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Bluegreen 10-Q 2008



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, 2008

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________________to ______________________

 

 

 

Commission File Number: 001-09292

(BLUEGREEN LOGO)

 

Bluegreen Corporation


(Exact name of registrant as specified in its charter)


 

 

 

Massachusetts

 

03-0300793


 


(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

4960 Conference Way North, Suite 100,
Boca Raton, Florida

 

33431


 


(Address of principal executive offices)

 

(Zip Code)


 

(561) 912-8000


(Registrant’s telephone number, including area code)

 


(Former name, former address and former fiscal year, if changed since last report)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

          Yes x     No o



          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated files, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

Large Accelerated filer o

 

Accelerated filer x

 

 

 

 

Non-Accelerated filer o

 

Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

               Yes o     No x

          Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 1, 2008, there were 32,605,128 shares of the registrant’s common stock, $0.01 par value, outstanding.

2




BLUEGREEN CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q

 

 

 

 

 

 

 

Page

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at December 31, 2007 and June 30, 2008

5

 

 

 

 

Condensed Consolidated Statements of Income – Three months ended June 30, 2007 and 2008

6

 

 

 

 

Condensed Consolidated Statements of Income – Six months ended June 30, 2007 and 2008

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2007 and 2008

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

Item 4.

Controls and Procedures

41

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

42

 

 

 

Item 1A.

Risk Factors

42

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

43

 

 

 

Item 6.

Exhibits

43

 

 

 

Signatures

 

44

3



TRADEMARKS

The terms “Bluegreen®,” “Bluegreen Communities®,” “Bluegreen Vacation Club®,” “Colorful Places To Live And Play®,” “You’re Going To Like What You See!®,” “Encore Rewards®,” “Outdoor Traveler Logo®,” and the “Bluegreen Logo®” are registered in the U.S. Patent and Trademark Office by Bluegreen Corporation.

The terms “The Hammocks at Marathon™,” “Orlando’s Sunshine Resort™,” “Solara Surfside™,” “Mountain Run at Boyne™,” “The Falls Village™,” “Bluegreen Wilderness Club™,” “The Lodge Alley Inn™,” “Carolina Grande™,” “Harbour Lights™,” “Patrick Henry Square™,” “SeaGlass Tower™,” “Shore Crest Vacation Villas™,” “Laurel Crest™,” “MountainLoft™,” “MountainLoft Resort II™,” “Daytona SeaBreeze™,” “Shenandoah Crossing™,” “Christmas Mountain Village™,” “Traditions of Braselton™,” “Sanctuary Cove at St. Andrews Sound™,” “Sanctuary River Club at St. Andrews Sound™,” “Catawba Falls Preserve™,” “Chapel Ridge™,” “Mountain Lakes Ranch™,” “Silver Lakes Ranch™,” “Mystic Shores™,” “Lake Ridge™,” “Lake Ridge at Joe Pool Lake™,” “Ridge Lake Shores™,” “Quail Springs Ranch™,” “SugarTree at the Brazos™,” “Mountain Springs Ranch™,” “Havenwood at Hunter’s CrossingTM,” “Vintage Oaks at the Vineyard™,” “King Oaks™,” “The Bridges at Preston Crossings™,” “Crystal Cove™,” “Fairway Crossings™,” “Woodlake™,” “Saddle Creek Forest™,” “The Settlement at Patriot Ranch™,” “Carolina National™,” “Brickshire™,” “Golf Club at Brickshire™,” “Preserve at Jordan Lake™,” “Encore Dividends™,” “Bluegreen Preferred™,” “BG Pirates Lodge™,” “Bluegreen Traveler Plus™,” “BG Club 36™,” “Bluegreen Wilderness Club at Long Creek Ranch™,” and “Bluegreen Wilderness Traveler at Shenandoah™” are trademarks or service marks of Bluegreen Corporation in the United States.

The terms “Big Cedar®” and “Bass Pro Shops®” are registered in the U.S. Patent and Trademark Office by Bass Pro Trademarks, LP.

The term “World Golf Village®” 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.

4



PART I - FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements.

BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

December 31,
2007

 

June 30,
2008

 

 

 


 


 

 

 

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

Cash and cash equivalents (including restricted cash of $19,460 and $23,716 at December 31, 2007 and June 30, 2008, respectively)

 

$

144,973

 

$

83,273

 

Contracts receivable, net

 

 

20,532

 

 

19,987

 

Notes receivable (net of allowance of $ 17,458 and $27,916 at December 31, 2007 and June 30, 2008, respectively)

 

 

160,665

 

 

226,803

 

Prepaid expenses

 

 

14,824

 

 

18,999

 

Other assets

 

 

23,405

 

 

29,277

 

Inventory, net

 

 

434,968

 

 

498,787

 

Retained interests in notes receivable sold

 

 

141,499

 

 

133,048

 

Property and equipment, net

 

 

94,421

 

 

109,968

 

Goodwill

 

 

4,291

 

 

8,502

 

 

 



 



 

Total assets

 

$

1,039,578

 

$

1,128,644

 

 

 



 



 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

38,901

 

$

34,914

 

Accrued liabilities and other

 

 

60,421

 

 

68,115

 

Deferred income

 

 

36,559

 

 

41,230

 

Deferred income taxes

 

 

98,362

 

 

99,552

 

Receivable-backed notes payable

 

 

54,999

 

 

119,703

 

Lines-of-credit and notes payable

 

 

176,978

 

 

240,854

 

10.50% senior secured notes payable

 

 

55,000

 

 

 

Junior subordinated debentures

 

 

110,827

 

 

110,827

 

 

 



 



 

Total liabilities

 

 

632,047

 

 

715,195

 

 

 

 

 

 

 

 

 

Minority interest

 

 

22,423

 

 

24,581

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 1,000 shares authorized; none issued

 

 

 

 

 

Common stock, $.01 par value, 90,000 shares authorized; 33,957 and 33,972 shares issued at December 31, 2007 and June 30, 2008, respectively

 

 

339

 

 

339

 

Additional paid-in capital

 

 

178,144

 

 

179,962

 

Treasury stock, 2,756 common shares at both December 31, 2007 and June 30, 2008, at cost

 

 

(12,885

)

 

(12,885

)

Accumulated other comprehensive income, net of income taxes

 

 

9,808

 

 

6,909

 

Retained earnings

 

 

209,702

 

 

214,543

 

 

 



 



 

Total shareholders’ equity

 

 

385,108

 

 

388,868

 

 

 



 



 

Total liabilities and shareholders’ equity

 

$

1,039,578

 

$

1,128,644

 

 

 



 



 


 

 

Note:

The condensed consolidated balance sheet at December 31, 2007 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.

5



BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

 

 


 

 

 

2007

 

2008

 

 

 


 


 

Revenues:

 

 

 

 

 

 

 

Gross sales of real estate

 

$

158,455

 

$

138,881

 

Estimated uncollectible VOI notes receivable

 

 

(15,181

)

 

(18,795

)

 

 



 



 

Sales of real estate

 

 

143,274

 

 

120,086

 

 

 

 

 

 

 

 

 

Other resort and communities operations revenue

 

 

15,590

 

 

17,806

 

Interest income

 

 

12,108

 

 

13,503

 

Other income, net

 

 

 

 

208

 

 

 



 



 

 

 

 

170,972

 

 

151,603

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of real estate sales

 

 

46,305

 

 

30,972

 

Cost of other resort and communities operations

 

 

11,855

 

 

11,074

 

Selling, general and administrative expenses

 

 

98,452

 

 

100,639

 

Interest expense

 

 

5,881

 

 

2,041

 

Other expense, net

 

 

246

 

 

 

 

 



 



 

 

 

 

162,739

 

 

144,726

 

 

 



 



 

 

 

 

 

 

 

 

 

Income before minority interest and provision for income taxes

 

 

8,233

 

 

6,877

 

Minority interest in income of consolidated subsidiary

 

 

1,633

 

 

1,320

 

 

 



 



 

Income before provision for income taxes

 

 

6,600

 

 

5,557

 

Provision for income taxes

 

 

2,508

 

 

2,112

 

 

 



 



 

Net income

 

$

4,092

 

$

3,445

 

 

 



 



 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.13

 

$

0.11

 

 

 



 



 

Diluted

 

$

0.13

 

$

0.11

 

 

 



 



 

 

 

 

 

 

 

 

 

Weighted average number of common and common equivalent shares:

 

 

 

 

 

 

 

Basic

 

 

30,926

 

 

31,227

 

 

 



 



 

Diluted

 

 

31,277

 

 

31,454

 

 

 



 



 

See accompanying notes to condensed consolidated financial statements.

6



BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30,

 

 

 


 

 

 

2007

 

2008

 

 

 


 


 

Revenues:

 

 

 

 

 

 

 

Gross sales of real estate

 

$

283,699

 

$

258,259

 

Estimated uncollectible VOI notes receivable

 

 

(26,594

)

 

(35,162

)

Gains on sales of VOI notes receivable

 

 

7,967

 

 

8,245

 

 

 



 



 

Sales of real estate

 

 

265,072

 

 

231,342

 

 

 

 

 

 

 

 

 

Other resort and communities operations revenue

 

 

30,608

 

 

35,676

 

Interest income

 

 

21,950

 

 

23,464

 

Other income, net

 

 

 

 

473

 

 

 



 



 

 

 

 

317,630

 

 

290,955

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of real estate sales

 

 

83,037

 

 

61,930

 

Cost of other resort and communities operations

 

 

24,274

 

 

23,761

 

Selling, general and administrative expenses

 

 

179,845

 

 

188,308

 

Interest expense

 

 

11,032

 

 

6,990

 

Other expense, net

 

 

973

 

 

 

 

 



 



 

 

 

 

299,161

 

 

280,989

 

 

 



 



 

 

 

 

 

 

 

 

 

Income before minority interest and provision for income taxes

 

 

18,469

 

 

9,966

 

Minority interest in income of consolidated subsidiary

 

 

3,267

 

 

2,158

 

 

 



 



 

Income before provision for income taxes

 

 

15,202

 

 

7,808

 

Provision for income taxes

 

 

5,777

 

 

2,967

 

 

 



 



 

Net income

 

$

9,425

 

$

4,841

 

 

 



 



 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.16

 

 

 



 



 

Diluted

 

$

0.30

 

$

0.15

 

 

 



 



 

 

 

 

 

 

 

 

 

Weighted average number of common and common equivalent shares:

 

 

 

 

 

 

 

Basic

 

 

30,943

 

 

31,220

 

 

 



 



 

Diluted

 

 

31,324

 

 

31,459

 

 

 



 



 

See accompanying notes to condensed consolidated financial statements.

7



BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended
June 30,

 

 

 


 

 

 

2007

 

2008

 

 

 


 


 

 

 

 

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

9,425

 

$

4,841

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Non-cash stock compensation expense

 

 

1,153

 

 

1,768

 

Minority interest in income of consolidated subsidiary

 

 

3,267

 

 

2,158

 

Depreciation and amortization

 

 

8,983

 

 

7,677

 

Gains on sales of VOI notes receivable

 

 

(7,967

)

 

(8,245

)

Loss on disposal of property and equipment

 

 

526

 

 

4

 

Estimated uncollectible notes receivable

 

 

26,614

 

 

35,279

 

Provision for deferred income taxes

 

 

5,777

 

 

2,967

 

Interest accretion on retained interests in notes receivable sold

 

 

(8,512

)

 

(8,282

)

Proceeds from sales of notes receivable

 

 

46,026

 

 

55,705

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Contracts receivable

 

 

(3,489

)

 

545

 

Notes receivable

 

 

(140,013

)

 

(159,020

)

Inventory

 

 

(17,075

)

 

(45,484

)

Prepaid expenses and other assets

 

 

335

 

 

(7,813

)

Accounts payable, accrued liabilities and other

 

 

14,920

 

 

8,827

 

 

 



 



 

Net cash used in operating activities

 

 

(60,030

)

 

(109,073

)

 

 



 



 

Investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(15,159

)

 

(12,681

)

Investment in statutory business trust

 

 

(619

)

 

 

Cash used in business acquisitions

 

 

 

 

(6,105

)

Cash received from retained interests in notes receivable sold

 

 

12,935

 

 

21,681

 

 

 



 



 

Net cash (used) provided by investing activities

 

 

(2,843

)

 

2,895

 

 

 



 



 

Financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings collateralized by notes receivable

 

 

77,348

 

 

126,827

 

Payments on borrowings collateralized by notes receivable

 

 

(7,292

)

 

(62,659

)

Proceeds from lines-of-credit facilities and other notes payable

 

 

38,055

 

 

74,409

 

Payments under lines-of-credit facilities and other notes payable

 

 

(49,996

)

 

(37,753

)

Payments on 10.50% senior secured notes

 

 

 

 

(55,000

)

Proceeds from issuance of junior subordinated debentures

 

 

20,619

 

 

 

Payment of debt issuance costs

 

 

(1,569

)

 

(1,396

)

Proceeds from exercise of stock options

 

 

553

 

 

50

 

 

 



 



 

Net cash provided by financing activities

 

 

77,718

 

 

44,478

 

 

 



 



 

Net increase (decrease) in cash and cash equivalents

 

 

14,845

 

 

(61,700

)

Cash and cash equivalents at beginning of period

 

 

71,148

 

 

144,973

 

 

 



 



 

Cash and cash equivalents at end of period

 

 

85,993

 

 

83,273

 

Restricted cash and cash equivalents at end of period

 

 

(26,675

)

 

(23,716

)

 

 



 



 

Unrestricted cash and cash equivalents at end of period

 

$

59,318

 

$

59,557

 

 

 



 



 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash operating, investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory acquired through financing

 

$

12,600

 

$

8,432

 

 

 



 



 

Property and equipment acquired through financing

 

$

896

 

$

3,643

 

 

 



 



 

Retained interests in notes receivable sold

 

$

5,065

 

$

9,624

 

 

 



 



 

Net change in unrealized gains in retained interests in notes receivable sold

 

$

(2,823

)

$

(4,676

)

 

 



 



 

See accompanying notes to condensed consolidated financial statements.

8



BLUEGREEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)

1. Organization and Significant Accounting Policies

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

The financial information furnished herein reflects all adjustments consisting of normal recurring items that, in our opinion, are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The results of operations for the three and six months ended June 30, 2008, are not necessarily indicative of the results to be expected for the year ending December 31, 2008. For further information, refer to our audited consolidated financial statements for the year ended December 31, 2007, which are included in our 2007 Annual Report on Form 10-K (“Annual Report”).

Organization

We provide Colorful Places to Live and Play® through our resorts and residential communities businesses. Our resorts business (“Bluegreen Resorts”) acquires, develops, markets, sells and manages real estate-based vacation ownership interests (“VOIs”) in resorts generally located in popular, high-volume, “drive-to” vacation destinations. VOIs in our resorts typically entitle the buyer to use resort accommodations through an annual or biennial allotment of “points” which represent their ownership and beneficial use rights in perpetuity in our Bluegreen Vacation Club (supported by an underlying deeded VOI held in trust for the buyer). Members in our Bluegreen Vacation Club may stay in any of our participating resorts or take advantage of an exchange program offered by a third-party world-wide vacation ownership exchange network of over 3,700 resorts and other vacation experiences such as cruises and hotel stays. During the six months ended June 30, 2008, our 28 sales offices were marketing and selling VOIs in 22 core resorts located in the United States and Aruba. As of June 30, 2008, we operated 20 sales offices on-site at our core resorts, six off-site sales offices and one on the campus of a resort under development. In July 2008, we commenced selling at our newly acquired resort, The Royal Suites at Atlantic Palace in Atlantic City, New Jersey. In addition, we anticipate sales to commence at our other new resort, Club La Pension in New Orleans, Louisiana, during the third quarter of 2008. Additionally, Bluegreen Vacation Club members who acquired or upgraded their VOIs on or after July 1, 2006, also have access to 18 Shell Vacation Club (“Shell”) resorts, through our Select Connections™ joint venture with Shell. Shell is an unaffiliated privately-held resort developer.

Our residential communities business (“Bluegreen Communities”) acquires, develops and subdivides property and markets residential homesites, the majority of which are sold directly to retail customers who seek to build a home generally in the future, in some cases on properties featuring a golf course and other related amenities.

Our other resort and communities operations revenues consist primarily of resort property management services, resort title services, resort amenity operations, non-cash sales incentives provided to buyers of VOIs, rental brokerage services, realty operations and daily-fee golf course operations. We also generate significant interest income by providing financing to individual purchasers of VOIs.

Principles of Consolidation

Our consolidated financial statements include the accounts of all of our wholly-owned subsidiaries and entities in which we hold a controlling financial interest. The only non-wholly owned subsidiary that we consolidate is Bluegreen/Big Cedar Vacations, LLC (the “Bluegreen/Big Cedar Joint Venture”), as we hold a 51% equity interest in the Bluegreen/Big Cedar Joint Venture, have an active role as the day-to-day manager of the Bluegreen/Big Cedar Joint Venture’s activities, and have majority voting control of the Bluegreen/Big Cedar Joint Venture’s management committee. We do not consolidate our 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

9



Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN No. 46R”). The statutory business trusts are accounted for under the equity method of accounting. We have eliminated all significant intercompany balances and transactions.

Use of Estimates

United States generally accepted accounting principles (“GAAP”) require us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

We have made certain reclassifications of prior period amounts to conform to the current period presentation.

Earnings Per Common Share

We compute basic earnings per common share by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per common share is computed in the same manner as basic earnings per common share, but gives effect to all dilutive stock options and unvested restricted stock using the treasury stock method. During the six months ended June 30, 2007 and 2008, a total of 138,313 and 15,000 shares of common stock, respectively, were issued as a result of stock option exercises. There were approximately 1.2 million stock options not included in diluted earnings per common share during the three and six months ended June 30, 2007 because the effect would be anti-dilutive. There were approximately 1.8 million and 1.6 million stock options not included in diluted earnings per common share during the three and six months ended June 30, 2008, respectively, because the effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2007

 

2008

 

2007

 

2008

 

 

 


 


 


 


 

Basic and diluted earnings per share – numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,092

 

$

3,445

 

$

9,425

 

$

4,841

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share - weighted-average shares

 

 

30,926

 

 

31,227

 

 

30,943

 

 

31,220

 

 

 



 



 



 



 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and unvested restricted stock

 

 

351

 

 

227

 

 

381

 

 

239

 

 

 



 



 



 



 

Denominator for diluted earnings per share - adjusted weighted-average shares

 

 

31,277

 

 

31,454

 

 

31,324

 

 

31,459

 

 

 



 



 



 



 

Basic earnings per common share

 

$

0.13

 

$

0.11

 

$

0.30

 

$

0.16

 

 

 



 



 



 



 

Diluted earnings per common share

 

$

0.13

 

$

0.11

 

$

0.30

 

$

0.15

 

 

 



 



 



 



 

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 3) 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 the reach of 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 an agreement that either: (1) 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).

10



In connection with such transactions, we retain subordinated traunches and rights to excess interest spread, 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 gains or losses on our retained interests in notes receivable sold are included in our shareholders’ equity as accumulated other comprehensive income, net of income taxes. Declines in fair value that are determined to be other than temporary are charged to operations and classified as a reduction to interest income.

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 estimated future expected cash flows 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. In the first six months ended June 30, 2008 we recorded a charge in March 2008 for other-than-temporary decreases in the fair value of three of our retained interest in notes receivable sold totaling approximately $2.7 million. The decrease in the fair value of our retained interest in notes receivable sold, and the resulting other-than-temporary charge, was based on both an increase in the discount rates applied to estimated future cash flows on our retained interests to reflect current interest rates in the securitization market, and higher than anticipated defaults in sold notes.

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
June 30,

 

Six Months Ended
June 30,

 

 

 


 


 

 

 

2007

 

2008

 

2007

 

2008

 

 

 


 


 


 


 

 

Net income

 

$

4,092

 

$

3,445

 

$

9,425

 

$

4,841

 

Change in net unrealized gains on retained interests in notes receivable sold, net of income taxes

 

 

(1,548

)

 

(1,500

)

 

(1,756

)

 

(2,899

)

 

 


 


 


 


 

Total comprehensive income

 

$

2,544

 

$

1,945

 

$

7,669

 

$

1,942

 

 

 


 


 


 


 

Recently Adopted Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a methodology for measuring fair value, and expands the required disclosure for fair value measurements. With the exception of its applicability to non-financial assets and liabilities (as discussed below), we adopted SFAS No. 157 on January 1, 2008, at which time it was applied prospectively.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and was adopted by us on January 1, 2008. To date, we have not elected the fair value measurement option for any financial assets or liabilities.

Accounting Pronouncements Not Yet Adopted

In February 2008, the FASB agreed to partially defer the effective date of SFAS No. 157, with respect to non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We are currently evaluating the impact that the adoption of the remaining provisions of SFAS No. 157 will have on our financial statements.

On December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), subject to limited exceptions, an acquiring entity will be required to recognize all the assets acquired

11



and liabilities assumed in a transaction at the acquisition-date fair value. Additionally, due diligence and transaction costs incurred to effect an acquisition will be expensed as incurred, as opposed to being capitalized as part of the acquisition purchase price. SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) must be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. We are currently evaluating the impact that SFAS No. 141(R) will have on our financial statements.

2. Business Combinations

During the three months ended June 30, 2008, we purchased real estate and operations at two resorts, The Royal Suites at Atlantic Palace in Atlantic City, New Jersey, and Club La Pension in New Orleans, Louisiana. Each of these acquisitions constituted the purchase of a business under SFAS No. 141, Business Combinations, and Emerging Issues Task Force (“EITF”) 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business. The combined purchase price of these acquisitions was $21.8 million, which was allocated as follows: VOI inventory of $9.9 million, property and equipment of $7.7 million, and goodwill of $4.2 million.

3. Sales of Notes Receivable

2008 Term Securitization. On March 31, 2008, the Company completed a private offering and sale of $60.0 million of timeshare loan-backed securities (the “2008 Term Securitization”). The total principal amount of the timeshare loans sold totaled $68.6 million, including: (1) $61.4 million of loans in aggregate principal of timeshare loans that were previously transferred under an existing timeshare loan purchase facility with Branch Banking & Trust Company (“BB&T”) (the “BB&T Purchase Facility”); and (2) $7.2 million of timeshare loans owned by us immediately prior to the 2008 Term Securitization. BB&T Capital Markets acted as the initial purchaser in the 2008 Term Securitization.

The proceeds from the 2008 Term Securitization were used to: (1) repay $51.0 million of the $60.6 million outstanding under the 2008 BB&T Purchase Facility; (2) deposit initial amounts in a required cash reserve account; (3) pay certain transaction fees and expenses, and (4) provide net cash proceeds of $5.8 million to us, which were used for general corporate purposes and debt service. The Company also received a retained interest in the future cash flows from the 2008 Term Securitization. The timeshare loans were sold to BRFC 2008-A LLC, the Company’s wholly-owned, special purpose finance subsidiary (the “Subsidiary”). The Subsidiary then sold the timeshare loans to BXG Receivables Note Trust 2008-A, a Delaware statutory trust (a qualified special purpose entity), without recourse to the Company or the Subsidiary except for breaches of certain representations and warranties at the time of sale.

There were no sales of notes receivable during the three months ended June 30, 2007 or 2008. Sales of notes receivable during the six months ended June 30, 2007 and 2008 were as follows (in millions):

12



 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale Facility

 

Aggregate
Principal
Balance of
Notes
Receivable

 

Purchase
Price

 

Gain
Recognized

 

Initial Fair
Value of
Retained
Interest

 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2006-A GE Purchase Facility

 

$

51.2

 

$

46.0

 

$

8.0

 

$

6.2

 

 

 



 



 



 



 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sale Facility

 

Aggregate
Principal
Balance of
Notes
Receivable

 

Purchase
Price

 

Gain
Recognized

 

Initial Fair
Value of
Retained
Interest

 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 Term Securitization

 

$

68.6

 

$

60.0

 

$

8.2

 

$

11.7

 

 

 



 



 



 



 

The following assumptions were used to measure the initial fair value of the retained interest in notes receivable sold during the six months ended June 30, 2007 and 2008:

 

 

 

 

 

 

 

For the Six Months Ended

 

 


 

 

June 30, 2007

 

June 30,
2008

 

 


 


 

 

 

 

 

Prepayment rates

 

15.0% - 11.0%

 

31.0% - 17.0%

Loss severity rates

 

38.0% - 71.3%

 

38.0%

Default rates

 

10.5% - 1.0%

 

7.2% - 1.0%

Discount rates

 

9.0%

 

13.4%

4. Retained Interests in Notes Receivable Sold

Our retained interests in notes receivable sold, which are classified as available-for-sale investments, and their associated unrealized gain (loss) are set forth below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007:

 

Amortized
Cost

 

Unrealized
Gain (Loss)

 

Fair Value

 


 


 


 


 

2002 Term Securitization

 

$

8,842

 

$

 

$

8,842

 

2004 Term Securitization

 

 

11,934

 

 

2,797

 

 

14,731

 

2004 GE Purchase Facility

 

 

5,633

 

 

(609

)

 

5,024

 

2005 Term Securitization

 

 

29,268

 

 

2,230

 

 

31,498

 

2006 GE Purchase Facility

 

 

15,481

 

 

953

 

 

16,434

 

2006 Term Securitization

 

 

24,522

 

 

1,529

 

 

26,051

 

2007 Term Securitization

 

 

30,000

 

 

8,919

 

 

38,919

 

 

 



 



 



 

Total

 

$

125,680

 

$

15,819

 

$

141,499

 

 

 



 



 



 

13



 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2008:

 

Amortized
Cost

 

Unrealized
Gain (Loss)

 

Fair Value

 


 


 


 


 

2002 Term Securitization

 

$

8,890

 

$

(354

)

$

8,536

 

2004 Term Securitization

 

 

9,217

 

 

2,229

 

 

11,446

 

2004 GE Purchase Facility

 

 

3,792

 

 

32

 

 

3,824

 

2005 Term Securitization

 

 

21,784

 

 

2,553

 

 

24,337

 

2006 GE Purchase Facility

 

 

15,667

 

 

218

 

 

15,885

 

2006 Term Securitization

 

 

20,158

 

 

171

 

 

20,329

 

2007 Term Securitization

 

 

32,265

 

 

4,430

 

 

36,695

 

2008 Term Securitization

 

 

10,131

 

 

1,865

 

 

11,996

 

 

 



 



 



 

Total

 

$

121,904

 

$

11,144

 

$

133,048

 

 

 



 



 



 

The following assumptions were used to measure the fair value of the above retained interests:

 

 

 

 

 

 

 

As of

 

 


 

 

December, 31,
2007

 

June 30,
2008

 

 


 


 

 

 

 

 

Prepayment rates

 

33% - 6%

 

35% - 5%

Loss severity rates

 

18% - 72%

 

6% - 38%

Default rates

 

12% - 0%

 

13% - 0%

Discount rates

 

12.6%

 

14.5%

As previously stated,  in the first six months ended June 30, 2008 we recorded a charge in March 2008 for other-than-temporary decreases in the fair value of three of our retained interest in notes receivable sold totaling approximately $2.7 million.  The decrease in the fair value of our retained interest in notes receivable sold, and the resulting other-than-temporary charge, was based on both an increase in the discount rates applied to estimated future cash flows on our retained interests to reflect current nterest rates in the securitization market, and higher than anticipated defaults in sold notes.

5. Lines-of-Credit and Receivable-Backed Notes Payable

Lines-of-Credit and Notes Payable

Please refer to our Annual Report as well as the “Liquidity and Capital Resources” section included in “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for specific information related to our debt. The table below sets forth the balances of our lines-of-credit and notes payable (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 


 

 

 

December 31, 2007

 

June 30, 2008

 

 

 


 


 

 

 

Balance

 

Interest
Rates

 

Balance

 

Interest
Rates

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The GMAC Communities Facility

 

$

66,418

 

 

8.25%

 

$

67,769

 

 

6.00%

 

The GMAC AD&C Facility

 

 

81,662

 

 

9.10%

 

 

109,464

 

 

6.96%

 

Textron AD&C Facility

 

 

9,701

 

 

8.50%

 

 

25,180

 

 

6.25 –6.50%

 

Wachovia Notes Payable

 

 

16,353

 

 

6.60 – 6.95%

 

 

22,334

 

 

4.46 – 4.81%

 

Fifth Third Bank Note Payable

 

 

 

 

 

 

3,400

 

 

5.46%

 

Wachovia Line-of-Credit

 

 

 

 

 

 

9,949

 

 

4.21%

 

Other

 

 

2,844

 

 

3.29 – 11.03%

 

 

2,758

 

 

5.86 – 11.03%

 

 

 



 

 

 

 



 

 

 

 

Total

 

$

176,978

 

 

 

 

$

240,854

 

 

 

 

 

 



 

 

 

 



 

 

 

 

Significant changes during the six months ended June 30, 2008 include:

The GMAC Communities Facility. During the six months ended June 30, 2008, we borrowed $16.5 million to fund development expenditures on certain of the secured projects. These borrowings were partially offset by repayments

14



of $15.1 million. The interest rate on this borrowing is the prime rate plus 1.00%, and the maturity date is September 30, 2009.

The GMAC AD&C Facility. During the six months ended June 30, 2008, we borrowed $30.3 million to fund construction and development at our Club 36 resort in Las Vegas, Nevada, and $16.6 million for construction and development at our Fountains Resort in Orlando, Florida. These borrowings were partially offset by repayments of $19.1 million. The interest rate on this borrowing is the one-month LIBOR plus 4.50%, and matures at various dates based upon the sub-loan agreements.

Textron AD&C Facility. In April 2008, we borrowed $9.0 million in connection with the acquisition of The Royal Suites at Atlantic Palace located in Atlantic City, New Jersey. In May 2008, we also borrowed $8.4 million in connection with the acquisition of additional VOIs at one of our existing resorts in Wisconsin. These borrowings were partially offset by net repayments of $1.9 million. The interest rate on this borrowing is the prime rate plus 1.50%, and the maturity date varies based on the sub-loan borrowing agreements; however, the borrowing period ends on April 17, 2010.

Wachovia Notes Payable. In June 2008, we entered into a note payable for $6.1 million in connection with the acquisition of Club La Pension located in New Orleans, Louisiana. The interest is due monthly and is charged at the 30-day LIBOR plus 2.35%, and matures in June 2012.

Fifth Third Bank. In April 2008, we purchased a building which we plan to convert into a preview center in Myrtle Beach, South Carolina. The purchase price was $4.8 million, of which $3.4 million was financed by a note payable to Fifth Third Bank. The note payable allows for total borrowing of $7.1 million, the remaining $3.7 million is available to fund refurbishment of the building, subject to the terms and conditions of the note. Interest is payable monthly through the earlier of the construction completion date or October 31, 2009 and is charged at the one-month LIBOR plus 3%. Subsequent to the construction completion date or October 31, 2009, interest and principle payments shall be made until maturity. The note payable matures in April 2023.

The Wachovia Line-of-Credit. In March 2008, we borrowed $10.0 million on this line of credit for general corporate purposes. Amounts borrowed under this line bear interest at the 30-day LIBOR plus 1.75%. Interest is due monthly, and all outstanding amounts are due on July 30, 2009. The line-of-credit agreement contains certain covenants and conditions typical of arrangements of this type. As of June 30, 2008, an aggregate of $9.5 million of irrevocable letters of credit were provided under this line-of-credit in connection with regulatory requirements to conduct presales of one of our resorts.

Total interest expense capitalized to construction in progress was $3.9 million and $7.3 million for the three and six months ended June 30, 2007, respectively, and $3.7 million and $8.7 million for the three and six months ended June 30, 2008, respectively.

Receivable-Backed Notes Payable

The table below sets forth the balances of our receivable-backed notes payable facilities (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 


 

 

 

December 31, 2007

 

June 30, 2008

 

 

 


 


 

 

 

Balance

 

Interest
Rate

 

Balance

 

Interest
Rate

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 BB&T Purchase Facility

 

$

16,967

 

5.85

%

 

$

71,369

 

4.21

%

 

GMAC Receivables Facility

 

 

11,400

 

8.60

%

 

 

9,418

 

6.46

%

 

GE Bluegreen/Big Cedar Receivables Facility

 

 

24,100

 

6.35

%

 

 

19,363

 

4.21

%

 

Textron Facility

 

 

1,482

 

8.25

%

 

 

1,221

 

6.00

%

 

Foothill Facility

 

 

1,050

 

7.75

%

 

 

18,332

 

5.50

%

 

 

 



 

 

 

 



 

 

 

 

Total

 

$

54,999

 

 

 

 

$

119,703

 

 

 

 

 

 



 

 

 

 



 

 

 

 

2008 BB&T Purchase Facility. In March 2008, we extended the BB&T Purchase Facility to May 2010 and expanded the facility amounts to a cumulative purchase price of $150.0 million, on a revolving basis. Interest on the 2008 BB&T Purchase Facility is equal to the 30-day LIBOR plus 1.75%. During the first six months of 2008, we transferred $131.5 million of VOI notes receivable to the 2008 BB&T Purchase Facility and received $109.1 million in cash proceeds. In conjunction with the 2008 Term Securitization, we repaid $51.0 million of the outstanding

15



balance on March 31, 2008. At June 30, 2008, the outstanding balance was $71.4 million. As of June 30, 2008, our remaining availability under this facility was $78.6 million.

Foothill Facility. During June 2008, we amended the Loan and Security Agreement with Wells Fargo Foothill, Inc. (“Foothill”). This facility is a $30.0 million revolving credit facility secured by the pledge of Bluegreen Communities’ and Bluegreen Resorts’ receivables. The facility, as amended, provides for a borrowing period for advances on eligible receivables through December 31, 2009 with a maturity date of all borrowings of December 31, 2010. In addition, the amended facility provides for up to $25 million (included in the $30 million facility amount) of advances at 90% on certain timeshare notes receivable that were not previously eligible under the facility. Principal payments are based on principal and interest payments received by us on pledged receivables. Interest is due monthly and is charged at the prime lending rate plus a range of 0.25% to 0.50%. During June 2008, we transferred $19.7 million of timeshare notes receivable to this facility and received cash proceeds of $17.6 million, net of issuance costs. At June 30, 2008, $0.4 million of the outstanding balance was secured by the pledge of Bluegreen Communities’ receivables and $17.9 million was secured by the pledge of Bluegreen Resorts’ receivables. As of June 30, 2008, our remaining availability under this facility was $11.7 million.

6. 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 repaid $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 $1.4 million. On March 31, 2008, we repaid the remaining $55.0 million of notes plus accrued interest.

7. Common Stock and Stock Option Plans

The following table lists relevant information pertaining to our grants of stock options and restricted stock during the six months ended June 30, 2008 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Option Awards

 

Restricted Stock Awards

 

 

 


 


 

 

 

Quantity

 

Grant Date
Fair Value

 

Quantity

 

Grant Date
Fair Value

 

 

 


 


 


 


 

Directors

 

 

242

 

$

663

 

 

142

 

$

991

 

Employees

 

 

778

 

 

2,264

 

 

1,183

 

 

9,208

 

 

 



 



 



 



 

Total

 

 

1,020

 

$

2,927

 

 

1,325

 

$

10,199

 

 

 



 



 



 



 

We recognize stock-based compensation expense under the provisions of SFAS No. 123R, Share-Based Payment (revised 2004) (“SFAS No. 123R”). We utilize the Black-Scholes option pricing model for calculating the fair value of each option granted. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, this model requires the input of subjective assumptions, including the expected price volatility of the underlying stock. Projected data related to the expected volatility and expected life of stock options is based upon historical and other information. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore, the existing valuation models do not provide a precise measure of the fair value of our employee stock options. Additionally, SFAS No. 123R also requires us to estimate forfeitures in calculating the expense relating to stock-based compensation.

Total stock-based compensation expense for directors and employees during the three and six months ended June 30, 2007 was $0.5 million and $1.2 million, respectively. Total stock-based compensation expense for directors and employees during the three and six months ended June 30, 2008 was $1.0 million and $1.8 million, respectively. The following table represents certain information related to our unrecognized compensation for our stock-based awards as of June 30, 2008:

16



 

 

 

 

 

 

 

 

As of June 30, 2008

 

Weighted
Average
Remaining
Recognition
Period

 

Unrecognized
Compensation

 


 


 


 

 

 

(in years)

 

 

(000’s)

 

 

 

 

 

 

 

 

 

Stock Option Awards

 

 

3.7

 

$

8,635

 

Restricted Stock Awards

 

 

4.7

 

$

11,693

 

A summary of our stock option activity related to our stock incentive plans is presented below (in thousands, except price per option data):

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding
Options

 

Weighted
Average
Exercise Price
Per Option

 

Number of
Options
Exercisable

 

 

 


 


 


 

Balance at December 31, 2007

 

 

1,938

 

$

11.51

 

 

579

 

Granted

 

 

1,020

 

$

7.68

 

 

 

 

Forfeited

 

 

(99

)

$

15.07

 

 

 

 

Expired

 

 

(5

)

$

8.50

 

 

 

 

Exercised

 

 

(15

)

$

3.48

 

 

 

 

 

 



 

 

 

 

 

 

 

Balance at June 30, 2008

 

 

2,839

 

$

10.05

 

 

757

 

 

 



 

 

 

 

 

 

 

A summary of the status of the Company’s unvested restricted stock awards as of June 30, 2008, and activity during the six months ended June 30, 2008, is as follows (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

Number
of Shares

 

Weighted-Average
Grant-Date
Fair Value

 

 

 


 


 

Unvested at December 31, 2007

 

 

207

 

$

11.98

 

Granted

 

 

1,325

 

$

7.69

 

Vested

 

 

(6

)

$

11.98

 

Forfeited

 

 

(14

)

$

11.98

 

 

 



 

 

 

 

Unvested at June 30, 2008

 

 

1,512

 

$

8.22

 

 

 



 

 

 

 

8. Business Segments

We have two reportable business segments – Bluegreen Resorts and Bluegreen Communities. Bluegreen Resorts develops, markets, and sells VOIs in our resorts, through the Bluegreen Vacation Club, and provides resort management services to resort property owners associations. Bluegreen Communities acquires large tracts of real estate, which are subdivided, improved (in some cases to include a golf course on the property and other related amenities) and sold, typically on a retail basis as homesites. Disclosures for our business segments are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen
Resorts

 

Bluegreen
Communities

 

Total

 

 

 


 


 


 

For the Three Months Ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

Sales of real estate

 

$

105,247

 

$

38,027

 

$

143,274

 

Other resort and communities operations revenue

 

 

12,235

 

 

3,355

 

 

15,590

 

Depreciation expense

 

 

2,107

 

 

431

 

 

2,538

 

Field operating profit

 

 

8,225

 

 

6,527

 

 

14,752

 

17



 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen
Resorts

 

Bluegreen
Communities

 

Total

 

 

 


 


 


 

For the Three Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

Sales of real estate

 

$

107,120

 

$

12,966

 

$

120,086

 

Other resort and communities operations revenue

 

 

15,067

 

 

2,739

 

 

17,806

 

Depreciation expense

 

 

1,854

 

 

400

 

 

2,254

 

Field operating profit

 

 

5,373

 

 

1,035

 

 

6,408

 


 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen
Resorts

 

Bluegreen
Communities

 

Total

 

 

 


 


 


 

For the Six Months Ended June 30, 2007

 

 

 

 

 

 

 

 

 

 

Sales of real estate

 

$

192,171

 

$

72,901

 

$

265,072

 

Other resort and communities operations revenue

 

 

25,073

 

 

5,535

 

 

30,608

 

Depreciation expense

 

 

4,224

 

 

857

 

 

5,081

 

Field operating profit

 

 

15,973

 

 

15,335

 

 

31,308

 


 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen
Resorts

 

Bluegreen
Communities

 

Total

 

 

 


 


 


 

For the Six Months Ended June 30, 2008

 

 

 

 

 

 

 

 

 

 

Sales of real estate

 

$

197,467

 

$

33,875

 

$

231,342

 

Other resort and communities operations revenue

 

 

29,029

 

 

6,647

 

 

35,676

 

Depreciation expense

 

 

3,760

 

 

807

 

 

4,567

 

Field operating profit

 

 

11,170

 

 

4,904

 

 

16,074

 


 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen
Resorts

 

Bluegreen
Communities

 

Total

 

 

 


 


 


 

As of December 31, 2007

 

 

 

 

 

 

 

 

 

 

Notes Receivable

 

$

155,592

 

$

5,073

 

$

160,665

 

Inventory

 

 

288,969

 

 

145,999

 

 

434,968

 

Goodwill

 

 

4,291

 

 

 

 

4,291

 


 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen
Resorts

 

Bluegreen
Communities

 

Total

 

 

 


 


 


 

As of June 30, 2008

 

 

 

 

 

 

 

 

 

 

Notes Receivable

 

$

222,017

 

$

4,786

 

$

226,803

 

Inventory

 

 

343,948

 

 

154,839

 

 

498,787

 

Goodwill

 

 

8,502

 

 

 

 

8,502

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 


 


 

 

 

2007

 

2008

 

2007

 

2008

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Field operating profit for reportable segments

 

$

14,752

 

$

6,408

 

$

31,308

 

$

16,074

 

Interest income

 

 

12,108

 

 

13,503

 

 

21,950

 

 

23,464

 

Other (expense) income, net

 

 

(246

)

 

208

 

 

(973

)

 

473

 

Corporate general and administrative expenses

 

 

(12,500

)

 

(11,201

)

 

(22,784

)

 

(23,055

)

Interest expense

 

 

(5,881

)

 

(2,041

)

 

(11,032

)

 

(6,990

)

 

 



 



 



 



 

Consolidated income before minority interest and provision for income taxes

 

$

8,233

 

$

6,877

 

$

18,469

 

$

9,966

 

 

 



 



 



 



 

18



Depreciation expense for our reportable segments reconciled to our consolidated depreciation expense is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 


 


 

 

 

2007

 

2008

 

2007

 

2008

 

 

 


 


 


 


 

Depreciation expense for reportable segments

 

$

2,538

 

$

2,254

 

$

5,081

 

$

4,567

 

Depreciation expense for corporate fixed assets

 

 

1,145

 

 

1,121

 

 

2,319

 

 

2,205

 

 

 



 



 



 



 

Consolidated depreciation expense

 

$

3,683

 

$

3,375

 

$

7,400

 

$

6,772

 

 

 



 



 



 



 

Assets for our reportable segments reconciled to our total consolidated assets are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

As of

 

 

 


 

 

 

December 31,
2007

 

June 30,
2008

 

 

 



 



 

 

 

 

 

 

 

 

 

Notes receivable for reportable segments

 

$

160,665

 

$

226,803

 

Inventory for reportable segments

 

 

434,968

 

 

498,787

 

Goodwill

 

 

4,291

 

 

8,502

 

Assets not allocated to reportable segments

 

 

439,654

 

 

394,552

 

 

 



 



 

Total assets

 

$

1,039,578

 

$

1,128,644

 

 

 



 



 

Geographic Information

Sales of real estate by geographic area are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months
Ended June 30,

 

For the Six Months
Ended June 30,

 

 

 


 


 

 

 

2007

 

2008

 

2007

 

2008

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

141,615

 

$

118,478

 

$

260,530

 

$

227,926

 

Aruba

 

 

1,659

 

 

1,608

 

 

4,542

 

 

3,416

 

 

 



 



 



 



 

Consolidated totals

 

$

143,274

 

$

120,086

 

$

265,072

 

$

231,342

 

 

 



 



 



 



 

Inventory by geographic area is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

As of

 

 

 


 

 

 

December 31,
2007

 

June 30,
2008

 

 

 


 


 

 

 

 

 

 

 

 

 

United States

 

$

431,160

 

$

494,702

 

Aruba

 

 

3,808

 

 

4,085

 

 

 



 



 

Consolidated totals

 

$

434,968

 

$

498,787

 

 

 



 



 

9. Income Taxes

We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. During 2007, the Internal Revenue Service completed its audit of our 2004 and 2005 U.S. federal income tax returns. With certain exceptions, we are no longer subject to state and local, or non-U.S. income tax examinations by tax authorities for years before 2003.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. Based on an evaluation of uncertain tax provisions, we measure tax benefits based on the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The adoption of FIN 48 on January 1, 2007 did not impact our financial position or results of operations.

As of June 30, 2008, we had no amounts recorded for uncertain tax positions.

19



During the three months ended June 30, 2008, we made certain operational changes to optimize the utilization of certain of our state net operating losses. In addition to optimizing our utilization of state net operating losses, the implementation of these changes had the impact of reducing our deferred interest obligation under Internal Revenue Code (“IRC”) Section 453 by approximately $2.4 million reflected as a reduction of interest expense. IRC Section 453 requires that certain companies accrue and pay interest on income deferred under the installment method of profit recognition (an acceptable method for tax reporting).

10. Contingencies

Bluegreen Resorts

Tennessee Tax Audit

In 2005, the State of Tennessee Audit Division (the “Division”) audited certain subsidiaries within Bluegreen Resorts for the period from December 1, 2001 through December 31, 2004. On September 23, 2006, the Division issued a notice of assessment for approximately $652,000 of accommodations tax based on the use of Bluegreen Vacation Club accommodations by Bluegreen Vacation Club members who became members through the purchase of non-Tennessee property. We believe the attempt to impose such a tax is contrary to Tennessee law and intend to vigorously oppose such assessment by the Division. An informal conference was held in December 2007 to discuss this matter with representatives of the Division. No formal resolution of the issue was reached during the conference and no further action has to date been initiated yet by the State of Tennessee. While the timeshare industry has been successful in challenging the imposition of sales taxes on the use of accommodations by timeshare owners, there is no assurance that we will be successful in contesting the current assessment.

Shore Crest Claim

We filed suit against the general contractor with regard to alleged construction defects at our Shore Crest Vacation Villas resort in South Carolina, including deficiencies in exterior insulating and finishing systems that have resulted in water intrusion; styled Shore Crest Vacation Villas II Owners Association, Inc., Bluegreen Corporation vs. Welbro Constructors, S.C., Inc. et al. Case No.: 04-CP-26-500 and Shore Crest Vacation Villas Owners Association, Inc., Bluegreen Vacations Unlimited, Inc., as successor to Patten Resorts, Inc. and as successor to Bluegreen Resorts, Inc. vs. Welbro Constructors Inc. et al. Case No. 04-CP-26-499. We are seeking to recover costs to repair these deficiencies from the defendants. Whether the matter is settled by litigation or by negotiation, it is possible that we may need to participate financially in some way to correct the construction deficiencies and will continue to incur legal and other costs as the matter is pursued. As of June 30, 2008, we had accrued $1.3 million related to this matter.

Bluegreen Communities

Mountain Lakes

Bluegreen Southwest One, L.P., (“Southwest”), a subsidiary of Bluegreen Corporation, is the developer of the Mountain Lakes subdivision in Texas. In Cause No. 28006; styled Betty Yvon Lesley et a1 v. Bluff Dale Development Corporation, Bluegreen Southwest One. L.P. #et al. in the 266th Judicial District Court, Erath County, Texas, the plaintiffs filed a declaratory judgment action against Southwest seeking to develop their reserved mineral interests in, on and under the Mountain Lakes subdivision. The plaintiffs’ claims are based on property law, oil and gas law, contract and tort theories. The property owners association and some of the individual landowners have filed cross actions against Bluegreen, Southwest and individual directors of the property owners association related to the mineral rights and certain amenities in the subdivision as described below. On January 17, 2007, the court ruled that the restrictions placed on the development that prohibited oil and gas production and development were invalid and not enforceable as a matter of law, that such restrictions do not prohibit the development of the plaintiffs’ prior reserved mineral interests and that Southwest breached its duty to lease the minerals to third parties for development. The Court further ruled that Southwest is the sole holder of the right to lease the minerals to third parties. The order granting the plaintiffs’ motion was severed into a new cause styled Cause No. 28769 Betty Yvon Lesley et a1 v. Bluff Dale Development Corporation, Bluegreen Southwest One. L.P. #et al. in the 266th Judicial District Court, Erath County, Texas. Southwest has appealed the trial court’s ruling. The appeal is styled Bluegreen Southwest One, L.P. et al. v. Betty Yvon Lesley et al.; in the 11th Court of Appeals, Eastland, Texas. We do not believe that we have material exposure to the property owners association based on the cross claim relating to the mineral rights other than a potential claim for legal fees incurred by the property owners association in connection

20



with the matter. As of June 30, 2008, we had accrued $1.5 million in connection with the issues raised related to the mineral rights claims.

Separately, one of the amenity lakes in the Mountain Lakes development did not reach the expected water level after construction was completed. Owners of homesites within the Mountain Lakes subdivision and the property owners Association of Mountain Lakes have asserted cross claims against Southwest and Bluegreen regarding such failure as part of the Lesley litigation referenced above as well as in Cause No. 067-223662-07; Property Owners Association of Mountain Lakes Ranch, Inc. v. Bluegreen Southwest One, L.P. et al.; in the 67th Judicial District Court of Tarrant County, Texas. Southwest continues to investigate reasons for the delay of the lake to fill and currently estimates that the cost of remediating the condition will be approximately $3.0 million. The amount was accrued during the year ended December 31, 2006. Additional claims may be pursued in the future in connection with these matters, and it is not possible at this time to estimate the likelihood of loss or amount of potential exposure with respect to any such matters.

11. Subsequent Events

In July 2008, we borrowed $6.6 million under the GMAC AD&C Facility to fund development activities at our Club 36 resort in Las Vegas, Nevada. In addition, we also borrowed $4.9 million in connection with the development at our Fountains resort in Orlando, Florida. Subsequent to these borrowings, net of repayments, we had approximately $32.7 million in remaining availability on this facility.

In July 2008, we transferred $24.0 million of VOI notes receivable and received $19.9 million in cash proceeds under the 2008 BB&T Purchase Facility. Subsequent to this borrowing we had $59.8 million in remaining availability on this facility.

In July 2008, we granted approximately 42,000 shares of restricted common stock and options to purchase approximately 53,000 shares of common stock to certain of our non-employee directors. These awards were granted under the 2008 Stock Incentive Plan as compensation to the non-employee directors. The total grant date fair value of all the grants was approximately $408,000.

In July 2008, we signed a non-binding letter of intent relating to the acquisition of the Company at a price of $15.00 per common share by Diamond Resorts International (Diamond Resorts), which would result in a transaction value of approximately $500 million, exclusive of Bluegreen’s outstanding debt. The proposed transaction is subject to numerous terms and conditions, including, but not limited to, satisfactory completion of due diligence by Diamond Resorts, the signing of a definitive agreement, and approvals by Bluegreen’s Board of Directors and the Company’s shareholders. There can be no assurances that negotiations will lead to the signing of a definitive agreement, that financing for the transaction will be available, that any proposed transaction will be accepted or approved by the Company’s Board of Directors and shareholders, or that the sale will be completed based on the signing of the non-binding letter of intent or the execution of a definitive agreement, or that Bluegreen will identify any alternative transaction that would provide greater value to its shareholders.

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 Litigation Reform Act of 1995 and are making the following statements 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, receivables performance 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, availability of financing, increases in interest rates, changes in regulations and other factors discussed throughout our SEC filings, including the Risk Factor section of our Annual Report, 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 Quarterly 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.

 

 

Our continued liquidity and profitability depends on our ability to sell or borrow against our notes receivable.

 

 

We depend on additional funding to finance our operations.

 

 

There has been a material deterioration in the sub-prime lending markets which could adversely impact our liquidity and earnings.

 

 

We would incur substantial losses if the customers we finance default on their obligations.

 

 

Our results of operations and financial condition could be adversely impacted if our estimates concerning our notes receivable are incorrect.

 

 

The state of the economy, generally, interest rates and the availability of financing and increased fuel prices could affect our ability to market VOIs and residential homesites.

 

 

Our success depends on our ability to market our products successfully and efficiently.

 

 

We are subject to the risks of the real estate market and the risks associated with real estate development, including the risks and uncertainties relating to the cost and availability of desirable land, labor and construction materials.

 

 

Claims for development-related defects could adversely affect our financial condition and operating results.

 

 

We may not successfully execute our growth strategy.

 

 

We face a variety of risks associated with any expansion of our operations.

 

 

We may face additional risks when and if we expand into new markets.

 

 

The resale market for VOIs could adversely affect our business.

22



 

 

 

 

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.

 

 

 

 

Environmental liabilities, including claims with respect to mold or hazardous or toxic substances, could have a material adverse impact on our business.

 

 

 

 

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 our reports filed with the SEC including our Annual Report.

Executive Overview

We operate through two business segments – Bluegreen Resorts and Bluegreen Communities. Bluegreen Resorts develops, markets and sells VOIs for inclusion in the Bluegreen Vacation Club, and provides resort management services to resort property owners associations. Bluegreen Communities acquires large tracts of real estate, which it subdivides, improves (in some cases to include a golf course on the property and other related amenities) and sells, typically on a retail basis, as homesites.

During the six months ended June 30, 2008, we acquired two vacation ownership properties, our Atlantic City and New Orleans resorts. We commenced selling VOIs at our Atlantic City resort in July 2008, and plan to open a sales office at our New Orleans resort in the third quarter. Also during the first half of 2008, we closed an underperforming off-site sales office in Dallas, Texas.

We have historically experienced and expect to continue to experience seasonal fluctuations in our gross revenues and net earnings. This seasonality may cause significant fluctuations in our quarterly operating results, with the majority of our gross revenues and net earnings historically expected to occur in the quarters ending in September and December each year. Although we expect to see more potential customers at our sales offices during the quarters ending in June and September, ultimate recognition of the resulting sales during these periods may be delayed due to complex down payment requirements for real estate sales under GAAP or due to the timing of development and the requirement that we use the percentage-of-completion method of accounting. We expect that we will continue to invest in projects that will require substantial development (with significant capital requirements), and as a consequence, our results of operations may fluctuate significantly between quarterly and annual periods as a result of the required use of the percentage-of-completion method of accounting.

We believe that inflation and changing prices have materially impacted our revenues and results of operations, specifically due to periodic increases in the sales prices of our VOIs and homesites and increases in construction and development costs from time to time. We expect the increased construction and development costs over the past few years to result in an increase in our cost of sales for the foreseeable future. There is no assurance that we will be able to increase or maintain the current level of our sales prices or that increased construction costs will not have a material adverse impact on our gross margin. In addition, to the extent that inflation in general or increased prices for our VOIs and homesites would adversely impact consumer sentiment, our results of operations could be adversely impacted. Also, to the extent inflationary trends, tightened credit markets or other factors affect interest rates, our debt service costs may increase.

Our Bluegreen Communities business continues to be adversely impacted by deterioration in the real estate markets. Although to date we have not experienced a significant reduction in sale prices, we have experienced a decrease in demand, particularly for higher priced premium homesites, and a decrease in sales volume.

We recognize revenue on homesite and VOI sales when a minimum of 10% of the sales price has been received in cash, the refund or rescission period has expired, collectibility of the receivable representing the remainder of the sales price is reasonably assured and we have completed substantially all of our obligations with respect to any development of the real estate sold. Refund or rescission periods include those required by law and those provided for in our sales contracts. With respect to VOI sales, the revenue recognition rules require that incentives and other similarly treated items, such as customer down payment equity earned through our Sampler Program, be considered in calculating the required down payment for our VOI sales. If, after considering the value of sales incentives provided, the required 10% of sales price down payment threshold is not met, the VOI sale and the related cost of sale and direct selling costs are deferred and not recognized until the buyer’s commitment test is satisfied, generally

23



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.

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.

We finance approximately 95% of Bluegreen Resorts sales of VOIs, and accordingly, are subject to the risk of defaults by customers. We reduce sales of VOIs by our estimate of future uncollectible note balances on originated VOI receivables, excluding any benefit for the value of future recoveries. During the first six months of 2008, we reduced sales of VOIs by $35.2 million for such provision.

The allowance for loan losses by segment as of December 31, 2007 and June 30, 2008 was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen
Resorts

 

Bluegreen
Communities

 

Total

 

 

 


 


 


 

 

December 31, 2007:

 

 

 

 

 

 

 

 

 

 

Notes receivable

 

$

172,787

 

$

5,336

 

$

178,123

 

Allowance for loan losses

 

 

(17,196

)

 

(262

)

 

(17,458

)

 

 



 



 



 

Notes receivable, net

 

$

155,591

 

$

5,074

 

$

160,665

 

 

 



 



 



 

Allowance as a % of gross notes receivable

 

 

10

%

 

5

%

 

10

%

 

 



 



 



 

 

June 30, 2008:

 

 

 

 

 

 

 

 

 

 

Notes receivable

 

$

249,723

 

$

4,996

 

$

254,719

 

Allowance for loan losses

 

 

(27,706

)

 

(210

)

 

(27,916

)

 

 



 



 



 

Notes receivable, net

 

$

222,017

 

$

4,786

 

$

226,803

 

 

 



 



 



 

Allowance as a % of gross notes receivable

 

 

11

%

 

4

%

 

11

%

 

 



 



 



 

The table below sets forth the activity in our allowance for uncollectible notes receivable for the six months ended June 30, 2008 (in thousands):

 

 

 

 

 

Balance, December 31, 2007

 

$

17,458

 

Provision for loan losses(1)

 

 

35,279

 

Less: Allowance on sold receivables

 

 

(10,964

)

Less: Write-offs of uncollectible receivables

 

 

(13,857

)

 

 



 

Balance, June 30, 2008

 

$

27,916

 

 

 



 

                           (1) Includes provision for loan losses on homesite notes receivable

We determine the adequacy of our reserve for loan losses and review it on a regular basis considering, among other factors, historical frequency of default, loss experience, static pool analyses, estimated value of the underlying collateral (communities notes receivable, only), present and expected economic conditions, as well as other factors. For VOI notes receivable, we estimate uncollectibles based on historic uncollectibles for similar VOI notes receivable. The average annual default rates and delinquency rates (31 or more days past due) on Bluegreen Resorts’ and Bluegreen Communities’ receivables owned or serviced by us were as follows:

 

 

 

 

 

 

 

 

Average Annual Default Rates

 

Twelve months ended
June 30,

 


 


 

 

Division

 

2007

 

2008

 


 


 


 

Bluegreen Resorts

 

 

7.2%

 

 

8.2%

 

Bluegreen Communities

 

 

3.7%

 

 

3.4%

 

24



 

 

 

 

 

 

 

 

Delinquency Rates

 

As of

 


 


 

Division

 

December 31,
2007

 

June 30,
2008

 


 


 


 

Bluegreen Resorts

 

 

  4.5%

 

 

  3.6%

 

Bluegreen Communities

 

 

13.2%

 

 

10.9%

 

We believe that the decrease in delinquencies as of June 30, 2008 compared to December 31, 2007 is consistent with historical seasonal patterns. Substantially all defaulted VOI notes receivable result in the holder of the note receivable acquiring the related VOI that secured the note receivable. In cases where we have retained or reacquired ownership of the VOI notes receivable, the VOI is acquired and resold in the normal course of business.

A significant portion of our revenues historically has been comprised of gains on sales of notes receivable. The gains are recorded on our consolidated statement of income as a component of sales of real estate and the related retained interests in the notes receivable sold are recorded on our consolidated balance sheet at the time of sale.

The amount of gains recognized and the fair value of the retained interests recorded are based in part on management’s best estimates of future prepayment rates, default rates, loss severity rates, discount rates and other considerations in light of then-current conditions. If actual prepayments with respect to loans occur more quickly than we projected at the time such loans were sold, as can occur when interest rates decline, interest income 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 will be reduced until the outside investors were paid or the regular payment formula was resumed. In addition, from time to time, we may agree to defer receiving all or a portion of our deferred payment on certain of our retained interests in notes receivable sold in an accommodation to third party rating agencies. Also, as market conditions change, the discount rates that we use to value our retained interests in notes receivable sold may change. If these situations occur, it could cause a material decline in the fair value of the retained interests and current charges to earnings. There is no assurance that the carrying value of our retained interests in notes receivable sold will be fully realized or that future loan sales will be consummated or, if consummated, result in gains. See “VOI Receivables Purchase Facilities – Off-Balance Sheet Arrangements” below.

The Financial Accounting Standards Board (“FASB”) is currently reviewing the accounting principles relative to the transfer of financial assets, including the sale of notes receivable. In advance of possible new accounting rules, which could be effective as early as 2010, Bluegreen intends to structure all future sales of notes receivable so they are treated as on-balance sheet borrowings. This will impact the comparability to prior periods as future transactions will not result in gains on sale of notes receivable.

During 2007 and the first six months of 2008, the deteriorating credit market, primarily driven by the sub-prime loan crisis, negatively impacted our financial activities. Although we have been able to secure financing and securitize VOI notes receivable, such transactions were more difficult to effect and were priced at a higher cost than in prior periods. There can be no assurance that we will be able to continue to secure funding or to convert VOI notes receivable on acceptable terms, if at all.

Critical Accounting Policies and Estimates

The discussion and analysis of our results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of commitments and contingencies. On an ongoing basis, management evaluates its estimates, including those that relate to the recognition of revenue, including revenue recognition under the percentage-of-completion method of accounting; our reserve for loan losses; the valuation of retained interests in notes receivable sold and the related gains on sales of notes receivable; the recovery of the carrying value of real estate inventories, golf courses, intangible assets and other assets; and the estimate of contingent liabilities related to litigation and other claims and assessments.

25



Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions and conditions. If actual results significantly differ from management’s estimates, our results of operations and financial condition could be materially, adversely impacted. For a more detailed discussion of these critical accounting policies see “Critical Accounting Policies and Estimates” in our Annual Report.

Accounting Pronouncements Not Yet Adopted

In February 2008, the FASB agreed to partially defer for one year the effective date of SFAS No. 157, with respect to non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We are currently evaluating the impact that SFAS No. 157 will have on our financial statements.

On December 4, 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), subject to limited exceptions, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Additionally, due diligence and transaction costs incurred to effect an acquisition will be expensed as incurred, as opposed to being capitalized as part of the acquisition purchase price (which is currently our practice). SFAS No. 141(R) also includes a substantial number of new disclosure requirements. SFAS No. 141(R) must be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. We are currently evaluating the impact that SFAS No. 141(R) will have on our financial statements.

On December 4, 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements-an Amendment of Accounting Research Bulletin (“ARB”) No. 51 (“SFAS No. 160”). SFAS No. 160 establishes new accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non-controlling interest. SFAS No. 160 will become effective for us beginning with our 2009 fiscal year. We are currently evaluating the impact that SFAS No. 160 will have on our financial statements.

Results of Operations

We review financial information, allocate resources and manage our business as two segments, Bluegreen Resorts and Bluegreen Communities. The information reviewed is based on internal reports and excludes an allocation of general and administrative expenses attributable to corporate overhead. The information provided is based on a management approach and is used by us for the purpose of tracking trends and changes in results. It does not reflect the actual economic costs, contributions or results of operations of the segments as stand alone businesses. If a different basis of presentation or allocation were utilized, the relative contributions of the segments might differ but the relative trends, in our view, would likely not be materially impacted. The table below sets forth our financial results by segment:

26



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bluegreen Resorts

 

Bluegreen Communities

 

Total

 

 

 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

% of Sales

 

Amount

 

% of Sales

 

Amount

 

% of Sales

 

 

 


 


 


 


 


 


 

Three Months Ended
June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross sales of real estate

 

$

120,428

 

 

 

 

$

38,027

 

 

 

 

$

158,455

 

 

 

 

Estimated uncollectible VOI notes receivable

 

 

(15,181

)

 

 

 

 

 

 

 

 

 

(15,181

)

 

 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

Sales of real estate

 

 

105,247

 

100

%

 

 

38,027

 

100

%

 

 

143,274

 

100

%

 

Cost of real estate sales

 

 

(26,634

)

(25

)

 

 

(19,671

)

(52

)

 

 

(46,305

)

(32

)

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

Gross profit

 

 

78,613

 

75

 

 

 

18,356

 

48

 

 

 

96,969

 

68

 

 

Other resort and communities operations revenues

 

 

12,235

 

12

 

 

 

3,355

 

9

 

 

 

15,590

 

11

 

 

Cost of other resort and communities operations

 

 

(8,900

)

(9

)

 

 

(2,955

)

(8

)

 

 

(11,855

)

(8

)

 

Selling and marketing expenses

 

 

(66,111

)

(63

)

 

 

(9,404

)

(25

)

 

 

(75,515

)

(53

)

 

Field general and administrative expenses (1)

 

 

(7,612

)

(7

)

 

 

(2,825

)

(7

)

 

 

(10,437

)

(8

)

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

Field operating profit

 

$

8,225

 

8

%

 

$

6,527

 

17

%

 

$

14,752

 

10

%

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross sales of real estate

 

$

125,915

 

 

 

 

$

12,966

 

 

 

 

$

138,881

 

 

 

 

Estimated uncollectible VOI notes receivable

 

 

(18,795

)

 

 

 

 

 

 

 

 

 

(18,795

)

 

 

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

Sales of real estate

 

 

107,120

 

100

%

 

 

12,966

 

100

%

 

 

120,086

 

100

%

 

Cost of real estate sales

 

 

(23,390

)

(22

)

 

 

(7,582

)

(58

)

 

 

(30,972

)

(26

)

 

 

 



 

 

 

 



 

 

 

 



 

 

 

 

Gross profit