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 September 30, 2003
or
|_| - Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-19292
BLUEGREEN CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 03-0300793
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4960 Conference Way North, Suite 100, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
(561) 912-8000
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in 12b-2 of the Exchange Act). Yes |_| 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 November 12, 2003, there were 27,702,063 shares of Common Stock,
$.01 par value per share, issued, 2,755,300 treasury shares and 24,946,763
shares outstanding.
BLUEGREEN CORPORATION
Index to Quarterly Report on Form 10-Q
Part I - Financial Information (unaudited)
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002..................... 3
Condensed Consolidated Statements of Income - Three Months
Ended September 30, 2003 and September 29, 2002.............. 4
Condensed Consolidated Statements of Income - Nine Months
Ended September 30, 2003 and September 29, 2002.............. 5
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2003 and September 29, 2002.............. 6
Notes to Condensed Consolidated Financial Statements .............. 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition ............... 22
Item 3. Quantitative and Qualitative
Disclosures About Market Risk ............................... 39
Item 4. Controls and Procedures............................................ 39
Part II - Other Information
Item 1. Legal Proceedings.................................................. 40
Item 6. Exhibits and Reports on Form 8-K................................... 41
Signatures................................................................. 42
Note: The terms "Bluegreen" and "Bluegreen Vacation Club" are registered in the
U.S. Patent and Trademark office by Bluegreen Corporation.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BLUEGREEN CORPORATION
Condensed Consolidated Balance Sheets
(amounts in thousands, except per share data)
September 30, December 31,
2003 2002
---- ----
(Unaudited) (Note)
ASSETS
Cash and cash equivalents (including restricted cash of $36,000 and $20,551
at September 30, 2003 and December 31, 2002, respectively) ............................ $ 55,782 $ 46,905
Contracts receivable, net ................................................................ 33,952 16,230
Notes receivable, net .................................................................... 108,306 61,795
Inventory, net ........................................................................... 210,354 173,131
Prepaid expenses ......................................................................... 12,944 11,630
Retained interests in notes receivable sold .............................................. 55,684 44,228
Property and equipment, net .............................................................. 54,999 51,787
Intangible assets ........................................................................ 3,779 13,269
Other assets ............................................................................. 16,266 15,017
--------- ---------
Total assets .......................................................................... $ 552,066 $ 433,992
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable ......................................................................... $ 7,174 $ 5,878
Accrued liabilities and other ............................................................ 52,803 31,537
Deferred income .......................................................................... 19,529 19,704
Deferred income taxes .................................................................... 43,646 31,200
Receivable-backed notes payable .......................................................... 22,254 5,360
Lines-of-credit and notes payable ........................................................ 78,316 34,409
10.50% senior secured notes payable ...................................................... 110,000 110,000
8.25% convertible subordinated debentures ................................................ 34,371 34,371
--------- ---------
Total liabilities ..................................................................... 368,093 272,459
Commitments and contingencies
Minority interest ........................................................................ 5,125 3,250
Shareholders' Equity
Preferred stock, $.01 par value, 1,000 shares authorized; none issued .................... -- --
Common stock, $.01 par value, 90,000 shares authorized; 27,510 and 27,343
shares issued at September 30, 2003 and December 31, 2002, respectively ............... 275 273
Additional paid-in capital ............................................................... 124,216 123,535
Treasury stock, 2,756 common shares at cost at both September 30, 2003
and December 31, 2002 ................................................................. (12,885) (12,885)
Accumulated other comprehensive income, net of income taxes .............................. 1,787 460
Retained earnings ........................................................................ 65,455 46,900
--------- ---------
Total shareholders' equity ............................................................ 178,848 158,283
--------- ---------
Total liabilities and shareholders' equity ............................................ $ 552,066 $ 433,992
========= =========
Note: The condensed consolidated balance sheet at December 31, 2002 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.
See accompanying notes to condensed consolidated financial statements.
3
BLUEGREEN CORPORATION
Condensed Consolidated Statements of Income
(amounts in thousands, except per share data)
(unaudited)
Three Months Ended
September 30, September 29,
2003 2002
---- ----
(Restated)
Revenues:
Sales ................................................................. $108,941 $83,386
Other resort and communities operations revenue ....................... 14,549 7,564
Interest income ....................................................... 4,441 4,018
Gain on sales of notes receivable ..................................... 476 2,037
-------- -------
128,407 97,005
Costs and expenses:
Cost of sales ......................................................... 31,033 29,009
Cost of other resort and communities operations ....................... 14,489 6,831
Selling, general and administrative expenses .......................... 59,132 47,102
Interest expense ...................................................... 3,650 3,321
Provision for loan losses ............................................. 2,300 1,561
Other expense, net .................................................... 515 676
-------- -------
111,119 88,500
-------- -------
Income before minority interest and provision for income taxes .......... 17,288 8,505
Minority interest in income of consolidated subsidiary ................... 699 245
-------- -------
Income before provision for income taxes ................................. 16,589 8,260
Provision for income taxes ............................................... 6,387 3,180
-------- -------
Net income ............................................................... $ 10,202 $ 5,080
======== =======
Earnings per common share:
Basic .................................................................... $ 0.41 $ 0.21
======== =======
Diluted .................................................................. $ 0.36 $ 0.19
======== =======
Weighted average number of common and common
equivalent shares:
Basic .................................................................... 24,634 24,497
======== =======
Diluted .................................................................. 29,377 28,749
======== =======
See accompanying notes to condensed consolidated financial statements.
4
BLUEGREEN CORPORATION
Condensed Consolidated Statements of Income
(amounts in thousands, except per share data)
(unaudited)
Nine Months Ended
September 30, September 29,
2003 2002
---- ----
(Restated)
Revenues:
Sales ........................................................................... $256,749 $ 210,424
Other resort and communities operations revenue ................................. 42,592 20,561
Interest income ................................................................. 12,308 11,373
Gain on sales of notes receivable ............................................... 3,360 5,334
Other income, net ............................................................... 608 --
-------- ---------
315,617 247,692
Costs and expenses:
Cost of sales ................................................................... 76,366 76,368
Cost of other resort and communities operations ................................. 43,196 18,251
Selling, general and administrative expenses .................................... 148,859 121,456
Interest expense ................................................................ 9,626 9,432
Provision for loan losses ....................................................... 5,525 3,810
Other expense, net .............................................................. -- 1,020
-------- ---------
283,572 230,337
-------- ---------
Income before minority interest and provision for income taxes .................... 32,045 17,355
Minority interest in income of consolidated subsidiary ............................. 1,875 645
-------- ---------
Income before provision for income taxes ........................................... 30,170 16,710
Provision for income taxes ......................................................... 11,615 6,433
-------- ---------
Income before cumulative effect of a change in accounting principle ................ 18,555 10,277
Cumulative effect of a change in accounting principle, net of income
taxes (Note 1) ................................................................. -- (5,929)
Minority interest in cumulative effect of change in accounting principle,
net of income taxes ............................................................ -- (350)
-------- ---------
Net income ......................................................................... $ 18,555 $ 4,698
======== =========
Earnings per common share:
Basic:
Income before cumulative effect of a change in accounting principle ............. $ 0.75 $ 0.42
Cumulative effect of a change in accounting principle, net of income
taxes and minority interest ................................................. -- (0.23)
-------- ---------
Net income ...................................................................... $ 0.75 $ 0.19
======== =========
Diluted:
Income before cumulative effect of a change in accounting principle ............. $ 0.68 $ 0.40
Cumulative effect of a change in accounting principle, net of income
taxes and minority interest ................................................. -- (0.19)
-------- ---------
Net income ...................................................................... $ 0.68 $ 0.21
======== =========
Weighted average number of common and common
equivalent shares:
Basic .............................................................................. 24,604 24,392
======== =========
Diluted ............................................................................ 29,089 28,705
======== =========
See accompanying notes to condensed consolidated financial statements.
5
BLUEGREEN CORPORATION
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
Nine Months Ended
September 30, September 29,
2003 2002
---- ----
(Restated)
Operating activities:
Net income ........................................................................... $ 18,555 $ 4,698
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net ........................ -- 5,929
Minority interest in income of consolidated subsidiary .......................... 1,875 295
Depreciation and amortization ................................................... 10,403 6,842
Amortization of discount on note payable ........................................ -- 107
Gain on sales of notes receivable ............................................... (3,360) (5,334)
(Gain) loss on sales of property and equipment .................................. (212) 250
Provision for loan losses ....................................................... 5,525 3,810
Provision for deferred income taxes ............................................. 11,615 6,433
Interest accretion on retained interests in notes receivable sold ............... (3,564) (3,919)
Proceeds from sales of notes receivable ......................................... 49,650 73,654
Proceeds from borrowings collateralized by notes receivable ..................... 22,086 3,175
Payments on borrowings collateralized by notes receivable ....................... (4,970) (4,713)
Changes in operating assets and liabilities:
Contracts receivable ............................................................... (17,722) (12,294)
Notes receivable ................................................................... (115,197) (94,167)
Inventory .......................................................................... 11,232 31,881
Prepaids and other assets .......................................................... (3,186) (4,402)
Accounts payable, accrued liabilities and other .................................... 29,581 11,058
--------- ---------
Net cash provided by operating activities ............................................... 12,311 23,303
--------- ---------
Investing activities:
Purchases of property and equipment .................................................. (7,527) (5,232)
Sales of property and equipment ...................................................... 1,080 42
Cash received from retained interests in notes receivable sold ....................... 5,948 13,681
--------- ---------
Net cash provided (used) by investing activities ........................................ (499) 8,491
--------- ---------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and
other notes payable ................................................................ 32,000 32,018
Payments under line-of-credit facilities and other notes payable ..................... (33,830) (34,711)
Payment under 8% convertible subordinated notes payable to related
parties ............................................................................ -- (6,000)
Payment of debt issuance costs ....................................................... (1,642) (2,641)
Proceeds from exercise of employee and director stock options ........................ 537 526
--------- ---------
Net cash used by financing activities ................................................... (2,935) (10,808)
--------- ---------
Net increase in cash and cash equivalents ............................................... 8,877 20,986
Cash and cash equivalents at beginning of period ........................................ 46,905 38,477
--------- ---------
Cash and cash equivalents at end of period .............................................. 55,782 59,463
Restricted cash and cash equivalents at end of period ................................... (36,000) (24,620)
--------- ---------
Unrestricted cash and cash equivalents at end of period ................................. $ 19,782 $ 34,843
========= =========
See accompanying notes to condensed consolidated financial statements.
6
BLUEGREEN CORPORATION
Condensed Consolidated Statements of Cash Flows - continued
(amounts in thousands)
(unaudited)
Nine Months Ended
September 30, September 29,
2003 2002
---- ----
(Restated)
Supplemental schedule of non-cash operating, investing
and financing activities:
Retained interests in notes receivable sold ........................ $11,682 $19,396
======= =======
Property and equipment acquired through financing .................. $ 2,250 $ 198
======= =======
Inventory acquired through foreclosure or deedback in lieu of
foreclosure ....................................................... $ 4,967 $ 6,695
======= =======
Inventory acquired through financing ............................... $43,488 $ --
======= =======
Net change in unrealized gains on investments ...................... $ 2,158 $ 450
======= =======
See accompanying notes to condensed consolidated financial statements.
7
BLUEGREEN CORPORATION
Notes to Condensed Consolidated Financial Statements
September 30, 2003
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Bluegreen Corporation (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
The financial information furnished herein reflects all adjustments
consisting of normal recurring accruals that, in the opinion of
management, are necessary for a fair presentation of the results for the
interim periods. The results of operations for the three and nine months
ended September 30, 2003 are not necessarily indicative of the results to
be expected for the year ending December 31, 2003. For further
information, refer to the Company's audited consolidated financial
statements for the nine months ended December 31, 2002, which are included
in the Company's Transitional Annual Report on Form 10-KT, filed with the
Securities and Exchange Commission on March 31, 2003.
On October 14, 2002, the Company's Board of Directors approved a change in
the Company's fiscal year from a 52- or 53-week period ending on the
Sunday nearest the last day of March in each year to the calendar year
ending on December 31. Accordingly, the financial information presented in
the accompanying condensed consolidated financial statements is based on
the Company's new fiscal year.
Organization
The Company is a leading marketer of vacation and residential lifestyle
choices through its resort and residential land and golf communities
businesses, which are located predominantly in the Southeastern,
Southwestern and Midwestern United States. The Company's resort business
("Bluegreen Resorts") acquires, develops and markets vacation ownership
interests ("VOIs") in resorts generally located in popular, high-volume,
"drive-to" vacation destinations. VOIs are of two types: one which
entitles the buyer of the points-based Bluegreen Vacation Club (the
"Club") product to an annual allotment of "points" in perpetuity
(supported by an underlying deeded fixed week being held in trust for the
buyer) and the second which entitles the fixed-week buyer to a
fully-furnished vacation residence for an annual one-week period in
perpetuity. "Points" may be exchanged by the buyer in various increments
for lodging for varying lengths of time in fully-furnished vacation
residences at the Company's participating resorts. The Company currently
develops, markets and sells VOIs in 15 resorts located in the United
States and Aruba. The Company also markets and sells VOIs in its resorts
at five off-site sales locations. The Company's residential land and golf
communities business ("Bluegreen Communities") acquires, develops and
subdivides property and markets the subdivided residential home sites to
retail customers seeking to build a home in a high quality residential
setting, in some cases on properties featuring a golf course and related
amenities. During the nine months ended September 30, 2003, sales
generated by Bluegreen Resorts and Bluegreen Communities represented
approximately 74% and 26%, respectively, of the Company's total sales. The
Company's other resort and communities operations revenues are generated
from mini-vacation package sales, vacation ownership tour sales, resort
property management services, resort title services, resort amenity
operations, hotel operations, realty resale commissions and daily-fee golf
course operations. The Company also generates significant interest income
by providing financing to individual purchasers of VOIs and, to a nominal
extent, home sites sold by Bluegreen Communities.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of
the Company, all of its wholly-owned subsidiaries and entities in which
the Company holds a controlling financial interest. The only non-wholly
owned subsidiary, Bluegreen/Big Cedar Vacations LLC (the "Joint Venture"),
is consolidated as the Company holds a 51% equity interest in the Joint
Venture, has an active role as the day-to-day manager of the Joint
Venture's activities and has majority voting control of the Joint
Venture's management committee. All significant intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the amounts reported in the condensed consolidated financial statements
and accompanying notes. Actual results could differ from those estimates.
8
Cumulative Effect of Change in Accounting Principle
During the years ended March 31, 2002 and April 1, 2001, the Company
deferred the costs of generating VOI tours through its telemarketing
programs until the earlier of such time as the tours were conducted or the
related mini-vacation packages expired, based on an accepted industry
accounting principle. In December 2002, the Company elected to change its
accounting policy to expense such costs as incurred, effective April 1,
2002. The Company believes that the new method of accounting for these
costs is preferable over the Company's previous method and has applied it
prospectively. The Company believes accounting for these costs as period
expenses results in improved financial reporting. The condensed
consolidated statement of income for the three months ended September 29,
2002 has been restated from the amounts previously reported in the
Company's Quarterly Report on Form 10-Q to reflect the impact of the
change in accounting principle. Net income as previously reported in the
Company's Quarterly Report on Form 10-Q for the three months ended
September 29, 2002 reconciled to the restated amount is as follows (in
thousands, except per share data):
Net income, as previously reported ......................................... $5,723
Impact of expensing telemarketing costs that were previously
deferred in the computation of net income, as previously
reported, net of income taxes and minority interest ..................... (643)
------
Net income, as restated .................................................... $5,080
======
Earnings per common share, as previously reported:
Basic ................................................................... $ 0.23
======
Diluted ................................................................. $ 0.21
======
Earnings per common share, as restated:
Basic ................................................................... $ 0.21
======
Diluted ................................................................. $ 0.19
======
The condensed consolidated statement of income for the nine months ended
September 29, 2002 includes amounts restated to reflect the impact of the
change in accounting principle as of April 1, 2002. However, the amounts
included in this interim period related to the three months ended March
31, 2002, do not reflect the impact of the change in accounting principle.
Accordingly, pro forma information is presented below to show the effect
of a retroactive application of the change in accounting principle on the
operating results of the Company for the nine months ended September 29,
2002 (in thousands, except per share data):
Net income ................................................................. $3,563
======
Basic earnings per common share ............................................ $ 0.15
======
Diluted earnings per common share .......................................... $ 0.17
======
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
common share is computed in the same manner as basic earnings per share,
but also gives effect to all dilutive stock options using the treasury
stock method and includes an adjustment, if dilutive, to both net income
and shares outstanding as if the Company's 8.25% convertible subordinated
debentures were converted into common stock at the beginning of the
periods presented. The Company excluded approximately 906,000 and 1.2
million anti-dilutive stock options from its computations of earnings per
common share during the three and nine months ended September 30, 2003,
respectively, and excluded approximately 1.6 million anti-dilutive stock
options from its computations of earnings per common share during both the
three and nine months ended September 29, 2002.
9
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 29, September 30, September 29,
2003 2002 2003 2002
(Restated) (Restated)
-------------------------------------------------------------
Basic earnings per common share - numerators:
Income before cumulative effect of a change in
accounting principle ................................... $ 10,202 $ 5,080 $ 18,555 $ 10,277
Cumulative effect of a change in accounting
principle, net of income taxes and minority
interest ............................................... -- -- -- (5,579)
-----------------------------------------------------------
Net income ................................................ $ 10,202 $ 5,080 $ 18,555 $ 4,698
===========================================================
Diluted earnings per common share - numerators:
Income before cumulative effect of a change in
accounting principle - basic ........................... $ 10,202 $ 5,080 $ 18,555 $ 10,277
Effect of dilutive securities, net of income taxes ........ 441 436 1,308 1,318
-----------------------------------------------------------
Income before cumulative effect of a change in
accounting principle - diluted ......................... 10,643 5,516 19,863 11,595
Cumulative effect of a change in accounting
principle, net of income taxes and minority
interest ............................................... -- -- -- (5,579)
-----------------------------------------------------------
Net income - diluted ...................................... $ 10,643 $ 5,516 $ 19,863 $ 6,016
===========================================================
Denominators:
Denominator for basic earnings per common
share - weighted-average shares ........................ 24,634 24,497 24,604 24,392
Effect of dilutive securities:
Stock options .......................................... 572 81 314 142
Convertible securities ................................. 4,171 4,171 4,171 4,171
-----------------------------------------------------------
Dilutive potential common shares ........................... 4,743 4,252 4,485 4,313
-----------------------------------------------------------
Denominator for diluted earnings per common share -
adjusted weighted-average shares and assumed
conversions ............................................. 29,377 28,749 29,089 28,705
===========================================================
Basic earnings per common share:
Income before cumulative effect of a change in
accounting principle .................................... $ 0.41 $ 0.21 $ 0.75 $ 0.42
Cumulative effect of a change in accounting
principle, net of income taxes and minority
interest ................................................ -- -- -- (0.23)
-----------------------------------------------------------
Net income ................................................. $ 0.41 $ 0.21 $ 0.75 $ 0.19
===========================================================
Diluted earnings per common share:
Income before cumulative effect of a change in
accounting principle .................................... $ 0.36 $ 0.19 $ 0.68 $ 0.40
Cumulative effect of a change in accounting
principle, net of income taxes and minority
interest ................................................ -- -- -- (0.19)
-----------------------------------------------------------
Net income ................................................. $ 0.36 $ 0.19 $ 0.68 $ 0.21
===========================================================
Sales of Notes Receivable and Related Retained Interests
When the Company sells its notes receivable either pursuant to its
vacation ownership receivables purchase facilities, term securitizations
or, in the case of land mortgages receivable, private-placement Real
Estate Mortgage Investment Conduits ("REMICs"), it evaluates whether or
not such transfers should be accounted for as a sale pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" and related interpretations. The evaluation of sale treatment
under SFAS No. 140 involves legal assessments of the transactions, which
include determining whether the transferred assets have been isolated from
the Company (i.e. put
10
presumptively beyond the reach of the Company and its 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
the Company does not maintain effective control over the transferred
assets through either (1) an agreement that both entitles and obligates
the transferor to repurchase or redeem them before their maturity or (2)
the ability to unilaterally cause the holder to return specific assets
(other than through a cleanup call).
In connection with such transactions, the Company retains 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.
The fair value of the retained interests in the notes receivable sold is
initially and periodically measured based on the present value of future
expected cash flows estimated using management's best estimates of the key
assumptions - prepayment rates, loss severity rates, default rates and
discount rates commensurate with the risks involved. The Company revalues
its retained interests in notes receivable sold on a quarterly basis.
The Company's retained interests in notes receivable sold are considered
to be available-for-sale investments and, accordingly, are carried at fair
value in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Accordingly, unrealized holding gains or
losses on retained interests in notes receivable sold are included in
shareholders' equity, net of income taxes. Declines in fair value that are
determined to be other than temporary are charged to operations.
Interest on the Company's retained interests in notes receivable sold is
accreted using the effective yield method.
Recent Accounting Pronouncements
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." This statement requires entities to record
the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. The adoption of the new statement did not
have an impact on the Company's financial position or results of
operations as of and for the nine months ended September 30, 2003.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The adoption of the
new statement did not have an impact on the Company's financial position
or results of operations as of and for the nine months ended September 30,
2003.
On January 1, 2003, the Company adopted the accounting provisions of
Interpretation No. 45, oGuarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Otherso
("FIN 45"). The Company had previously adopted the disclosure requirements
of FIN 45 during the nine months ended December 31, 2002. FIN 45 requires
that certain guarantees be initially recorded at fair value, as opposed to
the former practice of recording a liability only when a loss was probable
and reasonably estimable. FIN 45 also requires a guarantor to make
significant new disclosures for virtually all guarantees. The adoption of
the accounting requirements of FIN 45 did not have an impact on the
Company's financial position or results of operations as of and for the
nine months ended September 30, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"),
which addresses consolidation of variable interest entities. FIN 46
expands the criteria for consideration in determining whether a variable
interest entity should be consolidated by a business entity, and requires
existing unconsolidated variable interest entities (which include, but are
not limited to, special purpose entities) to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks
among parties involved. This interpretation's consolidation provisions
apply immediately to variable interests in variable interest entities
created after January 31, 2003. It applies in the first period ending
after December 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1,
2003. The adoption of FIN 46 did not did not have an impact on the
Company's financial position or results of operations as of and for the
nine months ended September 30, 2003 and is not expected to have an impact
on the Company for the foreseeable future.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." This statement amends
and clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003,
11
except for certain hedging relationships designated after June 30, 2003.
The adoption of this statement did not have an impact on the results of
operations or financial position of the Company as of and for the nine
months ended September 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for classifying and
measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and
equity. With the exception of certain mandatorily redeemable financial
interests (such as the Company's noncontrolling interest in the Joint
Venture), SFAS No. 150 became effective for all other instruments entered
into or modified after May 31, 2003 and to all other instruments that
existed as of July 1, 2003. The application of SFAS No. 150 to certain
mandatorily redeemable financial interests has been deferred indefinitely
by the FASB. The adoption of this statement did not have an impact on the
results of operations or financial position of the Company as of and for
the nine months ended September 30, 2003.
In February 2003, the FASB released for public comment an exposure draft
of an American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP"), "Accounting for Real Estate Time-Sharing
Transactions" and a proposed FASB Statement, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and No.
67." The proposed SOP, if adopted by the FASB, would primarily impact the
Company's recognition of certain sales of VOIs and the manner in which the
Company accounts for the cost of sales of VOIs. Currently, it appears that
a final pronouncement on VOI transactions would not be effective for the
Company until the year ending December 31, 2005. The Company has not yet
evaluated the impact of the proposed SOP on its results of operations or
financial position, as the FASB and the AICPA are currently reconsidering
the direction and scope of this proposed SOP in light of the comment
letters received and the ongoing FASB project to develop global revenue
recognition guidelines.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", encourages, but does not require companies to record
compensation cost for employee stock options at fair value. The Company
has elected to continue to account for stock options using the intrinsic
value method pursuant to Accounting Principles Board Opinion No. 25 and
related Interpretations. Accordingly, compensation cost for stock options
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the exercise price of the
option.
Pro forma information regarding net income and earnings per share as if
the Company had accounted for its grants of stock options to its employees
under the fair value method of SFAS No. 123 is presented below. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the nine months ended September 30, 2003 and September 29,
2002, respectively: risk free investment rates of 2.8% and 2.0%; dividend
yields of 0% and 0%; a volatility factor of the expected market price of
the Company's common stock of .631 and .698; and a weighted-average life
of 6.0 years and 5.0 years, respectively. During the nine months ended
September 30, 2003, the Company granted options to acquire 727,508 shares
of its common stock.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
effects of applying SFAS No. 123 for the purpose of providing pro forma
disclosures are not likely to be representative of the effects on reported
pro forma net income for future years, due to the impact of the staggered
vesting periods of the Company's stock option grants. The Company's pro
forma information is as follows (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 29, September 30, September 29,
2003 2002 2003 2002
(Restated) (Restated)
-------------------------------------------------------------
Net income, as reported ........................ $10,202 $ 5,080 $18,555 $ 4,698
Pro forma stock-based employee
compensation cost, net of income taxes ...... (81) (66) (320) 95
------- ------- ------- -------
Pro forma net income ........................... $10,121 $ 5,014 $18,235 $ 4,793
======= ======= ======= =======
Earnings per common share, as reported:
Basic ...................................... $ 0.41 $ 0.21 $ 0.75 $ 0.19
Diluted .................................... $ 0.36 $ 0.19 $ 0.68 $ 0.21
Pro forma earnings per common share:
Basic ...................................... $ 0.41 $ 0.20 $ 0.74 $ 0.20
Diluted .................................... $ 0.36 $ 0.19 $ 0.67 $ 0.21
12
Accumulated Other Comprehensive Income
Accumulated other comprehensive income on the condensed consolidated
balance sheets is comprised of net unrealized gains on retained interests
in notes receivable sold, which are classified as available-for-sale
investments.
The following table discloses the components of the Company's
comprehensive income for the periods presented (in thousands):
Three Months Ended Nine Months Ended
September 30, September 29, September 30, September 29,
2003 2002 2003 2002
(Restated) (Restated)
--------------------------------------------------------------
Net income .............................................. $10,202 $ 5,080 $18,555 $ 4,698
Net unrealized gains on retained interests in notes
receivable sold, net of income taxes ............... 551 1,423 1,327 1,700
------- ------- ------- -------
Total comprehensive income .............................. $10,753 $ 6,503 $19,882 $ 6,398
======= ======= ======= =======
Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period presentation.
2. Acquisition
On October 2, 2002, Great Vacation Destinations, Inc. (f/k/a Leisure Plan,
Inc.), a wholly-owned subsidiary of the Company (the "Subsidiary"),
acquired substantially all of the assets and assumed certain liabilities
of TakeMeOnVacation, LLC, RVM Promotions, LLC and RVM Vacations, LLC (the
"Acquisition"). The Subsidiary was a newly-formed entity with no prior
operations. As part of the Acquisition, the Subsidiary paid $2.3 million
in cash at the closing of the Acquisition on October 2, 2002 (including a
$292,000 payment for certain refundable deposits) and $500,000 in cash on
March 31, 2003. The Subsidiary also agreed to pay contingent consideration
up to a maximum of $12.5 million through December 31, 2007, based on the
Subsidiary's Net Operating Profit (as that term is defined in Section 1.49
of the Asset Purchase Agreement), as follows:
(i) 75% of the Subsidiary's Net Operating Profit, until the
cumulative amount paid under this clause is $2.5 million;
(ii) with respect to additional Net Operating Profit not included
in the calculation under clause (i), 50% of the Subsidiary's
Net Operating Profit, until the cumulative amount paid under
this clause (ii) is $5.0 million; and
(iii) with respect to additional Net Operating Profit not included
in the calculation under clauses (i) and (ii), 25% of the
Subsidiary's Net Operating Profit, until the cumulative amount
paid under this clause (iii) is $5.0 million.
Applicable payments will be made after the end of each calendar year,
commencing with the year ending December 31, 2003. Should any contingent
consideration be paid, the Company will record that amount as goodwill.
Based on the Subsidiary's results of operations to date, the Company has
not accrued any contingent consideration as of September 30, 2003.
3. Sale of Notes Receivable
In June 2001, the Company executed agreements for a vacation ownership
receivables purchase facility (the "Purchase Facility") with Credit Suisse
First Boston ("CSFB") acting as the initial purchaser. In April 2002, ING
Capital, LLC ("ING"), an affiliate of ING Bank NV, acquired and assumed
CSFB's rights, obligations and commitments as initial purchaser in the
Purchase Facility by purchasing the outstanding principal balance under
the facility from CSFB. The Purchase Facility utilizes an owner's trust
structure, pursuant to which the Company sells receivables to Bluegreen
Receivables Finance Corporation V, a wholly-owned, special purpose finance
subsidiary of the Company (the "Finance Subsidiary"), and the Finance
Subsidiary sells the receivables to an owners' trust (a qualified special
purpose entity) without recourse to the Company or the Finance Subsidiary
except for breaches of certain representations and warranties at the time
of sale. The Company did not enter into any guarantees in connection with
the Purchase Facility. The Purchase Facility has detailed requirements
with respect to the eligibility of receivables for purchase and fundings
under the Purchase Facility are subject to certain conditions precedent.
Under the Purchase Facility, a variable purchase price of 85.00% of the
principal balance of the receivables sold, subject to certain terms and
conditions, is paid at closing in cash. The balance of the purchase price
is deferred until such time as ING has received a specified return and all
servicing, custodial, agent and
13
similar fees and expenses have been paid. ING earned a return equal to the
London Interbank Offered Rate ("LIBOR") plus 1.00% through April 15, 2003,
and LIBOR plus 1.25% through September 30, 2003. In addition, ING received
a 0.25% annual facility fee through April 15, 2003. The ING Purchase
Facility also provided for the sale of land notes receivable, under
modified terms. The Company acted as the servicer under the ING Purchase
Facility for a fee.
On December 13, 2002, ING Financial Markets, LLC ("IFM"), an affiliate of
ING, consummated a $170.2 million private offering and sale of VOI
loan-backed securities on behalf of the Company (the "2002 Term
Securitization"). The $181.0 million in aggregate principal of VOI
receivables included in the 2002 Term Securitization included qualified
receivables from three sources: 1) $119.2 million in aggregate principal
amount of receivables that were previously sold to ING under the ING
Purchase Facility; 2) $54.2 million in aggregate principal amount of
receivables that were previously sold to General Electric Capital Real
Estate ("GE") and Barclays Bank, PLC ("Barclays"), under a completed
purchase facility (the "GE/Barclays Purchase Facility"); and 3) $7.6
million in aggregate principal amount of receivables that were previously
hypothecated with GE under a VOI receivables warehouse facility (the "GE
Warehouse Facility"). The proceeds from the 2002 Term Securitization were
used to pay ING, GE and Barclays all amounts then outstanding under the
ING Purchase Facility, the GE/Barclays Purchase Facility and the GE
Warehouse Facility, respectively.
As a result of the 2002 Term Securitization, the availability under the
Purchase Facility, as subsequently amended, allowed for sales of
additional notes receivable for a cumulative purchase price of up to $75.0
million on a revolving basis through September 30, 2003, at 85.00% of the
principal balance, subject to the eligibility requirements and certain
conditions precedent. On October 8, 2003, Resort Finance, LLC ("RFL"),
acquired and assumed ING's rights, obligations and commitments as the
initial purchaser in the Purchase Facility by purchasing the outstanding
principal balance under the facility from ING. In connection with its
assumption of the Purchase Facility, RFL expanded the size of the Purchase
Facility to $100.0 million and extended the term of the Purchase Facility
on a revolving basis through March 31, 2004.
During the three months ended September 30, 2003, the Company sold
approximately $8.4 million of aggregate principal balance of notes
receivable under the Purchase Facility for a purchase price of $7.2
million. As a result of this sale, the Company recognized a gain of
approximately $476,000 and recorded retained interests in notes receivable
sold and servicing assets of approximately $1.7 million and $87,000,
respectively. During the nine months ended September 30, 2003, the Company
sold approximately $58.4 million of aggregate principal balance of notes
receivable under the ING Purchase Facility for a cumulative purchase price
of $49.7 million. In connection with these sales, the Company recognized
an aggregate gain of approximately $3.4 million and recorded retained
interests in notes receivable sold and servicing assets of approximately
$11.7 million and $600,000, respectively.
The following assumptions were used to measure the initial fair value of
the retained interests in notes receivable sold during the nine months
ended September 30, 2003: Prepayment rates ranging from 17% to 14% per
annum as the portfolios mature; loss severity rate of 45%; default rates
ranging from 7% to 1% per annum as the portfolios mature; and a discount
rate of 14%.
4. Receivable-backed Notes Payable
On September 10, 2003, the Company amended the terms of its revolving
vacation ownership receivables credit facility (the "GMAC Receivables
Facility") with Residential Funding Corporation ("RFC"), an affiliate of
General Motors Acceptance Corporation, which was originally entered into
on February 10, 2003. The amendment increased the borrowing capacity from
$50.0 million to $75.0 million. The borrowing period on the GMAC
Receivables Facility expires on March 10, 2005, and outstanding borrowings
mature no later than March 10, 2012. The GMAC Receivables Facility has
detailed requirements with respect to the eligibility of receivables for
inclusion and other conditions to funding. The borrowing base under the
GMAC Receivables Facility is 90% of the outstanding principal balance of
eligible notes arising from the sale of VOIs. The GMAC Receivables
Facility includes affirmative, negative and financial covenants and events
of default. All principal and interest payments received on pledged
receivables are applied to principal and interest due under the GMAC
Receivables Facility. Indebtedness under the facility bears interest at
LIBOR plus 4%. The Company was required to pay an upfront loan fee of
$375,000 in connection with the GMAC Receivables Facility. During the nine
months ended September 30, 2003, the Company borrowed an aggregate of
$19.3 million pursuant to the GMAC Receivables Facility, with $16.0
million of such borrowings outstanding at September 30, 2003.
5. Lines-of-Credit and Notes Payable
On August 29, 2003, the Company borrowed $6.7 million in the form of two
promissory notes pursuant to an existing, now expired, credit facility
with Finova Capital Corporation. The proceeds from the borrowing were used
to acquire 3,996 unsold VOIs and undeveloped land that can accommodate the
construction of approximately 200 new vacation residences in a resort
called the Grande Villas at World Golf Village(TM), located in St.
Augustine, Florida for a total purchase price of $8.4 million.
14
The balance of the purchase price was paid from operating cash. The
promissory notes, which are secured by the underlying assets, require
principal payments based on agreed-upon release prices as VOIs are sold,
subject to certain minimum periodic principal reductions, and bear
interest at the greater of 7% or the prime lending rate plus 2%, payable
monthly. The final maturities of the promissory notes are February 28,
2005 for the $5.6 million promissory note and August 29, 2006 for the $1.1
million promissory note.
On September 16, 2003, the Company borrowed $17.4 million pursuant to an
existing credit facility with RFC. The proceeds from the borrowing were
used to acquire The Fountains(TM) (f/k/a Oasis Lakes Resort), an existing
vacation ownership resort in Orlando, Florida for a total purchase price
of $20.5 million. The balance of the purchase price was paid from
operating cash. The acquisition included certain unsold VOIs, land that
can accommodate the construction of approximately 576 additional vacation
residences, a 20,000 square-foot sales center, an adjoining parcel of land
that is zoned for commercial use and certain notes receivable. The
borrowing, which is secured by the underlying assets, requires principal
payments based on agreed-upon release prices as VOIs are sold, subject to
certain minimum periodic principal reductions, and bears interest at the
LIBOR lending rate plus 4.75%, payable monthly. The final maturity of the
note payable is September 16, 2007.
6. Supplemental Guarantor Financial Information
On April 1, 1998, the Company consummated a private placement offering
(the "Offering") of $110 million in aggregate principal amount of 10.5%
senior secured notes due April 1, 2008 (the "Notes"). None of the assets
of Bluegreen Corporation secure its obligations under the Notes, and the
Notes are effectively subordinated to secured indebtedness of the Company
to any third party to the extent of assets serving as security therefore.
The Notes are unconditionally guaranteed, jointly and severally, by each
of the Company's 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 cover the full amount of the Notes and each of the Subsidiary
Guarantors is 100% owned, directly or indirectly, by the Company.
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)
(UNAUDITED)
SEPTEMBER 30, 2003
-------------------------------------------------------------------------
COMBINED
NON- COMBINED
BLUEGREEN GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ....................... $ 15,002 $ 25,335 $ 15,445 $ -- $ 55,782
Contracts receivable, net ....................... -- 2,090 31,862 -- 33,952
Intercompany receivable ......................... 115,071 -- -- (115,071) --
Notes receivable, net ........................... 408 16,918 90,980 -- 108,306
Inventory, net .................................. -- 22,024 188,330 -- 210,354
Retained interests in notes receivable sold ..... -- 55,684 -- -- 55,684
Investments in subsidiaries ..................... 7,730 -- 3,230 (10,960) --
Property and equipment, net ..................... 11,415 1,925 41,659 -- 54,999
Other assets .................................... 6,358 2,881 23,750 -- 32,989
--------- --------- --------- --------- ---------
Total assets ................................. $ 155,984 $ 126,857 $ 395,256 $(126,031) $ 552,066
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable, deferred income, accrued
liabilities and other .......................... $ 12,658 $ 30,706 $ 36,142 $ -- $ 79,506
Intercompany payable ............................ -- 3,918 111,153 (115,071) --
Deferred income taxes ........................... (19,455) 29,787 33,314 -- 43,646
Lines-of-credit and receivable-backed notes
payable ........................................ 5,066 14,764 80,740 -- 100,570
10.50% senior secured notes payable ............. 110,000 -- -- -- 110,000
8.25% convertible subordinated debentures ....... 34,371 -- -- -- 34,371
--------- --------- --------- --------- ---------
Total liabilities ............................ 142,640 79,175 261,349 (115,071) 368,093
Minority interest ............................... -- -- -- 5,125 5,125
Total shareholders' equity .......................... 13,344 47,682 133,907 (16,085) 178,848
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity .......... $ 155,984 $ 126,857 $ 395,256 $(126,031) $ 552,066
========= ========= ========= ========= =========
16
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, 2002
------------------------------------------------------------------------
COMBINED
NON- COMBINED
BLUEGREEN GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ......................... $ 22,373 $ 17,951 $ 6,581 $ -- $ 46,905
Contracts receivable, net ......................... -- 1,457 14,773 -- 16,230
Intercompany receivable ........................... 101,549 -- -- (101,549) --
Notes receivable, net ............................. 1,740 9,434 50,621 -- 61,795
Inventory, net .................................... -- 19,440 153,691 -- 173,131
Retained interests in notes receivable sold ....... -- 44,228 -- -- 44,228
Investments in subsidiaries ....................... 7,730 -- 3,230 (10,960) --
Property and equipment, net ....................... 9,791 1,959 40,037 -- 51,787
Other assets ...................................... 6,576 1,792 31,548 -- 39,916
--------- --------- --------- --------- ---------
Total assets ................................... $ 149,759 $ 96,261 $ 300,481 $(112,509) $ 433,992
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued liabilities
and other .................................... $ 8,510 $ 22,485 $ 26,124 $ -- $ 57,119
Intercompany payable .............................. -- 8,392 93,157 (101,549) --
Deferred income taxes ............................. (19,344) 24,698 25,846 -- 31,200
Lines-of-credit and notes payable ................. 3,384 3,000 33,385 -- 39,769
10.50% senior secured notes payable ............... 110,000 -- -- -- 110,000
8.25% convertible subordinated debentures ......... 34,371 -- -- -- 34,371
--------- --------- --------- --------- ---------
Total liabilities .............................. 136,921 58,575 178,512 (101,549) 272,459
Minority interest .................................. -- -- -- 3,250 3,250
Total shareholders' equity ......................... 12,838 37,686 121,969 (14,210) 158,283
--------- --------- --------- --------- ---------
Total liabilities and shareholders' equity ...... $ 149,759 $ 96,261 $ 300,481 $(112,509) $ 433,992
========= ========= ========= ========= =========
17
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------------
COMBINED
NON- COMBINED
BLUEGREEN GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
REVENUES
Sales ............................................. $ -- $ 9,857 $ 99,084 $ -- $ 108,941
Management fees ................................... 11,803 -- -- (11,803) --
Other resort and communities operations revenue ... -- 1,416 13,133 -- 14,549
Interest income ................................... 64 1,542 2,835 -- 4,441
Gain on sales of notes receivable ................. -- 476 -- -- 476
--------- --------- --------- --------- ---------
11,867 13,291 115,052 (11,803) 128,407
COSTS AND EXPENSES
Cost of sales ..................................... -- 2,566 28,467 -- 31,033
Cost of other resort and communities operations ... -- 458 14,031 -- 14,489
Management fees ................................... -- 298 11,505 (11,803) --
Selling, general and administrative expenses ...... 7,471 5,814 45,847 -- 59,132
Interest expense .................................. 2,647 169 834 -- 3,650
Provision for loan losses ......................... -- 303 1,997 -- 2,300
Other expense, net ................................ 10 358 147 -- 515
--------- --------- --------- --------- ---------
10,128 9,966 102,828 (11,803) 111,119
--------- --------- --------- --------- ---------
Income before provision for income taxes and
minority interest .............................. 1,739 3,325 12,224 -- 17,288
Provision for income taxes ........................ 669 1,011 4,707 -- 6,387
Minority interest in income of consolidated
subsidiary ................................... -- -- -- 699 699
--------- --------- --------- --------- ---------
Net income ........................................ $ 1,070 $ 2,314 $ 7,517 $ (699) $ 10,202
========= ========= ========= ========= =========
THREE MONTHS ENDED SEPTEMBER 29, 2002 (RESTATED)
-------------------------------------------------------------------------
COMBINED
NON- COMBINED
BLUEGREEN GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------
REVENUES
Sales ............................................. $ -- $ 7,125 $ 76,261 $ -- $ 83,386
Management fees ................................... 8,719 -- -- (8,719) --
Other resort and communities operations revenue ... -- 1,071 6,493 -- 7,564
Interest income ................................... 64 1,781 2,173 -- 4,018
Gain on sales of notes receivable .................. -- 2,037 -- -- 2,037
--------- --------- --------- --------- ---------
8,783 12,014 84,927 (8,719) 97,005
COSTS AND EXPENSES
Cost of sales ..................................... -- 1,992 27,017 -- 29,009
Cost of other resort and communities operations ... -- 380 6,451 -- 6,831
Management fees ................................... -- 226 8,493 (8,719) --
Selling, general and administrative expenses ...... 6,412 4,143 36,547 -- 47,102
Interest expense .................................. 2,543 104 674 -- 3,321
Provision for loan losses ......................... -- 100 1,461 -- 1,561
Other expense, net ................................ 1 527 148 -- 676
--------- --------- --------- --------- ---------
8,956 7,472 80,791 (8,719) 88,500
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for
income taxes and minority interest ............. (173) 4,542 4,136 -- 8,505
Provision (benefit) for income taxes .............. (67) 1,655 1,592 -- 3,180
Minority interest in income of consolidated
subsidiary ..................................... -- -- -- 245 245
--------- --------- --------- --------- ---------
Net income (loss) ................................. $ (106) $ 2,887 $ 2,544 $ 245 $ 5,080
========= ========= ========= ========= =========
18
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------
COMBINED COMBINED
BLUEGREEN NON-GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
REVENUES
Sales ............................................. $ -- $ 26,227 $ 230,522 $ -- $ 256,749
Management fees ................................... 28,370 -- -- (28,370) --
Other resort and communities operations revenue ... -- 4,319 38,273 -- 42,592
Interest income ................................... 228 5,314 6,766 -- 12,308
Gain on sales of notes receivable ................. -- 3,360 -- -- 3,360
Other income (expense), net ....................... 50 (534) 1,092 -- 608
--------- --------- --------- --------- ---------
28,648 38,686 276,653 (28,370) 315,617
COSTS AND EXPENSES
Cost of sales ..................................... -- 7,011 69,355 -- 76,366
Cost of other resort and communities operations ... -- 1,345 41,851 -- 43,196
Management fees ................................... -- 814 27,556 (28,370) --
Selling, general and administrative expenses ...... 22,066 15,313 111,480 -- 148,859
Interest expense .................................. 6,870 434 2,322 -- 9,626
Provision for loan losses ......................... -- 834 4,691 -- 5,525
--------- --------- --------- --------- ---------
28,936 25,751 257,255 (28,370) 283,572
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for
income taxes and minority interest ............. (288) 12,935 19,398 -- 32,045
Provision (benefit) for income taxes .............. (111) 4,258 7,468 -- 11,615
Minority interest in income of consolidated
subsidiary .................................... -- -- -- 1,875 1,875
--------- --------- --------- --------- ---------
Net income (loss) ................................. $ (177) $ 8,677 $ 11,930 $ (1,875) $ 18,555
========= ========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 29, 2002 (RESTATED)
-----------------------------------------------------------------------
COMBINED COMBINED
BLUEGREEN NON-GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS ELIMINATIONS CONSOLIDATED
-----------------------------------------------------------------------
REVENUES
Sales ............................................. $ -- $ 18,696 $ 191,728 $ -- $ 210,424
Management fees ................................... 22,180 -- -- (22,180) --
Other resort and communities operations revenue ... -- 3,244 17,317 -- 20,561
Interest income ................................... 223 5,058 6,092 -- 11,373
Gain on sales of notes receivable .................. -- 5,334 -- -- 5,334
--------- --------- --------- --------- ---------
22,403 32,332 215,137 (22,180) 247,692
COSTS AND EXPENSES
Cost of sales ..................................... -- 5,177 71,191 -- 76,368
Cost of other resort and communities operations ... -- 1,162 17,089 -- 18,251
Management fees ................................... -- 666 21,514 (22,180) --
Selling, general and administrative expenses ...... 19,535 10,698 91,223 -- 121,456
Interest expense .................................. 7,008 343 2,081 -- 9,432
Provision for loan losses ......................... -- 284 3,526 -- 3,810
Other expense (income), net ........................ (248) 1,175 93 -- 1,020
--------- --------- --------- --------- ---------
26,295 19,505 206,717 (22,180) 230,337
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for
income taxes and minority interest ............. (3,892) 12,827 8,420 -- 17,355
Provision (benefit) for income taxes .............. (1,499) 4,845 3,087 -- 6,433
Minority interest in income of consolidated
subsidiary .................................... -- -- -- 645 645
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting principle ............... (2,393) 7,982 5,333 (645) 10,277
Cumulative effect of a change in
accounting principle, net of income
taxes ......................................... -- (714) (5,215) -- (5,929)
Minority interest in cumulative effect of a
change in accounting principle, net of
income taxes .................................. -- -- -- (350) (350)
--------- --------- --------- --------- ---------
Net income (loss) ................................. $ (2,393) $ 7,268 $ 118 $ 295 $ 4,698
========= ========= ========= ========= =========
19
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------
COMBINED
NON- COMBINED
BLUEGREEN GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS CONSOLIDATED
--------------------------------------------------------
Operating activities:
Net cash provided (used) by operating activities ....................... $ (5,857) $ 2,757 $ 15,411 $ 12,311
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment ................................. (2,104) (336) (5,087) (7,527)
Sales of property and equipment ..................................... 854 -- 226 1,080
Cash received from retained interests in notes receivable sold ...... -- 5,948 -- 5,948
-------- -------- -------- --------
Net cash (used) provided by investing activities ....................... (1,250) 5,612 (4,861) (499)
-------- -------- -------- --------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and other
notes payable .................................................... 7,000 -- 25,000 32,000
Payments under line-of-credit facilities and other notes payable .... (7,528) -- (26,302) (33,830)
Payment of debt issuance costs ...................................... (273) (985) (384) (1,642)
Proceeds from the exercise of employee and director stock options ... 537 -- -- 537
-------- -------- -------- --------
Net cash used by financing activities .................................. (264) (985) (1,686) (2,935)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ................... (7,371) 7,384 8,864 8,877
Cash and cash equivalents at beginning of period ....................... 22,373 17,951 6,581 46,905
-------- -------- -------- --------
Cash and cash equivalents at end of period ............................. 15,002 25,335 15,445 55,782
Restricted cash at end of period ....................................... (173) (21,387) (14,440) (36,000)
-------- -------- -------- --------
Unrestricted cash and cash equivalents at end of period ................ $ 14,829 $ 3,948 $ 1,005 $ 19,782
======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 29, 2002
------------------------------------
COMBINED
NON- COMBINED
BLUEGREEN GUARANTOR SUBSIDIARY
CORPORATION SUBSIDIARIES GUARANTORS CONSOLIDATED
--------------------------------------------------------
Operating activities:
Net cash provided (used) by operating activities ....................... $ 26,195 $ (9,176) $ 6,284 $ 23,303
-------- -------- -------- --------
Investing activities:
Purchases of property and equipment ................................. (1,428) (628) (3,176) (5,232)
Sales of property and equipment ..................................... 1 -- 41 42
Cash received from retained interests in notes receivable sold ...... -- 13,681 -- 13,681
-------- -------- -------- --------
Net cash provided (used) by investing activities ....................... (1,427) 13,053 (3,135) 8,491
-------- -------- -------- --------
Financing activities:
Proceeds from borrowings under line-of-credit facilities and other
notes payable .................................................... 9,850 -- 22,168 32,018
Payments under line-of-credit facilities and other notes payable .... (9,883) (2,356) (22,472) (34,711)
Payment of debt issuance costs ...................................... (23) (1,250) (1,368) (2,641)
Payment under convertible subordinated debt notes payable to
related parties ................................................. (6,000) -- -- (6,000)
Proceeds from the exercise of employee and director stock options ... 526 -- -- 526
-------- -------- -------- --------
Net cash used by financing activities .................................. (5,530) (3,606) (1,672) (10,808)
-------- -------- -------- --------
Net increase in cash and cash equivalents .............................. 19,238 271 1,477 20,986
Cash and cash equivalents at beginning of period ....................... 10,969 19,036 8,472 38,477
-------- -------- -------- --------
Cash and cash equivalents at end of period ............................. 30,207 19,307 9,949 59,463
Restricted cash and cash equivalents at end of period .................. (173) (16,610) (7,837) (24,620)
-------- -------- -------- --------
Unrestricted cash and cash equivalents at end of period ................ $ 30,034 $ 2,697 $ 2,112 $ 34,843
======== ======== ======== ========
20
7. Contingencies
In the ordinary course of its business, the Company from time to time
becomes subject to claims or proceedings relating to the purchase,
subdivision, sale and/or financing of real estate. Additionally, from time
to time, the Company becomes involved in disputes with existing and former
employees. The Company believes that substantially all of these claims and
proceedings are incidental to its business.
On August 21, 2000, the Company received a Notice of Field Audit Action
(the "Notice") from the State of Wisconsin Department of Revenue (the
"DOR") alleging that two subsidiaries now owned by the Company failed to
collect and remit sales and use taxes to the State of Wisconsin during the
period from January 1, 1994 through September 30, 1997 totaling $1.9
million. The majority of the assessment is based on the subsidiaries not
charging sales tax to purchasers of VOIs at the Company's Christmas
Mountain Village(TM) resort. In addition to the assessment, the Notice
indicated that interest would be charged, but no penalties would be
assessed. As of September 30, 2003, aggregate interest was approximately
$2.1 million. The Company filed a Petition for Redetermination (the
"Petition") on October 19, 2000, and, if the Petition is unsuccessful, the
Company intends to vigorously appeal the assessment. The Company acquired
the subsidiaries that are the subject of the Notice in connection with the
acquisition of RDI Group, Inc. ("RDI") on September 30, 1997. Under the
RDI purchase agreement, the Company has the right to offset payments owed
by the Company to RDI's former stockholders pursuant to a $1.0 million
outstanding note payable balance and to make a claim against such
stockholders for $500,000 previously paid for any breach of
representations and warranties. (One of the former RDI stockholders is
currently employed by the Company as its Senior Vice President of Sales
for Bluegreen Resorts.) The Company has filed an action against the RDI
stockholders for damages arising out of the Wisconsin assessments based on
its right of indemnification and offset under the RDI purchase agreement
and related promissory note. The RDI stockholders have filed a
counterclaim against the Company and a third-party complaint against the
Company and one of its wholly-owned subsidiaries alleging that the Company
and its subsidiary have failed to make the payments required under the
terms of the promissory note.
On May 24, 2003, the Company received a second Notice of Field Audit
Action (the "Second Notice") from the DOR alleging that the two
subsidiaries of the Company discussed above failed to collect and remit
sales and use taxes to the State of Wisconsin during the period from April
1, 1998 through March 31, 2002 totaling $1.4 million. The majority of the
assessment is based on the subsidiaries not charging sales tax to
purchasers of VOIs at the Company's Christmas Mountain Village(TM) resort.
In addition to the assessment, the Second Notice indicated that interest
and penalties would be assessed. As of September 30, 2003, aggregate
interest and penalties total approximately $1 million. The Company filed a
Petition for Redetermination (the "Second Petition") on July 9, 2003, and,
if the Second Petition is unsuccessful, the Company intends to vigorously
appeal the assessment. In addition, the Company believes that, if
necessary, amounts paid to the State of Wisconsin pursuant to the Notice
and the Second Notice, if any, may be further funded through collections
of sales tax from the consumers who effected the assessed VOI sales with
RDI without paying sales tax on their purchases.
Based on management's assessment of the Company's position in the Petition
and the Second Petition, the Company's belief that its right of offset
with the former RDI stockholders will be upheld and other factors
discussed above, management does not believe that the possible sales tax
assessment pursuant to the Notice and the Second Notice will have a
material adverse impact on the Company's results of operations or
financial position, and therefore no amounts have been accrued related to
this matter. Additionally, as the statute requiring the assessment of
sales tax on VOIs in Wisconsin was repealed in December 1999 and based on
the applicable statutes of limitations, the Company believes its exposure
in these matters is limited to that discussed above.
8. Business Segments
The Company has two reportable business segments. Bluegreen Resorts
acquires, develops and markets VOIs at the Company's resorts and Bluegreen
Communities acquires large tracts of real estate that are subdivided,
improved (in some cases to include a golf course and related amenities on
the property) and sold, typically on a retail basis.
Required disclosures for the Company's business segments are as follows
(in thousands):
Bluegreen Bluegreen
Resorts Communities Totals
-------------------------------------------
As of and for the three months ended September 30, 2003
-------------------------------------------------------
Sales $ 83,925 $ 25,016 $108,941
Other resort and communities operations revenue 12,826 1,723 14,549
Depreciation expense 959 452 1,411
Field operating profit 21,799 2,028 23,827
Inventory, net 93,228 117,126 210,354
21
Bluegreen Bluegreen
Resorts Communities Totals
-------------------------------------------
As of and for the three months ended September 29, 2002
(Restated)
-------------------------------------------------------
Sales $ 56,306 $ 27,080 $ 83,386
Other resort and communities operations revenue 6,050 1,514 7,564
Depreciation expense 630 347 977
Field operating profit 7,565 5,182 12,747
Inventory, net 68,588 100,251 168,839
For the nine months ended September 30, 2003
-------------------------------------------------------
Sales $191,060 $ 65,689 $256,749
Other resort and communities operations revenue 37,605 4,987 42,592
Depreciation expense 2,628 1,249 3,877
Field operating profit 40,796 5,644 46,440
For the nine months ended September 29, 2002 (Restated)
-------------------------------------------------------
Sales $131,912 $ 78,512 $210,424
Other resort and communities operations revenue 17,499 3,062 20,561
Depreciation expense 2,008 929 2,937
Field operating profit 16,949 13,079 30,028
Field operating profit for reportable segments reconciled to consolidated
income before provision for income taxes and minority interest is as
follows (in thousands):
Three Months Ended Nine Months Ended
-------------------------------------------------------------------
September 29, September 29,
September 30, 2002 September 30, 2002
2003 (Restated) 2003 (Restated)
-------------------------------------------------------------------
Field operating profit for reportable segments $ 23,827 $ 12,747 $ 46,440 $ 30,028
Interest income 4,441 4,018 12,308 11,373
Gain on sales of notes receivable 476 2,037 3,360 5,334
Other income (expense), net (515) (676) 608 (1,020)
Corporate general and administrative expenses (4,991) (4,739) (15,520) (15,118)
Interest expense (3,650) (3,321) (9,626) (9,432)
Provision for loan losses (2,300) (1,561) (5,525) (3,810)
-------- -------- -------- --------
Consolidated income before minority interest and
provision for income taxes $ 17,288 $ 8,505 $ 32,045 $ 17,355
======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Bluegreen Corporation (the "Company") desires to take advantage of the "safe
harbor" provisions of the Private Securities Reform Act of 1995 (the "Act") and
is making the following statements pursuant to the Act to do so. Certain
statements herein and elsewhere in this report and the Company's other filings
with the Securities and Exchange Commission constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company may also make written or oral forward-looking statements in its annual
report to stockholders, in press releases and in other written materials, and in
oral statements made by its officers, directors and employees. Such statements
may be identified 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 the Company's products, the Company's expected future sales,
financial position, operating results and liquidity and capital resources and
its business strategy, financial plan and expected capital requirements and
trends in the Company's operations or results are forward-looking statements.
Such forward-looking statements are subject to known and unknown risks and
uncertainties, many of which are beyond the Company's control, that could cause
the actual results, performance
22
or achievements of the Company, or industry trends, to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Given these uncertainties, investors are cautioned
not to place undue reliance on such forward-looking statements and no assurance
can be given that the plans, estimates and expectations reflected in such
statements will be achieved. Factors that could adversely affect the Company's
future results can also be considered general "risk factors" with respect to the
Company's business, whether or not they relate to a forward-looking statement.
The Company wishes to caution readers that the following important factors,
among other risk factors, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company:
a) Risks associated with changes in national, international or regional
economic conditions that can adversely affect the real estate
market, which is cyclical in nature and highly sensitive to such
changes, including, among other factors, levels of employment and
discretionary disposable income, consumer confidence, available
financing and interest rates and any decrease in the amount of
vacation travel (whether as a result of economic, political or other
factors), including, but not limited to, air travel, by American
consumers;
b) Risks associated with the imposition of additional compliance costs
on the Company as the result of changes in or the interpretation of
any environmental, zoning or other laws and regulations that govern
the acquisition, subdivision and sale of real estate and various
aspects of the Company's financing operation or the failure of the
Company to comply with any law or regulation. Also the risks that
changes in or the failure of the Company to comply with laws and
regulations governing the marketing (including telemarketing) of the
Company's inventories and services will adversely impact the
Company's ability to market and sell in any of its current or future
markets at its current relative marketing cost;
c) Risks associated with a large investment in real estate inventory at
any given time (including risks that real estate inventories will
decline in value due to changing market and economic conditions and
that the development, financing and carrying costs of inventories
may exceed those anticipated);
d) Risks associated with the inability to locate suitable inventory for
acquisition, or with a shortage of available inventory in the
Company's principal markets;
e) Risks associated with delays in bringing the Company's inventories
to market due to, among other things, changes in regulations
governing the Company's operations, adverse weather conditions,
natural disasters or changes in the availability of development
financing on terms acceptable to the Company;
f) Risks associated with changes in applicable usury laws or the
availability of interest deductions or other provisions of federal
or state tax law, which may limit the effective interest rates that
the Company may charge on its notes receivable;
g) Risks associated with a decreased willingness on the part of banks
to extend direct customer home site financing or increased costs
thereof, which could result in the Company receiving less cash in
connection with the sales of real estate and/or lower sales;
h) Risks associated with the fact that the Company requires external
sources of liquidity to support its operations, acquire, carry,
develop and sell real estate and satisfy its debt and other
obligations, and the Company may not be able to secure external
sources of liquidity on favorable terms or at all including those
transactions that are currently under negotiation;
i) Risks associated with the inability of the Company to locate sources
of capital on favorable terms for the pledge and/or sale of land and
vacation ownership notes receivable, including the inability to
consummate or fund securitization transactions or to consummate
fundings under facilities including those transactions that are
currently under negotiation;
j) Risks associated with an increase in prepayment rates, delinquency
rates or defaults with respect to Company-originated loans or an
increase in the costs related to reacquiring, carrying and disposing
of properties reacquired through foreclosure or deeds in lieu of
foreclosure, which could, among other things, reduce the Company's
interest income, increase loan losses thereby making it more
difficult and expensive for the Company to sell and/or pledge
receivables, reduce cash flow on retained interests in notes
receivable sold as well as adversely affect the fair value of the
retained interests in notes receivable sold as well as the risks and
uncertainties associated that estimates used in determining the
carrying amounts of the Company's assets and contingent liabilities
will prove not to be correct;
23
k) Risks associated with an increase in costs to develop inventory for
sale and/or selling, general and administrative expenses which
impact the achievement of anticipated profit and operating margins;
l) Risks and uncertainties associated with an increase or decrease in
the number of land or resort properties subject to the
percentage-of-completion method of accounting, which relies on the
use of estimates and requires deferral of profit recognition on such
projects until development is substantially complete as such
increases or decreases could cause material fluctuations in
period-to-period results of operations;
m) Risks associated with the failure of the Company to satisfy the
covenants contained in the agreements and indentures governing
certain of its credit and receivables purchase facilities
agreements, which, among other things, place certain restrictions on
the Company's ability to incur debt, incur liens, make investments,
pay dividends or repurchase debt or equity. In addition, the failure
to satisfy certain covenants contained in the Company's receivable
purchase facilities could materially defer or reduce future cash
receipts on the Company's retained interests in notes receivable
sold and could impact the Company's ability to sell additional
receivables under such purchase facilities. Any such failure could
impair the fair value of the retained interests in notes receivable
sold and materially, adversely impact the Company's liquidity
position and its results of operations;
n) The risks and uncertainties of the Company receiving an unfavorable
judgment in any litigation or proceedings that it is involved in,
and the impact of any related monetary or equity damages or
assessments;
o) Risks associated with selling Vacation Ownership Interests ("VOIs")
in foreign countries including, but not limited to, compliance with
legal regulations, labor relations and vendor relationships;
p) The risk that the Company's sales and marketing techniques are not
successful, and the risk that the Bluegreen Vacation Club(R) (the
"Club") is not accepted by consumers or imposes limitations on the
Company's operations, or is adversely impacted by legal or other
requirements;
q) Risks relating to any joint venture that the Company is a party to,
including risks that a dispute may arise with a joint venture
member, that the Company's joint venture will not be as successful
as anticipated and that the Company may have to make capital
contributions to the joint venture in amounts greater than
anticipated;
r) Risks and uncertainties that currently proposed or future changes in
accounting principles will have an adverse impact on the Company;
s) Risks associated with the Company's significant investment in and
operation of golf courses, the profitability of which and potential
gain or loss upon the ultimate disposition of such golf courses will
be impacted by prevailing market conditions and other factors.
t) Risks and uncertainties that the acquisition of a business by the
Company will result in unforeseen liabilities, decreases in net
income and/or cash flows or prove to be less successful than
anticipated or that contingent purchase price amounts will be
claimed based on the terms of the acquisition.
The Company does not undertake and expressly disclaims any duty to update or
revise forward-looking statements, even if the Company's situation changes in
the future.
General
The Company operates through two business segments. Bluegreen Resorts develops,
markets and sells VOIs in the Company's resorts, primarily through the 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 home sites.
The Company has historically experienced and expects to continue to experience
seasonal fluctuations in its gross revenues and net earnings. This seasonality
may cause significant fluctuations in the quarterly operating results of the
Company, with the majority of the Company's gross revenues and net earnings
historically occurring in the quarters ending in June and September each year.
Other material fluctuations in operating results may occur due to the timing of
development and the requirement that the Company 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.
Management expects that the Company will continue to invest in projects that
will require substantial development (with significant capital requirements),
and hence the Company's results of operations may
24
fluctuate significantly between quarterly and annual periods as a result of the
required use of the percentage-of-completion method of accounting.
The Company believes that inflation and changing prices have not had a material
impact on its revenues and results of operations during the three and nine
months ended September 30, 2003 or September 29, 2002, other than to the extent
that the Company continually reviews and has historically increased the sales
prices of its VOIs annually. Based on prior history, the Company does not expect
that inflation will have a material impact on the Company's revenues or results
of operations in the foreseeable future, although there is no assurance that the
Company will be able to continue to increase its sales prices. To the extent
inflationary trends affect short-term interest rates, a portion of the Company's
debt service costs may be affected as well as the interest rates the Company
charges its customers. The Company has historically adjusted the interest rates
charged on Bluegreen Communities' notes receivable from customers as market
rates changed, but has not adjusted the interest rates charged on notes
receivable from Bluegreen Resorts' customers due to market rate fluctuations.
The Company believes that the terrorist attacks on September 11, 2001 in the
United States, the recent hostilities in the Middle East and other world events
that have decreased the amount of vacation air travel by Americans have not, to
date, had a material adverse impact on the Company's sales in its domestic sales
offices. With the exception of the La Cabana Beach Resort and Racquet Club(TM)
in Aruba ("La Cabana"), guests at the Company's Club destination resorts more
typically drive, rather than fly, to these resorts due to the accessibility of
the resorts. There can be no assurances, however, that a long-term decrease in
air travel or increase in anxiety regarding actual or possible future terrorist
attacks or other world events will not have a material adverse impact on the
Company's results of operations in future periods.
The Company recognizes revenue on home site 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 the Company has completed substantially
all of its obligations with respect to any development relating to the real
estate sold. In cases where all development has not been completed, the Company
recognizes income in accordance with the percentage-of-completion method of
accounting.
Costs associated with the acquisition and development of vacation ownership
resorts and residential communities, including carrying costs such as interest
and taxes, are capitalized as inventory and are allocated to cost of real estate
sold as the respective revenues are recognized.
A portion of the Company's revenues historically has been and, although no
assurances can be given, is expected to continue to be comprised of gains on
sales of notes receivable. The gains are recorded on the Company's condensed
consolidated statement of income and the related retained interests in the note
receivable sold are recorded on its condensed consolidated balance sheet at the
time of sale. The amount of gains recognized and the fair value of the retained
interests recorded are based in part on management's best estimates of future
prepayment, default and 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 was 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 cash flow from the retained interests in notes
receivable sold will 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 there are other
trigger events, the funds received from obligors are distributed on an
accelerated basis to investors. If the accelerated payment formula were to
become applicable, the cash flow on the retained interests notes receivables
sold would be reduced until the outside investors were paid or the regular
payment formula was resumed. If these situations were to occur, it may cause a
decline in the fair value of the retained interests and a charge to earnings
currently. There can be no assurances that the carrying value of the Company's
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
"Purchase and Credit Facilities for Bluegreen Resorts' Receivables and
Inventories" below.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its results of operations and financial
condition are based upon its condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. 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
recognition under the percentage-of-completion method of accounting; the
Company's 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, intangible assets and other
assets; and the estimate of contingent
25
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,
the Company's results of operations and financial condition could be materially
adversely impacted.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its condensed
consolidated financial statements:
o In accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real
Estate," the Company recognizes revenue on retail land sales and
sales of VOIs when a minimum of 10% of the sales price has been
received in cash, the legal rescission period has expired,
collectibility of the receivable representing the remainder of the
sales price is reasonably assured and the Company has completed
substantially all of its obligations with respect to any development
related to the real estate sold. The Company believes that it uses a
reasonably reliable methodology to estimate the collectibility of
the receivable representing the remainder of the sales price of real
estate sold. See further discussion of the Company's policies
regarding the estimation of credit losses on its notes receivable,
below. Should the Company's estimates regarding the collectibility
of its receivables change adversely, the Company may have to defer
the recognition of sales and its results of operations could be
negatively impacted.
In cases where all development has not been completed, the Company
recognizes revenue in accordance with the percentage-of-completion
method of accounting. Should the Company's estimates of the total
anticipated cost of its vacation ownership or Bluegreen Communities
projects increase, the Company may be required to defer a greater
amount of revenue or may be required to defer revenue for a longer
period of time, and thus the Company's results of operations could
be adversely impacted.
o The Company estimates credit losses on its notes receivable
portfolios in accordance with SFAS No. 5, "Accounting for
Contingencies," as its note receivable portfolios consist of a large
group of smaller-balance, homogeneous loans. Consistent with Staff
Accounting Bulletin No. 102, "Selected Loan Loss Allowance
Methodology and Documentation Issues," the Company first segments
its notes receivable by identifying risk characteristics that are
common to groups of loans and then estimates credit losses based on
the risks associated with these segments. The Company considers many
factors when establishing and evaluating the adequacy of its reserve
for loan losses. These factors include recent and historical default
rates, static pool analyses, current delinquency rates, contractual
payment terms, loss severity rates along with present and expected
economic conditions. The Company reviews these factors and measures
loan impairment by applying historical loss rates, adjusted for
relevant environmental and collateral values, to the segments'
aggregate loan balances. The Company adjusts its reserve for loan
losses on at least a quarterly basis. Should the Company's estimates
of these and other pertinent factors change, the Company's results
of operations, financial condition and liquidity position could be
adversely affected.
o When the Company transfers financial assets to third parties, such
as when it sells notes receivable either pursuant to its vacation
ownership receivables purchase facilities or, in the case of land
mortgages receivable, private-placement REMICs, it evaluates whether
or not such transfer should be accounted for as a sale pursuant to
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" and related
interpretations. The evaluation of sale treatment under SFAS No. 140
involves legal assessments of the transactions, which include
determining whether the transferred assets have been isolated from
the Company (i.e. put presumptively beyond the reach of the Company
and its 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 the Company does
not maintain effective control over the transferred assets through
either (1) an agreement that both entitles and obligates the
transferor to repurchase or redeem them before their maturity or (2)
the ability to unilaterally cause the holder to return specific
assets (other than through a cleanup call). The Company believes
that it has obtained appropriate legal opinions and other guidance
deemed necessary to properly account for its transfers of financial
assets as sales in accordance with SFAS No. 140.
In connection with the sales of notes receivable referred to above,
the Company retains subordinated tranches, rights to excess interest
spread and servicing rights, all of which are retained interests in
the sold notes receivable. Gain or loss on 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. The Company initially and periodically
26
estimates fair value based on the present value of future expected
cash flows using management's best estimates of the key assumptions
- prepayment rates, loss severity rates, default rates and discount
rates commensurate with the risks involved. Should the Company's
estimates of these key assumptions change or should the portfolios
sold fail to satisfy specified performance criteria and therefore
trigger provisions whereby outside investors in the portfolios are
paid on an accelerated basis, there could be a reduction in the fair
value of the retained interests and the Company's results of
operations and financial condition could be adversely impacted.
During the three- and nine month periods ended September 30, 2003,
the Company recognized other-than temporary decreases of $692,000
and $824,000, respectively, in the fair market value of its retained
interest in a 2002 vacation ownership receivables securitization,
based on higher than anticipated default rates in the portfolio
sold.
o The Company periodically evaluates the recovery of the carrying
amounts of its long-lived assets including its real estate
properties under the guidelines of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Factors that the
Company considers in making this evaluation include the estimated
remaining life-of-project sales for each project based on current
retail prices and the estimated costs to complete each project.
Should the Company's estimates of these factors change, the
Company's results of operations and financial condition would be
adversely impacted.
o Goodwill and intangible assets deemed to have indefinite lives are
not amortized but are subject to annual impairment tests in
accordance with SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets." Other intangible assets are amortized over their
useful lives. Goodwill and other intangible assets are tested for
impairment on an annual basis by estimating the fair value of the
reporting unit (for the Company, either Bluegreen Resorts or
Bluegreen Communities) to which the goodwill or intangible assets
have been assigned. Should the Company's estimates of the fair value
of its reporting units change, the Company's results of operations
and financial condition could be adversely impacted.
o During the years ended March 31, 2002 and April 1, 2001, the Company
deferred the cost of generating vacation ownership tours through
telemarketing programs until such time as these tours were
conducted, based on an accepted industry accounting principle. In
December 2002, the Company elected to change its accounting policy
to expense such costs as incurred, effective April 1, 2002. The
Company believes that the new method of accounting for these costs
is preferable over the Company's previous method and has been
applied prospectively. The Company believes accounting for these
costs as period expenses results in improved financial reporting.
The cumulative effect of this change in accounting principle was
additional expenses of $5.9 million, net of tax, in the nine months
ended September 30, 2002. Had the Company applied this new method of
accounting for these costs retroactively to the entire nine-month
period ended September 30, 2002, pro forma net income would have
been approximately $3.6 million and diluted income per share would
have been $0.17.
Results of Operations
Bluegreen Bluegreen
(amounts in thousands) Resorts Communities Total
------------------------------------------------------------------
Three Months Ended September 30, 2003
Sales $ 83,925 100% $ 25,016 100% $108,941 100%
Cost of sales (16,464) (20) (14,569) (58) (31,033) (29)
-------- -------- --------
Gross profit 67,461 80 10,447 42 77,908 71
Other resort and communities operations revenues 12,826 15 1,723 7 14,549 13
Cost of other resort and communities operations (12,493) (15) (1,996) (8) (14,489) (13)
Selling and marketing expenses (41,650) (50) (5,854) (23) (47,504) (44)
Field general and administrative expenses(1) (4,345) (5) (2,292) (9) (6,637) (6)
-------- -------- --------
Field operating profit $ 21,799 26% $ 2,028 8% $ 23,827 22%
======== ======== ========
Three Months Ended September 29, 2002(2)
Sales $ 56,306 100% $ 27,080 100% $ 83,386 100%
Cost of sales (14,307) (25) (14,702) (54) (29,009) (35)
-------- -------- --------
Gross profit 41,999 75 12,378 46 54,377 65
Other resort and communities operations revenues 6,050 11 1,514 6 7,564 9
Cost of resort and communities operations (5,394) (10) (1,437) (5) (6,831) (8)
Selling and marketing expenses (32,255) (57) (5,270) (19) (37,525) (45)
Field general and administrative expenses(1) (2,835) (5) (2,003) (7) (4,838) (6)
-------- -------- --------
Field operating profit $ 7,565 13% $ 5,182 19% $ 12,747 15%
======== ======== ========
27
Bluegreen Bluegreen
(amounts in thousands) Resorts Communities Total
-----------------------------------------------------------------------
Nine Months Ended September 30, 2003
Sales $ 191,060 100% $ 65,689 100% $ 256,749 100%
Cost of sales (39,327) (21) (37,039) (56) (76,366) (30)
--------- --------- ---------
Gross profit 151,733 79 28,650 44 180,383 70
Other resort and communities operations revenues 37,605 20 4,987 8 42,592 17
Cost of other resort and communities operations (37,729) (20) (5,467) (8) (43,196) (17)
Selling and marketing expenses (98,514) (52) (15,232) (23) (113,746) (44)
Field general and administrative expenses(1) (12,299) (6) (7,294) (11) (19,593) (8)
--------- --------- ---------
Field operating profit $ 40,796 21% $ 5,644 9% $ 46,440 18%
========= ========= =========
Nine Months Ended September 29, 2002(2)
Sales $ 131,912 100% $ 78,512 100% $ 210,424 100%
Cost of sales (32,909) (25) (43,459) (55) (76,368) (36)
--------- --------- ---------
Gross profit 99,003 75 35,053 45 134,056 64
Other resort and communities operations revenues 17,499 13 3,062 4 20,561 10
Cost of resort and communities operations (15,004) (11) (3,247) (4) (18,251) (9)
Selling and marketing expenses (76,938) (58) (15,339) (20) (92,277) (44)
Field general and administrative expenses(1) (7,611) (6) (6,450) (8) (14,061) (7)
--------- --------- ---------
Field operating profit $ 16,949 13% $ 13,079 17% $ 30,028 14%
========= ========= =========
(1) General and administrative expenses attributable to corporate
overhead have been excluded from the tables. Corporate general and
administrative expenses totaled $5.0 million and $4.7 million for
the three months ended September 30, 2003 and September 29, 2002,
respectively, and $15.5 million and $15.1 million for the nine
months ended September 30, 2003 and September 29, 2002,
respectively.
(2) Restated. See Note 1 to the Condensed Consolidated Financial
Statements.
Sales and Field Operations
Consolidated sales increased 31% to $108.9 million during the three months ended
September 30, 2003 (the "2003 Quarter") from $83.4 million for the three months
ended September 29, 2002 (the "2002 Quarter"). Bluegreen Resorts and Bluegreen
Communities sales comprised 77% and 23%, respectively, of consolidated sales
during the 2003 Quarter. Bluegreen Resorts and Bluegreen Communities sales
comprised 68% and 32%, respectively, of consolidated sales during the 2002
Quarter.
Consolidated sales increased 22% to $256.7 million for the nine months ended
September 30, 2003 (the "2003 Period") from $210.4 million for the nine months
ended September 29, 2002 (the "2002 Period"). Bluegreen Resorts and Bluegreen
Communities sales comprised 74% and 26%, respectively, of consolidated sales
during the 2003 Period. Bluegreen Resorts and Bluegreen Communities sales
comprised 63% and 37%, respectively, of consolidated sales during the 2002
Period.
Bluegreen Resorts
During the 2003 Quarter and the 2002 Quarter, sales of VOIs were $83.9 million
and $56.3 million, respectively, reflecting a 49% increase. During the 2003
Period and the 2002 Period, sales of VOIs were $191.1 million and $131.9
million, respectively, reflecting a 45% increase.
The following table sets forth certain information for sales of VOIs for the
periods indicated, before giving effect to the percentage-of-completion method
of accounting.
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 29, September 30, September 29,
2003 2002 2003 2002
---- ---- ---- ----
Number of VOI sales transactions 8,476 6,326 20,270 15,119
Average sales price per transaction $9,680 $9,225 $9,696 $9,151
Gross margin 80% 75% 79% 75%
The $27.6 million increase in Bluegreen Resorts' sales during the 2003 Quarter,
as compared to the 2002 Quarter, was due in part to the opening of four new
sales sites. The new sales sites include a sales office at the Mountain Run at
Boyne(TM) resort in Boyne Mountain, Michigan (opened in November 2002), a sales
office at the Solara Surfside(TM) resort in Surfside, Florida (opened in January
2003) and two offsite sales operations in Minneapolis, Minnesota (opened in
November 2002) and Harbor Springs, Michigan (opened in March 2003 on the campus
of the Boyne Highlands resort, pursuant to a marketing agreement with Boyne USA
Resorts). These new sales sites generated a combined $8.6 million of sales
during
28
the 2003 Quarter. The remainder of the sales increase was due to same-store
sales increases primarily as a result of greater focus on marketing to the
Company's growing Club owner base and to sales prospects referred to the Company
by existing Club owners and other prospects. Sales to owner and referral
prospects increased by 50% during the 2003 Quarter as compared to the 2002
Quarter. Sales to owner and referral prospects also increased to 26% from 24% of
Bluegreen Resorts sales during the 2003 Quarter and 2002 Quarter, respectively.
This, combined with a 23% overall increase in the number of sales prospects seen
by Bluegreen Resorts to approximately 67,400 prospects during the 2003 Quarter
from approximately 54,900 prospects during the 2002 Quarter and an increase in
the sale-to-tour conversion ratio, significantly contributed to the overall
sales increase during the periods presented. The increase in average sales price
reflected in the above table also contributed to the increase in sales during
the 2003 Quarter as compared to the 2002 Quarter.
The $59.1 million increase in Bluegreen Resorts' sales during the 2003 Period,
as compared to the 2002 Period, was due in part to the opening of a Daytona
Beach, Florida sales site in June 2002 which, along with the four new sales
sites discussed above, generated a combined $22.8 million of incremental sales
during the 2003 Period. The remainder of the sales increase was due to
same-store sales increases primarily as a result of greater focus on marketing
to the Company's growing Club owner base and to sales prospects referred to the
Company by existing Club owners and other prospects. Sales to owner and referral
prospects increased by 38% during the 2003 Period as compared to the 2002
Period. This combined with a 28% overall increase in the number of sales
prospects seen by Bluegreen Resorts to approximately 166,500 prospects during
the 2003 Period from approximately 129,600 prospects during the 2002 Period and
an increase in the sale-to-tour conversion ratio, significantly contributed to
the overall sales increase during the periods presented. The increase in average
sales price reflected in the above table also contributed to the increase in
sales during the 2003 Period as compared to the 2002 Period.
Gross margin percentages varied between periods based on the relative costs of
the specific VOIs sold in the respective periods.
Bluegreen Resorts intends to continue its focus and resources on acquiring and
developing new resorts to ensure the availability of inventory in its principal
markets. During the 2003 Quarter, the Company acquired approximately 3,966
unsold VOIs, additional land that can accommodate the construction of
approximately 200 new vacation residences (10,400 VOIs) and certain onsite
amenities on the campus of the World Golf Village(R) in St. Augustine, Florida.
This resort, which has been renamed Grande Villas at World Golf Village(TM),
will be managed by the Company and will also have an onsite Club sales office.
Also during the 2003 Quarter, the Company acquired Oasis Lakes Resort(TM) in
Orlando, Florida (to be renamed The Fountains(TM)). The acquisition included
land that can accommodate the construction of approximately 576 new vacation
residences (29,952 VOIs), a nominal number of unsold VOIs and the resort's
onsite amenties. The Fountains will be managed by the Company and will also have
an onsite Club sales office.
Bluegreen Resorts is currently engaged in negotiating the possible acquisition
of additional resorts in Florida and in other areas within the United States.
There can be no assurances that these resorts will be acquired at acceptable
pricing or at all.
Other resort operations revenues increased $6.8 million during the 2003 Quarter
as compared to the 2002 Quarter. Other resort operations revenues increased
$20.1 million during the 2003 Period as compared to the 2002 Period. On October
2, 2002, Great Vacation Destinations, Inc. ("GVD", f/k/a Leisure Plan, Inc.), a
wholly-owned subsidiary of the Company, acquired substantially all of the assets
and assumed certain liabilities of TakeMeOnVacation, LLC, RVM Promotions, LLC
and RVM Vacations, LLC (collectively, "TMOV"). GVD was a newly-formed entity
with no prior operations. Utilizing the assets acquired from TMOV, GVD generates
sales leads for VOI sales utilizing various marketing strategies. Through the
application of a proprietary computer software system, these leads are then
contacted and given the opportunity to purchase mini-vacation packages. These
packages sometimes combine hotel stays, cruises and gift premiums. Buyers of
these mini-vacation packages are then usually required to participate in a
vacation ownership sales presentation. GVD generates sales prospects that are
sold to other VOI developers and, to a lesser extent, for the Company's VOI
sales business. During the 2003 Quarter and 2003 Period, GVD generated $5.3
million and $16.7 million of revenues, respectively. The remainder of the
increase in other resort operations revenues was due to an increase in revenues
generated by the Company's wholly-owned title company and an increase in
revenues from managing the Club; both of such increases are the result of the
increase in sales during the 2003 Quarter and 2003 Period as compared to the
2002 Quarter and 2002 Period, respectively.
Cost of other resort operations increased $7.1 million during the 2003 Quarter
as compared to the 2002 Quarter and increased $22.7 million during the 2003
Period as compared to the 2002 Period. These increases were primarily as a
result of operating expenses of $5.8 million and $21.0 million incurred by GVD
during the 2003 Quarter and 2003 Period, respectively. GVD's losses during the
2003 Quarter and 2003 Period are related in part to the impact of applying fair
market valuations to TMOV's assets based on purchase accounting required by SFAS
No. 141, "Business Combinations." The losses are also due to the initial costs
of GVD implementing new lead generation programs to integrate with the Company's
resorts business and the impact of deferred revenue accounting on mini-vacation
package sale recognition. The remaining increase in cost of other resort
operations during both the 2003 Quarter and 2003 Period is primarily due to
start-
29
up costs of a new owner services center in Indianapolis, Indiana and a new
purchasing and design operation in Knoxville, Tennessee.
Selling and marketing expenses for Bluegreen Resorts, which are primarily
variable with sales, decreased as a percentage of sales to 50% during the 2003
Quarter from 57% during the 2002 Quarter. Such expenses decreased as a
percentage of sales to 52% during the 2003 Period from 58% during the 2002
Period. These decreases are primarily due to an 8% increase in the sale-to-tour
conversion ratio (to 13% from 12%) and the increase in the average sales price
per transaction noted above. The decrease is also due to the increase in sales
to the Company's Club owner base and to sales prospects referred to the Company
by existing Club owners and other prospects, as previously discussed. Sales to
these prospects have relatively low associated marketing costs. Selling and
marketing expense as a percentage of sales is an important indicator of the
performance of Bluegreen Resorts and the Company as a whole. No assurances 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 $1.5
million during the 2003 Quarter as compared to the 2002 Quarter and increased
$4.7 million during the 2003 Period as compared to the 2002 Period. These
increases were primarily due to the addition of the Minneapolis, Daytona Beach
and Harbor Springs (Boyne Highlands) offsite sales offices and the Mountain Run
at Boyne(TM) and Solara Surfside(TM) sales offices and due to expenses
associated with the consideration of potential real estate acquisitions during
the 2003 Quarter and 2003 Period, which were not pursued. As a percentage of
sales, these costs decreased slightly to approximately 5% during the 2003
Quarter and 2003 Period from 6% during the 2002 Quarter and 2002 Period.
Bluegreen Communities
During the 2003 Quarter and the 2002 Quarter, Bluegreen Communities sales were
$25.0 million and $27.1 million, respectively, reflecting an 8% decrease. During
the 2003 Period and the 2002 Period, Bluegreen Communities sales were $65.7
million and $78.5 million, respectively, reflecting a 16% decrease.
The table below sets forth the number of home sites sold by Bluegreen
Communities and the average sales price per home site for the periods indicated,
before giving effect to the percentage-of-completion method of accounting and
excluding sales of bulk parcels.
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 29, September 30, September 29,
2003 2002 2003 2002
---- ---- ---- ----
Number of home sites sold 530 465 1,370 1,418
Average sales price per home site $60,029 $59,989 $57,069 $57,378
Gross margin 42% 46% 44% 45%
Bluegreen Communities' sales decreased $2.1 million during the 2003 Quarter as
compared to the 2002 Quarter and decreased $12.8 million during the 2003 Period
as compared to the 2002 Period primarily as a result of the substantial sellout
of one of the Company's premier golf course communities, The Preserve at Jordan
Lake(TM) during the quarter ended March 31, 2003. In March 2003, Bluegreen
Communities acquired 1,142 acres in Braselton, Georgia for the development of a
new golf course community known as the Traditions of Braselton(TM). This new
project, which began sales in April 2003, generated sales of $1.5 million during
the 2003 Quarter and $5.7 million during the 2003 Period (net of sales deferred
under the percentage-of-completion method of accounting of $6.3 million during
the 2003 Quarter and $8.1 million during the 2003 Period). The remaining
decrease is due to more sales being deferred under the percentage-of-completion
method of accounting during the 2003 Quarter and 2003 Period as compared to the
2002 Quarter and 2002 Period, respectively. As of September 30, 2003, Bluegreen
Communities had $18.8 million of sales and $8.0 million of field operating
profit deferred under percentage-of-completion accounting.
Bluegreen Communities intends to primarily focus its resources on developing new
golf course communities and continuing to support its successful projects in
Texas. Bluegreen Communities is currently engaged in negotiating the possible
acquisition of two properties for the development of new golf course communities
in the Southeastern United States. There can be no assurances that these
properties will be acquired at acceptable pricing or at all. During the 2003
Quarter, the Company's golf course communities and Texas projects comprised
approximately 40% and 56%, respectively, of Bluegreen Communities' sales. During
the 2003 Period, the Company's golf communities and Texas regions comprised
approximately 33% and 61%, respectively, of Bluegreen Communities' sales.
30
The decreases in gross margin during the 2003 Quarter and 2003 Period as
compared to the 2002 Quarter and 2002 Period were due to variations in the mix
of home sites sold during the respective periods. Variations in cost structures
and market pricing of projects available for sale as well as the opening of
phases of projects which include premium home sites (e.g., water frontage,
preferred views, larger acreage home sites, etc.) will 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 has historically been between
40% and 54% of sales and is expected to be such for the foreseeable future.
Other communities operations include the Company's Carolina National(TM), Golf
Club at Brickshire(TM) and Preserve at Jordan Lake(TM) golf courses as well as
realty resale operations at several of the Company's residential land
communities. Other communities operations revenues increased $209,000 to $1.7
million from $1.5 million and the related costs increased $559,000 to $2.0
million from $1.4 million during the 2003 Quarter and the 2002 Quarter,
respectively. Other communities operations revenues increased $1.9 million to
$5.0 million from $3.1 million and the related costs increased $2.2 million to
$5.5 million from $3.2 during the 2003 Period and the 2002 Period, respectively.
These increases were primarily due to the opening of the golf courses at
Brickshire(TM), located in New Kent, Virginia, and The Preserve in March 2002
and August 2002, respectively. In addition, the Company's realty resale
operations, which commenced sales in January 2003, generated $393,000 and $1.1
million in commission revenues during the 2003 Quarter and 2003 Period,
respectively.
The Company's golf course operations yielded aggregate losses of $281,000 during
the 2003 Quarter, $671,000 during the 2003 Period and $191,000 during the 2002
Period. Golf course operations yielded a nominal net profit during the 2002
Quarter. The losses from golf course operations are due to fixed operating
expenses and low, seasonal revenues during the winter months. Also, two of the
Company's golf courses were still in their first year of operations during the
2003 Period. Management believes that the operating results of these new courses
should improve as these courses mature.
The Company's realty resale operations generated a nominal net profit during the
2003 Quarter and 2003 Period, despite the fact that operations were still in the
start-up phase. Selling and marketing expenses for Bluegreen Communities
increased as a percentage of sales to 23% from 19% during the 2003 Quarter and
2002 Quarter, respectively, and to 23% from 20% during the 2003 Period and 2002
Period, respectively, due to the impact of percentage-of-completion accounting
and due to the substantial sell out of The Preserve during the 2003 Period.
While the Company is required to defer the recognition of sales under the
percentage-of-completion method of accounting, the Company cannot defer the
recognition of certain selling and marketing costs associated with the sales
deferred. This increases selling and marketing expenses as a percentage of
sales. The Preserve generated lower selling and marketing expenses as a
percentage of sales due in part to its location near the Raleigh-Durham area,
which decreased overall selling and marketing expenses as a percentage of sales
for Bluegreen Communities during the 2002 Period.
Corporate General and Administrative Expenses
For a discussion of field selling, general and administrative expenses, please
see "Sales and Field Operations", above.
The Company's corporate general and administrative ("G&A") expenses consist
primarily of expenses incurred to administer the various support functions at
the Company's corporate headquarters, including accounting, human resources,
information technology, mergers and acquisitions, mortgage servicing, treasury
and legal. Corporate G&A increased slightly to $5.0 million from $4.7 million
during the 2003 Quarter and the 2002 Quarter, respectively, and to $15.5 million
from $15.1 million during the 2003 Period and 2002 Period, respectively. As a
percentage of sales, these costs decreased during the 2003 Quarter and 2003
Period to 5% and 6%, respectively, from 6% and 7% during the 2002 Quarter and
2002 Period, respectively.
Interest Income
The Company's interest income is earned from its notes receivable, retained
interests in notes receivable sold (including REMIC transactions) and cash and
cash equivalents. Interest income increased by 11% to $4.4 million during the
2003 Quarter as compared to $4.0 million during the 2002 Quarter. Interest
income increased by 8% to $12.3 million during the 2003 Period as compared to
$11.4 million during the 2002 Period. The increases in interest income during
the 2003 Quarter and the 2003 Period were due to higher interest income earned
from the Company's notes receivable commensurate with higher average aggregate
notes receivable balances during the 2003 Quarter and the 2003 Period as
compared to the 2002 Quarter and 2002 Period, respectively. The increases in
interest income during the 2003 Quarter and 2003 Period were partially offset by
other-than-temporary decreases of $692,000 and $824,000, respectively, in the
fair value of the Company's retained interest in a 2002 vacation ownership
receivables securitization transaction, based on higher than anticipated default
rates in the portfolio sold.
31
Gain on Sales of Notes Receivable
Sales of vacation ownership notes receivable were made pursuant to receivables
purchase facilities in place during the respective periods (the current vacation
ownership receivables purchase facility is more fully described below under
"Credit Facilities for Bluegreen Resorts' Receivables and Inventories").
During the 2003 Quarter and the 2002 Quarter, the Company recognized gains on
the sales of notes receivable totaling $476,000 and $2.0 million, respectively.
During the 2003 Period and the 2002 Period, the Company recognized gains on the
sales of notes receivable totaling $3.4 million and $5.3 million, respectively.
The 77% decrease in gain on sales of notes receivable during the 2003 Quarter,
as compared to the 2002 Quarter, was primarily as a result of the decrease in
the principal amount of notes receivable sold ($8.4 million and $35.0 million in
the 2003 Quarter and 2002 Quarter, respectively). The 37% decrease in gain on
sales of notes receivable during the 2003 Period, as compared to the 2002
Period, was primarily as a result of the decrease in the principal amount of
notes receivable sold ($58.4 million and $94.5 million in the 2003 Period and
2002 Period, respectively). The amount of notes receivable sold during a
quarterly period depends on several factors including, but not limited to, the
amount of availability, if any, under receivables purchase facilities, the
amount of eligible receivables available for sale, the Company's cash
requirements, the covenants and other provisions of the relevant vacation
ownership receivables purchase facility (as described further below) and
management's discretion. During the 2003 Quarter, the amount of notes receivable
sold was less than historical levels of receivable sales as the Company's
existing purchase facility with ING Capital, LLC ("ING") was in the process of
being acquired by Resort Finance, LLC ("RFL") (see "Credit Facilities for
Bluegreen Resorts' Receivables and Inventories" for further discussion).
Other Expense, Net
Other expense, net of other income, totaled $515,000 and $676,000 during the
2003 Quarter and 2002 Quarter, respectively. Other income, net of other expense,
totaled $608,000 during the 2003 Period and other expense, net of other income,
was $1.0 million during the 2002 Period. The increase in other income, net,
during the 2003 Period as compared to the 2002 Period was primarily due to
foreign currency exchange gains on Bluegreen Communities' remaining Canadian
operations, increased deposit forfeiture income (on canceled sales) reflecting
the increased sales volume at Bluegreen Resorts, lower amortization expense
related to deferred facility fees on the Company's vacation ownership
receivables purchase facility and a gain recognized upon the disposition of a
shared ownership interest in a corporate airplane. In addition, other expense in
the 2002 Period included a casualty loss from a fire that occurred in a building
at the 51%-owned Big Cedar Wilderness Club and a loss on the disposal of fixed
assets used at two Indiana telemarketing offices that were closed.
Interest Expense
Interest expense increased slightly to $3.7 million from $3.3 million during the
2003 Quarter and the 2002 Quarter, respectively, and to $9.6 million from $9.4
million during the 2003 Period and 2002 Period, respectively, primarily as a
result of higher outstanding indebtedness during the periods. The Company's
debt-to-equity ratio increased to 1.37:1 at September 30, 2003 from 1.23:1 at
September 29, 2002. The increase in the debt-to-equity ratio was primarily due
to $28.4 million and $9.1 million of debt outstanding at September 30, 2003,
related to inventory acquisitions for Bluegreen Resorts and Bluegreen
Communities, respectively. In addition, as of September 30, 2003, the Company
had outstanding vacation ownership receivable-backed borrowings of $16.0
million, of which $11.8 million related to the Company's 51%-owned Big Cedar
Wilderness Club. These receivable-backed borrowings were made under a credit
facility with an affiliate of General Motors Acceptance Corporation ("GMAC"),
which was not in place as of September 29, 2002 (see further discussion under
"Purchase and Credit Facilities for Bluegreen Resorts' Receivables and
Inventories").
32
Provision for Loan Losses
The allowance for loan losses by division as of September 30, 2003 and December
31, 2002 is as follows (amounts in thousands):
Bluegreen Bluegreen
Resorts Communities Other Total
-------------------------------------------------------------
September 30, 2003
Notes receivable $ 102,793 $ 11,453 $ 1,452 $ 115,698
Less: allowance for loan losses (7,024) (256) (112) (7,392)
--------- --------- --------- ---------
Notes receivable, net $ 95,769 $ 11,197 $ 1,340 $ 108,306
========= ========= ========= =========
Allowance as a % of gross
notes receivable 7% 2% 8% 6%
========= ========= ========= =========
December 31, 2002
Notes receivable $ 53,029 $ 11,559 $ 1,896 $ 66,484
Less: allowance for loan losses (4,081) (496) (112) (4,689)
--------- --------- --------- ---------
Notes receivable, net $ 48,948 $ 11,063 $ 1,784 $ 61,795
========= ========= ========= =========
Allowance as a % of gross
notes receivable 8% 4% 6% 7%
========= ========= ========= =========
The Company recorded provisions for loan losses totaling $2.3 million and $1.6
million during the 2003 Quarter and the 2002 Quarter, respectively. The
provision for loan losses was $5.5 million and $3.8 million during the 2003
Period and 2002 Period, respectively. The increases in the provision during the
2003 Quarter and 2003 Period as compared to the 2002 Quarter and 2002 Period,
respectively, were primarily due to higher note receivable balances outstanding
at September 30, 2003 as compared to September 29, 2002. The Company believes
that its allowance for loan losses is an adequate reserve for future losses on
the Company's notes receivable portfolio as of September 30, 2003.
Other notes receivable at September 30, 2003 and December 31, 2002, primarily
consisted of a loan to Casa Grande Cooperative Association I, which is the
property owners' association that is responsible for the maintenance of La
Cabana.
Cumulative Effect of Change in Accounting Principle, Net of Tax
During the years ended March 31, 2002 and April 1, 2001, the Company deferred
the costs of generating vacation ownership tours through its telemarketing
programs until the earlier of such time as the tours were conducted or the
related mini-vacation packages expired, based on an accepted industry accounting
principle. In December 2002, the Company elected to change its accounting policy
to expense such costs as incurred, effective April 1, 2002. The Company believes
that the new method of accounting for these costs is preferable over the
Company's previous method and has applied it prospectively. The Company believes
accounting for these costs as period expenses results in improved financial
reporting. The cumulative effect of this change in accounting principle was
additional expense of $5.9 million, net of tax, in the 2002 Period.
Summary
Based on the factors discussed above, the Company's net income increased 101% to
$10.2 million during the 2003 Quarter from $5.1 million during the 2002 Quarter.
The Company's net income increased 295% to $18.6 million during the 2003 Period
from $4.7 million during the 2002 Period.
Changes in Financial Condition
Cash Flows From Operating Activities
Cash flows from operating activities decreased $11.0 million to net cash inflows
of $12.3 million from $23.3 million during the 2003 Period and the 2002 Period,
respectively. Proceeds from the sale of and borrowings collateralized by notes
receivable, net of payments on such borrowings, decreased $5.4 million to $66.8
million from $72.1 million during the 2003 Period and the 2002 Period,
respectively. The Company reports 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. Management
believes that accelerating the conversion of such notes receivable into cash,
either through the pledge or sale of the Company's notes receivable, on a
regular basis is an integral function of the Company's operations, and has
therefore classified such activities as operating activities.
33
The remaining decrease in operating cash flows related to the aggregate $4.8
million cash portion of the purchase prices of the Grande Villas at World Golf
Village(TM) resort in St. Augustine, Florida and The Fountains(TM) resort in
Orlando, Florida.
These decreases were partially offset by higher cash inflows associated with
higher net income during the 2003 Period as compared to the 2002 Period.
Cash Flows From Investing Activities
Cash flows from investing activities decreased $9.0 million to net cash outflows
of $499,000 from net cash inflows of $8.5 million in the 2003 Period and the
2002 Period, respectively. The decrease was primarily due to less cash received
from the Company's retained interests in notes receivable sold. As a result of a
term securitization of previously sold notes receivable during the nine months
ended December 31, 2002, all cash generated by the securitized receivables that
would normally be received by the Company in connection with the retained
interests was first used to fund required cash reserve accounts. The Company
began to receive cash inflows relative to the retained interests in the term
securitization during the 2003 Quarter. The Company received $5.9 million and
$13.7 million of cash from its retained interests in notes receivable sold
during the 2003 Period and the 2002 Period, respectively. The remainder of the
decrease in cash flows from investing activities was due to increased purchases
of fixed assets.
Cash Flows from Financing Activities
Financing activities resulted in net cash outflows of $2.9 million during the
2003 Period as compared to net cash outflows of $10.8 million during the 2002
Period. During the 2002 Period, the Company repaid upon maturity $6.0 million,
8% convertible subordinated notes payable to former members of its board of
directors. Also, payments under line-of-credit facilities, net of new
borrowings, decreased to $1.8 million in the 2003 Period from $2.7 million in
the 2002 Period. In addition, payment of debt issuance costs decreased $1.0
million to $1.6 million in the 2003 Period from $2.6 million in the 2002 Period.
Liquidity and Capital Resources
The Company's capital resources are provided from both internal and external
sources. The Company's primary capital resources from internal operations are:
(i) cash sales, (ii) down payments on home site and VOI sales which are
financed, (iii) proceeds from the sale of, or borrowings collateralized by,
notes receivable including cash received from the Company's 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
home sites 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. The Company's capital resources are used to
support the Company's operations, including (i) acquiring and developing
inventory, (ii) providing financing for customer purchases, (iii) funding
operating expenses and (iv) satisfying the Company's debt, and other
obligations. The Company anticipates that it will continue to require external
sources of liquidity to support its operations, satisfy its debt and other
obligations and to provide funds for future acquisitions.
Purchase and Credit Facilities for Bluegreen Resorts' Receivables and
Inventories
The Company maintains various credit and purchase facilities with financial
institutions that provide for receivable financing for its vacation ownership
projects.
The Company's ability to sell and/or borrow against its notes receivable from
VOI buyers is a critical factor in the Company's continued liquidity. The
vacation ownership business involves making sales of a product pursuant to which
a financed buyer is only required to pay a minimum of 10% of the purchase in
cash up front, yet selling, marketing and administrative expenses are primarily
cash expenses and which, in the Company's case for the 2003 Period, approximated
58% of sales. Accordingly, having facilities for the sale and hypothecation of
these vacation ownership receivables is a critical factor to the Company meeting
its short and long-term cash needs.
On October 8, 2003, RFL acquired and assumed ING's rights, obligations and
commitments as initial purchaser in an existing vacation ownership receivables
purchase facility (the "Purchase Facility") originally executed between ING and
the Company in April 2002. In connection with its assumption of the Purchase
Facility, RFL expanded and extended the Purchase Facility's size and term. The
Purchase Facility utilizes an owner's trust structure, pursuant to which the
Company sells receivables to Bluegreen Receivables Finance Corporation V, a
wholly-owned, special purpose finance subsidiary of the Company (the
"Subsidiary"), and the Subsidiary sells the receivables to an owners' trust
(qualified special purpose entity) without recourse to the Company or the
Subsidiary except for breaches of certain representations and warranties at
34
the time of sale. The Company did not enter into any guarantees in connection
with the Purchase Facility. The Purchase Facility has detailed requirements with
respect to the eligibility of receivables for purchase and fundings under the
Purchase Facility are subject to certain conditions precedent. Under the
Purchase Facility, a variable purchase price of 85.00% of the principal balance
of the receivables sold, subject to certain terms and conditions, is paid at
closing in cash. The balance of the purchase price will be deferred until such
time as RFL has received a specified return and all servicing, custodial, agent
and similar fees and expenses have been paid. RFL earns a return equal to the
one-month London Interbank Offered Rate ("LIBOR") plus 2.00%, subject to use of
alternate return rates in certain circumstances. In addition, RFL will receive a
0.25% annual program fee. The Purchase Facility also provides for the sale of
land notes receivable, under modified terms. The Company acts as servicer under
the Purchase Facility for a fee.
The Purchase Facility Agreements include various conditions to purchase,
covenants, trigger events and other provisions customary for a transaction of
this type. RFL's obligation to purchase under the Purchase Facility may
terminate upon the occurrence of specified events. These specified events, some
of which are subject to materiality qualifiers and cure periods, include,
without limitation, (1) a breach by the Company of the representations or
warranties in the Purchase Facility Agreements, (2) a failure by the Company to
perform its covenants in the Purchase Facility Agreements, including, without
limitation, a failure to pay principal or interest due to RFL, (3) the
commencement of a bankruptcy proceeding or the like with respect to the Company,
(4) a material adverse change to the Company since December 31, 2001, (5) the
amount borrowed under the Purchase Facility exceeding the borrowing base, (6)
significant delinquencies or defaults on the receivables sold, (7) a payment
default by the Company under any other borrowing arrangement of $5 million or
more (a "Significant Arrangement"), or an event of default under any indenture,
facility or agreement that results in a default under any Significant
Arrangement, (8) 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 the Company's tangible net worth or (b)
causes, or permits the holder of indebtedness to cause, an amount in excess of
5% of the Company's tangible net worth to become due, (9) the Company's tangible
net worth not equaling at least $110 million plus 50% of net income and 100% of
the proceeds from new equity financing following the first closing under the
Purchase Facility, (10) the ratio of the Company's debt to tangible net worth
exceeding 6 to 1, or (11) the failure of the Company to perform its servicing
obligations.
The Purchase Facility, as amended, allows for sales of notes receivable for a
cumulative purchase price of up to $100.0 million on a revolving basis through
March 31, 2004, at 85.00% of the principal balance, subject to the eligibility
requirements and certain conditions precedent. Based on sales of receivables
under the Purchase Facility and receipts from customers of the principal balance
of the receivables sold, the remaining availability under the Purchase Facility
as of September 30, 2003 was $40.6 million. On October 10, 2003, the Company
sold notes receivable with an aggregate principal balance of $19.7 million under
the facility for an aggregate purchase price of $16.7 million.
The Purchase Facility discussed above is the only receivables purchase facility
under which the Company currently has the ability to sell receivables, as the
Company's ability to sell receivables under prior facilities have expired. The
Company is seeking new vacation ownership receivable purchase facilities to
replace expiring facilities. The Company is currently discussing terms for two
potential new vacation ownership receivable purchase facilities with
unaffiliated financial institutions. Factors which could adversely impact the
Company's ability to obtain new or additional vacation ownership receivable
purchase facilities include, but are not limited to, 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
willing to enter into such facilities in the vacation ownership area; a
deterioration in the performance of the Company's 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 the Company's performance generally. There can be no assurances
that the Company will obtain new purchase facilities to replace the Purchase
Facility when it is completed or expires. As indicated above, the Company's
inability to sell vacation ownership receivables under a current or future
facility could have a material adverse impact on the Company's liquidity.
However, management believes that to the extent the Company could not sell
receivables under a purchase facility, it could mitigate the adverse impact on
its liquidity by using its receivables as collateral under existing credit
facilities.
The Company is also a party to a number of securitization-type transactions, all
of which in the Company's opinion utilize customary structures and terms for
transactions of this type. In each securitization-type transaction, the Company
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. The Company has 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
35
receivables to, a trust that owns the receivables), parties providing services
in connection with the facility, and the Company's 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, interest and principal payments to investors, and 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 the Company's 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 the Company's 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 the Company's special purpose subsidiary, the
suspension or termination of that commitment. In addition, in each
securitization facility certain breaches by the Company of its obligations as
servicer or other events allow the investor to cause the servicing to be
transferred to a substitute third party servicer. In that case, the Company's
obligation to service the receivables would terminate and it would cease to
receive a servicing fee.
In February 2003, the Company entered into a $50.0 million revolving vacation
ownership receivables credit facility (the "GMAC Receivables Facility") with
Residential Funding Corporation ("RFC"), an affiliate of GMAC. In September
2003, RFC increased the facility borrowing limit to $75.0 million. The borrowing
period on the GMAC Receivables Facility expires on March 10, 2005, and
outstanding borrowings mature no later than March 10, 2012. The GMAC Receivables
Facility has detailed requirements with respect to the eligibility of
receivables for inclusion and other conditions to funding. The borrowing base
under the GMAC Receivables Facility is 90% of the outstanding principal balance
of eligible notes arising from the sale of VOIs. The GMAC Receivables Facility
includes affirmative, negative and financial covenants and events of default.
All principal and interest payments received on pledged receivables are applied
to principal and interest due under the GMAC Receivables Facility. Indebtedness
under the facility bears interest at LIBOR plus 4%. The Company was required to
pay an upfront loan fee of $375,000 in connection with the GMAC Receivables
Facility. During the 2003 Period, the Company pledged $21.1 million in aggregate
principal balance of vacation ownership receivables under the GMAC Receivables
Facility and received $19.3 million in cash borrowings. At September 30, 2003,
$16.0 million was outstanding under the GMAC Receivables Facility.
RFC has also provided the Company with a $45.0 million acquisition, development
and construction revolving credit facility for Bluegreen Resorts (the "GMAC AD&C
Facility"). The borrowing period on the GMAC AD&C Facility expires on February
10, 2005, and outstanding borrowings mature no later than February 10, 2009.
Principal will be repaid through agreed-upon release prices as VOIs are sold at
the financed resorts, subject to minimum required amortization. Indebtedness
under the facility bears interest at LIBOR plus 4.75%. Interest payments are due
monthly. The Company was required to pay an upfront loan fee of $112,500 in
connection with the GMAC AD&C Facility. During the 2003 Quarter, the Company
borrowed $17.4 million under the GMAC AD&C Facility. This borrowing was incurred
in connection with the acquisition of The Fountains(TM) resort in Orlando,
Florida and will mature no later than September 16, 2007. As of September 30,
2003, $17.4 million was outstanding under the GMAC AD&C Facility. In October
2003, the Company borrowed an additional $8.1 million under the GMAC AD&C
Facility. This borrowing was collateralized by VOIs and land held for future
development at the Company's 51%-owned Big Cedar Wilderness Club resort.
GE previously provided the Company with a $28.0 million acquisition and
development facility for its VOI inventories (the "GE A&D Facility"). The
borrowing period on the GE A&D Facility has expired and all outstanding
borrowings have been repaid. The Company is currently negotiating a new
acquisition and development credit facility with GE. There can be no assurances
that the Company's negotiations will be successful.
Under an existing $30.0 million revolving credit facility with Wells Fargo
Foothill, Inc. ("Foothill") primarily for the use of borrowing against Bluegreen
Communities receivables, the Company can also borrow up to $10.0 million of the
facility collateralized by the pledge of vacation ownership receivables. See the
next paragraph for further details on this facility.
Credit Facilities for Bluegreen Communities' Receivables and Inventories
The Company has a $30.0 million revolving credit facility with Foothill secured
by the pledge of Bluegreen Communities'
36
receivables, with up to $10.0 million of the total facility available for
Bluegreen Communities' inventory borrowings and up to $10.0 million of the total
facility available for the pledge of Bluegreen Resorts' receivables. On March
26, 2003, the Company borrowed $8.5 million pursuant to the revolving credit
facility for the purpose of acquiring 1,142 acres of land in Braselton, Georgia
in connection with the development of a golf course community to be known as the
Traditions of Braselton(TM). The borrowing requires principal payments based on
agreed-upon release prices as home sites are sold and bears interest at the
prime lending rate plus 1.25%, payable monthly. Outstanding indebtedness related
to the Traditions of Braselton(TM) borrowing is due on March 10, 2006. The
interest rate charged on outstanding receivable borrowings under the revolving
credit facility, as amended, is the prime lending rate plus .75% when the
average monthly outstanding loan balance is greater than or equal to $10.0
million. If the average monthly outstanding loan balance is less than $10.0
million, the interest rate is the greater of 7.00% or the prime lending rate
plus 1.00%. All principal and interest payments received on pledged receivables
are applied to principal and interest due under the facility. In March 2003,
Foothill extended the Company's ability to borrow under the facility through
December 31, 2005, and extended the maturity date to December 31, 2007 for
borrowings collateralized by receivables. At September 30, 2003, the outstanding
principal balance under this facility was approximately $9.5 million, $3.4
million of which related to the acquisition of the Traditions of Braselton, $1.7
million of which related to Bluegreen Resorts' receivables borrowings and $4.4
million of which related to Bluegreen Communities' receivables borrowings.
On September 25, 2002, certain direct and indirect wholly-owned subsidiaries of
the Company entered into a $50 million revolving credit facility (the "GMAC
Communities Facility") with RFC. The Company is the guarantor on the GMAC
Communities Facility. The GMAC Communities Facility is secured by the real
property home sites (and personal property related thereto) at the following
Bluegreen Communities projects of the Company, as well as any Bluegreen
Communities projects acquired by the Company with funds borrowed under the GMAC
Communities Facility (the "Secured Projects"): Brickshire(TM) (New Kent County,
Virginia); Mountain Lakes Ranch(TM) (Bluffdale, Texas); Ridge Lake Shores(TM)
(Magnolia, Texas); Riverwood Forest(TM) (Fulshear, Texas); Waterstone(TM)
(Boerne, Texas) and Yellowstone Creek Ranch(TM) (Pueblo, Colorado). In addition,
the GMAC Communities Facility is secured by the Company's Carolina National(TM)
and The Preserve at Jordan Lake(TM) golf courses in Southport, North Carolina
and Chapel Hill, North Carolina, respectively. Borrowings under the GMAC
Communities Facility can be drawn through September 25, 2004. Principal payments
are effected through agreed-upon release prices paid to RFC as home sites in the
Secured Projects are sold. The outstanding principal balance of any borrowings
under the GMAC Communities Facility must be repaid by September 25, 2006. The
interest charged on outstanding borrowings is at the prime lending rate plus
1.00% and is payable monthly. The Company is required to pay an annual
commitment fee equal to 0.33% of the $50 million GMAC Communities Facility
amount. The GMAC Communities Facility includes customary conditions to funding,
acceleration and event of default provisions and certain financial affirmative
and negative covenants. During the 2003 Period, the Company borrowed $25.0
million under the GMAC Communities Facility. The Company uses the proceeds from
the GMAC Communities Facility to repay outstanding indebtedness on Bluegreen
Communities projects, finance the acquisition and development of Bluegreen
Communities projects and for general corporate purposes. As of September 30,
2003, $19.1 million was outstanding under the GMAC Communities Facility.
The Company is currently negotiating with an unaffiliated financial institution
and has received a term sheet regarding a $10 million, revolving line-of-credit
that would be collateralized by Bluegreen Communities' receivables. There can be
no assurances that this line-of-credit will be obtained on acceptable terms or
at all.
Over the past several years, the Company has received approximately 90% to 99%
of its home site sales proceeds in cash. Accordingly, in recent years the
Company has reduced the borrowing capacity under credit agreements secured by
Bluegreen Communities' receivables. The Company attributes the significant
volume of cash sales to an increased willingness on the part of banks to extend
direct customer home site financing at attractive interest rates. No assurances
can be given that local banks will continue to provide such customer financing.
Historically, the Company has funded development for road and utility
construction, amenities, surveys and engineering fees from internal operations
and has 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 home site releases. The release price is usually an amount based on a
pre-determined percentage of the gross selling price (typically 25% to 55%) of
the home sites in the subdivision. In addition, the agreements generally call
for minimum cumulative annual amortization. When the Company provides financing
for its customers (and therefore the release price is not available in cash at
closing to repay the lender), it is required to pay the creditor with cash
derived from other operating activities, principally from cash sales or the
pledge of receivables originated from earlier property sales.
Unsecured Credit Facility
The Company has a $12.5 million unsecured line-of-credit with Wachovia Bank,
N.A. Amounts borrowed under the line bear interest at LIBOR plus 2%. Interest is
due monthly and all outstanding amounts are due on December 31, 2003. The
Company is only allowed to borrow under the line-of-credit in amounts less than
the remaining availability under its current,
37
active vacation ownership receivables purchase facility plus availability under
certain receivable warehouse facilities, less any outstanding letters of credit.
The line-of-credit agreement contains certain covenants and conditions typical
of arrangements of this type. During the 2003 Period, the Company had borrowed
and repaid $5.0 million under this line-of-credit. As of September 30, 2003, no
amounts were outstanding under the line. This line-of-credit has historically
been an important source of short-term liquidity for the Company.
Summary
The Company requires external sources of liquidity in order to support its
operations and satisfy its debt and other obligations. The Company's level of
debt and debt service requirements have several important effects on its
operations, including the following: (i) the Company has significant cash
requirements to service debt, reducing funds available for operations and future
business opportunities and increasing the Company's vulnerability to adverse
economic and industry conditions; (ii) the Company's leveraged position
increases its vulnerability to competitive pressures; (iii) the financial
covenants and other restrictions contained in the indentures, the credit
agreements and other agreements relating to the Company's indebtedness require
the Company to meet certain financial tests and restrict its 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 the Company's competitors operate
on a less leveraged basis and have greater operating and financial flexibility
than the Company.
The Company intends to continue to pursue a growth-oriented strategy,
particularly with respect to its Bluegreen Resorts business segment. In
connection with this strategy, the Company 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 the Company's operations; interests in
joint ventures; and operating companies providing or possessing management,
sales, marketing, development, administration and/or other expertise with
respect to the Company's operations in the vacation ownership industry. In
addition, the Company intends to continue to focus Bluegreen Communities on
larger, more capital intensive projects particularly in those regions where the
Company believes the market for its products is strongest, such as new golf
communities in the Southeast and other areas and continued growth in the
Company's successful regions in Texas.
The Company's material commitments for capital resources as of September 30,
2003, included the required payments due on its receivable-backed debt, lines of
credit and other notes and debentures payable, commitments to complete its
vacation ownership and communities projects based on its sales contracts with
customers and commitments under noncancelable operating leases.
The following table summarizes the contractual minimum principal payments
required on all of the Company's outstanding debt (including its
receivable-backed debt, lines-of-credit and other notes and debentures payable)
and its noncancelable operating leases as of September 30, 2003, by period due
(in thousands):
Payments Due By Period
----------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual Obligations Total 1 year Years Years Years
- ----------------------- ----- ------ ----- ----- -----
Receivable-backed notes payable $ 22,254 $ -- $ -- $ 6,079 $ 16,175
Lines-of-credit and notes payable 78,316 29,829 47,695 600 192
10.50% senior secured notes payable 110,000 -- -- 110,000 --
8.25% convertible subordinated debentures 34,371 -- 6,771 9,200 18,400
Noncancelable operating leases 16,877 3,862 6,629 1,375 5,011
-------- -------- -------- -------- --------
Total contractual obligations $261,818 $ 33,691 $ 61,095 $127,254 $ 39,778
======== ======== ======== ======== ========
In addition, the Company has issued a $1.4 million letter-of-credit (the "LOC"),
which is collateralized by a certificate of deposit, in connection with the
issuance of a performance bond on a Bluegreen Communities project. The LOC
expires in January 2008.
The Company intends 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
above principal payments. While the Company believes that it will be able to
meet all required debt payments when due, there can be no assurances that this
will be the case.
The Company estimates 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 $6.9 million as of
38
September 30, 2003. The Company estimates that the total cash required to
complete its Bluegreen Communities projects in which sales have occurred to be
approximately $43.9 million as of September 30, 2003. These amounts assume that
the Company is 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, the Company anticipates that it will incur such obligations in the
future. The Company plans 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 assurances that the Company 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.
The Company believes that its 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 the Company will seek
to put in place will be sufficient to meet the Company's anticipated working
capital, capital expenditures and debt service requirements for the foreseeable
future. The Company will be required to renew or replace credit and/or
receivables purchase facilities that have expired or that will expire in the
near term. The Company will, in the future, also require additional credit
facilities or will be required to issue corporate debt or equity securities in
connection with acquisitions or otherwise. Any debt incurred or issued by the
Company 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 assurances that the credit facilities or receivables
purchase facilities which have expired or which are scheduled to expire in the
near term will be renewed or replaced or that sufficient funds will be available
from operations or under existing, proposed or future revolving credit or other
borrowing arrangements or receivables purchase facilities to meet the Company's
cash needs, including, without limitation, its debt service obligations. To the
extent the Company is not able to sell notes receivable or borrow under such
facilities, the Company's ability to satisfy its obligations would be materially
adversely affected.
The Company has a large number of credit facilities, indentures, 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 assurances can
be given that the Company will not be required to seek waivers of such covenants
or that such covenants will not limit the Company's ability to raise funds, sell
receivables, satisfy or refinance its obligations or otherwise adversely affect
the Company's operations. In addition, the Company's future operating
performance and ability to meet its financial obligations will be subject to
future economic conditions and to financial, business and other factors, many of
which will be beyond the Company's control.
The Company's ability to service or to refinance its indebtedness or to obtain
additional financing (including its ability to consummate future notes
receivable securitizations) depends, among other things, on its future
performance, which is subject to a number of factors, including the Company's
business, results of operations, leverage, financial condition and business
prospects, the performance of its receivables, prevailing interest rates,
general economic conditions and perceptions about the residential land and
vacation ownership industries, some of which are beyond the Company's control.
If the Company's cash flow and capital resources are insufficient to fund its
debt service obligations and support its operations, the Company, among other
consequences, may be forced to reduce or delay planned capital expenditures,
reduce its financing of sales, sell assets, obtain additional equity capital or
refinance or restructure its debt. The Company cannot provide any assurance that
it will be able to obtain sufficient external sources of liquidity on attractive
terms, or at all. In addition, many of the Company's obligations under our debt
arrangements contain cross-default or cross-acceleration provisions. As a
result, if the Company defaults under one debt arrangement, other lenders might
be able to declare amounts due under their arrangements, which would have a
material adverse effect on the Company's business.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For a complete description of the Company's foreign currency and interest rate
related market risks, see the discussion in the Company's Transitional Annual
Report on Form 10-KT for the nine months ended December 31, 2002. There has not
been a material change in the Company's exposure to foreign currency and
interest rate risks since December 31, 2002.
Item 4. Controls and Procedures
In order to ensure that the information disclosed in the Company's filings with
the Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, the Company has formalized its disclosure controls
and procedures. The Company's principal executive officer and principal
financial officer have reviewed and evaluated the effectiveness of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e)
and 15d-
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15(e), as of September 30, 2003. Based on such evaluation, such officers have
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (and its
consolidated subsidiary) required to be included in the Company's periodic SEC
filings. There has been no change in the Company's internal control over
financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's disclosure controls and procedures and
internal controls over financial reporting will prevent all error and all
improper conduct. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of improper conduct, if any, within the Company
have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control.
Further, the design of any system of controls also is based in part upon
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Appearing as Exhibits 31.1 and 31.2 to this quarterly report are the
Certifications of the principal executive officer and the principal financial
officer. The Certifications are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. This Item of this quarterly report is the
information concerning the evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the
Section 302 Certifications for a more complete understanding of the topics
presented.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company from time to time becomes
subject to claims or proceedings relating to the purchase, subdivision, sale
and/or financing of real estate. Additionally, from time to time, the Company
becomes involved in disputes with existing and former employees. The Company
believes that substantially all of these claims and proceedings are incidental
to its business.
On August 21, 2000, the Company received a Notice of Field Audit Action (the
"Notice") from the State of Wisconsin Department of Revenue (the "DOR") alleging
that two subsidiaries now owned by the Company failed to collect and remit sales
and use taxes to the State of Wisconsin during the period from January 1, 1994
through September 30, 1997 totaling $1.9 million. The majority of the assessment
is based on the subsidiaries not charging sales tax to purchasers of VOIs at the
Company's Christmas Mountain Village(TM) resort. In addition to the assessment,
the Notice indicated that interest would be charged, but no penalties would be
assessed. As of September 30, 2003, aggregate interest was approximately $2.1
million. The Company filed a Petition for Redetermination (the "Petition") on
October 19, 2000, and, if the Petition is unsuccessful, the Company intends to
vigorously appeal the assessment. The Company acquired the subsidiaries that are
the subject of the Notice in connection with the acquisition of RDI Group, Inc.
("RDI") on September 30, 1997. Under the RDI purchase agreement, the Company has
the right to offset payments owed by the Company to RDI's former stockholders
pursuant to a $1.0 million outstanding note payable balance and to make a claim
against such stockholders for $500,000 previously paid for any breach of
representations and warranties. (One of the former RDI stockholders is currently
employed by the Company as its Senior Vice President of Sales for Bluegreen
Resorts.) The Company has filed an action against the RDI stockholders for
damages arising out of the Wisconsin assessments based on its right of
indemnification and offset under the RDI purchase agreement and related
promissory note. The RDI stockholders have filed a counterclaim against the
Company and a third-party complaint against the Company and one of its
wholly-owned subsidiaries alleging that the Company and its subsidiary have
failed to make the payments required under the terms of the promissory note.
On May 24, 2003, the Company received a second Notice of Field Audit Action (the
"Second Notice") from the DOR alleging that the two subsidiaries of the Company
discussed above failed to collect and remit sales and use taxes to the State of
Wisconsin during the period from April 1, 1998 through March 31, 2002 totaling
$1.4 million. The majority of the assessment is based on the subsidiaries not
charging sales tax to purchasers of VOIs at the Company's Christmas Mountain
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Village(TM) resort. In addition to the assessment, the Second Notice indicated
that interest and penalties would be assessed. As of September 30, 2003,
aggregate interest and penalties total approximately $1 million. The Company
filed a Petition for Redetermination (the "Second Petition") on July 9, 2003,
and, if the Second Petition is unsuccessful, the Company intends to vigorously
appeal the assessment. In addition, the Company believes that, if necessary,
amounts paid to the State of Wisconsin pursuant to the Notice and the Second
Notice, if any, may be further funded through collections of sales tax from the
consumers who effected the assessed VOI sales with RDI without paying sales tax
on their purchases.
Based on management's assessment of the Company's position in the Petition and
the Second Petition, the Company's belief that its right of offset with the
former RDI stockholders will be upheld and other factors discussed above,
management does not believe that the possible sales tax assessment pursuant to
the Notice and the Second Notice will have a material adverse impact on the
Company's results of operations or financial position, and therefore no amounts
have been accrued related to this matter. Additionally, as the statute requiring
the assessment of sales tax on VOIs in Wisconsin was repealed in December 1999
and based on the applicable statutes of limitations, the Company believes its
exposure in these matters is limited to that discussed above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.116 Transfer Supplement (Committed) dated as of October 8, 2003
between ING Capital LLC and Resort Finance LLC.
10.117 Transfer Supplement (Noncommitted) dated as of October 8, 2003
between ING Capital LLC and Resort Finance LLC.
10.118 Extension Letter dated as of October 8, 2003, from Resort
Finance LLC to BXG Receivables Note Trust 2001-A, Bluegreen
Corporation and Bluegreen Receivables Finance Corporation V.
10.130 Amendment No. 2 to Second Amended and Restated Credit Facility
Agreement entered into as of August 29, 2003 between FINOVA
Capital Corporation, Bluegreen Corporation, Bluegreen
Southwest One, L.P., Bluegreen Southwest Land, Inc. and
Bluegreen Vacations Unlimited, Inc.
10.131 Promissory Note (Building) dated August 29, 2003 between
Bluegreen Vacations Unlimited, Inc. and FINOVA Capital
Corporation.
10.132 Promissory Note (Land) dated August 29, 2003 between Bluegreen
Vacations Unlimited, Inc. and FINOVA Capital Corporation.
10.157 Amendment No. 1 to Revolving Promissory Note (AD&C Loan) dated
as of September 10, 2003 between Bluegreen Vacations
Unlimited, Inc. and Residential Funding Corporation.
10.160 Amendment No. 1 to Revolving Promissory Note (Receivables
Loan) dated as of September 10, 2003 between Bluegreen
Corporation, Bluegreen Vacations Unlimited, Inc.,
Bluegreen/Big Cedar Vacations, LLC and Residential Funding
Corporation.
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
902 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
902 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: The following reports were filed on Form 8-K during
the period covered by this quarterly report.
On October 21, 2003, the Company filed a Current Report on
Form 8-K to furnish the Company's earnings release for the
quarter ended September 30, 2003.
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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: November 12, 2003 By: /S/ GEORGE F. DONOVAN
---------------------------------------
George F. Donovan
President and
Chief Executive Officer
Date: November 12, 2003 By: /S/ JOHN F. CHISTE
---------------------------------------
John F. Chiste
Senior Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 2003 By: /S/ ANTHONY M. PULEO
---------------------------------------
Anthony M. Puleo
Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
42