anticipated future sales of notes receivable under the
purchase facility and one or more replacement facilities we will seek to put in
place will be sufficient to meet our anticipated working capital, capital
expenditures and debt service requirements for the foreseeable future. We will
be required to renew or replace credit and receivables purchase facilities that
have expired or that will expire in the near term. We will, in the future, also
require additional credit facilities or will be required to issue corporate debt
or equity securities in connection with acquisitions or
41
otherwise. Any debt incurred or issued by us may be secured or unsecured, bear
fixed or variable rate interest and may be subject to such terms as the lender
may require and management deems prudent. There can be no assurance that the
credit facilities or receivables purchase facilities which have expired or which
are scheduled to, however, 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.
Our credit facilities, indentures, and other outstanding debt instruments,
and receivables purchase facilities which include customary conditions to
funding, eligibility requirements for collateral, cross-default and other
acceleration provisions, certain financial and other affirmative and negative
covenants, including, among others, limits on the incurrence of indebtedness,
limits on the repurchase of securities, payment of dividends, investments in
joint ventures and other restricted payments, the incurrence of liens,
transactions with affiliates, covenants concerning net worth, fixed charge
coverage requirements, debt-to-equity ratios, portfolio performance requirements
and events of default or termination. No assurance can be given that we will not
be required to seek waivers of such covenants or that such covenants will not
limit our ability to raise funds, sell receivables, satisfy or refinance our
obligations or otherwise adversely affect our operations. In addition, our
future operating performance and ability to meet our financial obligations will
be subject to future economic conditions and to financial, business and other
factors, many of which will be beyond our control.
Item 4. Controls and Procedures.
a) As of the end of the period covered by this report, we carried out
an evaluation under the supervision and with the participation of
our principal executive officer and principal financial officer of
the effectiveness of our disclosure controls and procedures, as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of June
30, 2006. 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, 2006 that has materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In April 2006, in Lesley, et al v. Bluegreen Southwest One, L.P. acting
through its General Partner Bluegreen Southwest Land, Inc., et al, Cause No.
28006 District Court of the 266th Judicial District, Erath County, Texas,
plaintiffs filed a First Amended Original Petition (April 2006). Pursuant to
this First Amended Original Petition Plaintiffs seek to develop mineral
interests in the Mountain Lakes subdivision and to recover damages from
Southwest, alleging breach of contract, breach of fiduciary duty, tortious
interference with existing and prospective relationships and intentional
invasion or interference with property rights by Southwest, for allegedly
interfering with the development of mineral rights held by plaintiffs.
Plaintiffs' claims against Southwest total in the aggregate $25 million. The
property owners association has officially filed a cross complaint against the
Company, Southwest and individual directors of the property owners association
asserting various tort claims. While no assurances can be given with respect to
the outcome of the litigation, based on information currently available, the
Company believes that the claims lack merit and intends to vigorously defend
itself in this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not purchase any of our equity securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934. From time to time, our Board
of Directors has adopted and publicly announced a share repurchase program.
Repurchases under such programs are subject to the price of our stock,
prevailing market conditions, our financial condition and available resources,
other investment alternatives and other factors. We are not required to seek
shareholder approval of share repurchase programs, have not done so in the past,
and do not anticipate doing so in the future, except to the extent we may be
required to do so under applicable law. We have not repurchased any shares since
the fiscal year ended April 1, 2001. As of June 30, 2006, there were 694,500
shares remaining for purchase under our current repurchase program.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 16, 2006, 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 four directors for a term of three years expiring at
the 2009 annual meeting of shareholders. Votes recorded, by nominee,
were as follows:
Shares Voted
---------------------------------------------
Nominee For Against Abstain Total
------------------- ---------- ------- --------- ----------
Norman H. Becker 28,069,658 -- 1,015,596 29,085,254
Robert F. Dwors 28,883,241 -- 202,013 29,085,254
J. Larry Rutherford 28,070,128 -- 1,015,126 29,085,254
Arnold Sevell 28,070,363 -- 1,014,891 29,085,254
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.
b) The approval of the 2006 Performance-Based Annual Incentive Plan.
Our stockholders voted to approve this proposal with 28,750,543
votes for and 314,360 votes against. There were 20,351 abstentions.
43
Item 6. Exhibits.
Exhibits:
4.1 Bluegreen Corporation and Mellon Investor Services LLC, Rights
Agreement dated July 27, 2006 (incorporated by reference to
exhibit of same designation to Current Report on Form 8-K dated
August 2, 2006).
10.63 Trust Agreement of Bluegreen Statutory Trust V among Bluegreen
Corporation as Depositor, Wilmington Trust Company as Trustee
and Property Trustee, dated as of July 19, 2006.
10.64 Amended and Restated Trust Agreement among Bluegreen Corporation
as Depositor, Wilmington Trust Company as Property Trustee and
Delaware Trustee, and various Administrative Trustees, dated as
of July 21, 2006 (Bluegreen Statutory Trust V).
10.65 Junior Subordinated Indenture between Bluegreen Corporation and
Wilmington Trust Company as Trustee, dated as of July 21, 2006.
10.137* Employment Agreement between Bluegreen Corporation and George F.
Donovan, dated as of June 28, 2006.
10.160 Fifth Amended and Restated Loan Agreement, dated July 26, 2006
by and among the Registrant, certain subsidiaries of the
Registrant and Wachovia Bank, N.A., for $15 million, unsecured,
revolving line-of-credit due June 30, 2007.
10.161 Fifth Amended and Restated Promissory Note dated July 26, 2006
by and among the Registrant, certain subsidiaries of the
Registrant and Wachovia Bank, N.A., for $15 million, unsecured,
revolving line-of-credit due June 30, 2007.
10.211 Purchase and Contribution Agreement, dated as of May 1, 2006 by
and among Bluegreen Corporation as Seller, and Bluegreen
Timeshare Finance Corporation I as Depositor.
10.212 Indenture dated May 1, 2006 between BXG Timeshare Trust I as
Issuer, Bluegreen Corporation as Servicer, Vacation Trust ,Inc.
as Club Trustee, Concord Servicing Corporation as Backup
Servicer, US Bank, N.A. as Indenture Trustee, Paying Agent and
Custodian, and Branch Banking and Trust Company as Agent.
10.213 Sale Agreement dated May 1, 2006, among Bluegreen Timeshare
Finance Corporation I as Depositor and BXG Timeshare Trust I as
Issuer.
10.214 Note Funding Agreement dated May 1, 2006 among BXG Timeshare
Trust I as Issuer, Bluegreen Corporation as Seller and Servicer,
Bluegreen Timeshare Finance Corporation I as Depositor, various
Purchaser Parties, and Branch Banking and Trust Company as
Agent.
10.215 Standard Definitions to Indenture dated May 1, 2006 between BXG
Timeshare Trust I as Issuer, Bluegreen Corporation as Servicer,
Vacation Trust ,Inc. as Club Trustee, Concord Servicing
Corporation as Backup Servicer, US Bank, N.A. as Indenture
Trustee, Paying Agent and Custodian, and Branch Banking and
Trust Company as Agent.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Compensation plan or arrangement
44
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, 2006 By: /S/ GEORGE F. DONOVAN
-------------------------------------
George F. Donovan
President and
Chief Executive Officer
Date: August 9, 2006 By: /S/ ANTHONY M. PULEO
-------------------------------------
Anthony M. Puleo
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: August 9, 2006 By: /S/ RAYMOND S. LOPEZ
-------------------------------------
Raymond S. Lopez
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
45