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BXG > SEC Filings for BXG > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for BLUEGREEN CORP

Form 10-Q for BLUEGREEN CORP


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward-Looking Statements and Risk Factors

We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and are making the following statements to do so. Certain statements in this Quarterly Reportand our other filings with the SEC constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. You may identify these statements by forward-looking words such as "may," "intend," "expect," "anticipate," "believe," "will," "should," "project," "estimate," "plan" or other comparable terminology or by other statements that do not relate to historical facts. All statements, trend analyses and other information relative to the market for our products and services, remaining life-of-project sales, our expected future sales, gross margin, financial position, operating results, liquidity and capital resources, our business strategy, financial plan and expected capital requirements as well as trends in our operations, receivables performance or results are forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties, many of which are beyond our control, including changes in economic conditions, generally, in areas where we operate, or in the travel and tourism industry, availability of financing, increases in interest rates, changes in regulations and other factors discussed throughout our SEC filings, including the Risk Factors sections of such filings, all of which could cause our actual results, performance or achievements, or industry trends, to differ materially from any future results, performance, or achievements or trends expressed or implied herein. Given these uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements, as the plans, estimates and expectations reflected herein may not be achieved. Factors that could adversely affect our future results can also be considered general risk factors with respect to our business, whether or not they relate to a forward-looking statement. In addition, past performance is not necessarily indicative of future results. We caution you that the important factors set forth below and elsewhere in this Quarterly Report and our other SEC filings, including our Annual Report, in some cases have affected, and in the future could affect, our actual results and could cause them to differ materially from those expressed in any forward-looking statements.

ˇ The overall state of the economy, interest rates and the availability of financing affect our ability to market VOIs.

ˇ We would incur substantial losses and our liquidity position could be adversely impacted if the customers we finance default on their obligations.

ˇ While we have attempted to restructure our business to reduce our need for and reliance on financing for liquidity in the short term, there is no assurance that such restructuring will be successful or that our business and profitability will not otherwise continue to depend on our ability to obtain financing, which may not be available on favorable terms, or at all.

ˇ Our future success depends on our ability to market our products and services successfully and efficiently and our marketing expenses may increase particularly in the event our marketing focus shifts towards new customers as opposed to our existing owners.

ˇ We may not be successful in increasing or expanding our fee-based services relationships, and our fee-based service activities, including the POA Sales activities which we commenced during January 2012, may not be profitable, which may have an adverse impact on our results of operations and financial condition.

ˇ Our results of operations and financial condition may be materially and adversely impacted if we do not continue to participate in exchange networks or our customers are not satisfied with the networks in which we participate.

ˇ The resale market for VOIs could adversely affect our business.

ˇ We are subject to the risks of the real estate market and the risks associated with real estate development, including the decline in real estate values and the deterioration of other conditions relating to the real estate market and real estate development.

ˇ Adverse outcomes in legal or other regulatory procedures, including claims for development-related defects, could adversely affect our financial condition and operating results.

ˇ We may be adversely affected by extensive federal, state and local laws and regulations and changes in applicable laws and regulations, including with respect to the imposition of additional taxes on operations. In addition, results of audits of our tax returns or those of our subsidiaries may have a material and adverse impact on our financial condition.

ˇ Environmental liabilities, including claims with respect to mold or hazardous or toxic substances, could have a material adverse impact on our financial condition and operating results.

ˇ The ratings of third-party rating agencies could adversely impact our ability to obtain, renew or extend credit facilities, or otherwise raise capital.

ˇ There are uncertainties and risks relating to our proposed merger with BFC; and the merger may not be completed on the contemplated terms, or at all.

ˇ There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP. Any changes in estimates, judgments and assumptions used could have a material adverse impact on our operating results and financial condition.

ˇ The loss of the services of our key management and personnel could adversely affect our business.

ˇ BFC holds a majority of our outstanding common stock, which may adversely affect the market price of our common stock.

Executive Overview

We are a sales, marketing and management company, focused on the vacation ownership industry. Our business was historically conducted through two operating segments - our resorts business segment ("Bluegreen Resorts") and our residential communities business segment ("Bluegreen Communities"). As a result of our sale of substantially all of the assets that comprised Bluegreen Communities on May 4, 2012, our continuing operations relate solely to Bluegreen Resorts.

Bluegreen Resorts markets, sells and manages vacation ownership interests ("VOIs") in resorts, which are generally located in popular, high-volume, "drive-to" vacation destinations, and were either developed or acquired by us or developed by others, in which case we earn fees for providing these services. VOIs in our resorts and those sold by us on behalf of third parties typically entitle the buyer to use resort accommodations through an annual or biennial allotment of "points" which represent their ownership and beneficial use rights in perpetuity in the Bluegreen Vacation Club (supported by an underlying deeded VOI held in trust for the buyer). Owners in the Bluegreen Vacation Club may stay in any of the 59 Bluegreen Vacation Club resorts or take advantage of an exchange program offered by a third-party world-wide vacation ownership exchange network of over 4,000 resorts and other vacation experiences such as cruises and hotel stays. Bluegreen Resorts also provides property and homeowners' association management services, VOI title services, mortgage servicing, design development services and resort amenity operational services. In addition, Bluegreen Resorts provides financing to individual purchasers of VOIs, which provides significant interest income to us.

On November 11, 2011, we entered into a definitive merger agreement with BFC Financial Corporation ("BFC"). BFC, indirectly through its wholly-owned subsidiary Woodbridge Holdings, LLC, currently owns approximately 54% of our common stock. Pursuant to the terms of the merger agreement, and subject to the conditions set forth herein, if the merger is consummated, we would become a wholly-owned subsidiary of BFC and our shareholders (other than BFC) would be entitled to receive eight shares of BFC's Class A Common Stock for each share of our common stock that they hold at the effective time of the merger (subject to adjustment in connection with the reverse stock split of BFC contemplated by the merger agreement).

The merger was approved by both our and BFC's shareholders on June 19, 2012; however, consummation of the merger remains subject to certain closing conditions, including the listing of BFC's Class A Common Stock on a national securities exchange at the effective time of the merger. Under the terms of the merger agreement, either party was permitted to terminate the agreement if the merger was not consummated by September 30, 2012. As previously disclosed, in light of the parties' continued efforts towards consummation of the merger, on September 27, 2012, we agreed with BFC that neither party would exercise its right to so unilaterally terminate the merger agreement prior to December 31, 2012. There is no assurance that the merger will be consummated on the contemplated terms, including in the contemplated time frame, or at all.

Following the announcement of our entry into the merger agreement, purported class action lawsuits seeking to enjoin the merger or, if it is completed, to recover relief as determined by the presiding court to be appropriate have been filed. See Note 8 to Condensed Consolidated Financial Statements.

If the merger is consummated, our common stock will no longer be listed for trading on the NYSE or registered under the Exchange Act. As described above, the merger agreement requires, as a condition to the merger, that BFC's Class A Common Stock be approved for listing on a national securities exchange at the effective time of the merger.

Bluegreen Resorts' results for the three and nine months ended September 30, 2012 reflect our continued focus on our fee-based service business and our efforts to achieve selling and marketing efficiencies. Furthermore, in January 2012 we began selling VOI inventory in connection with a new category of sales requiring low levels of capital deployment whereby we acquire VOI inventory from our resorts' property owner associations ("POAs") on a non-committed basis, in close proximity to the timing of our selling of such VOIs ("POA Sales"). VOIs are typically obtained by the POAs through foreclosure in connection with maintenance fee defaults and are generally acquired by us at a discount. Since we acquire the VOIs from the POAs "just-in-time," POA Sales are included in our "Sales of VOIs" along with sales of our existing VOI inventory. In the future, we intend to enter into similar "just-in-time" arrangements with third-party developers as part of our fee-based services initiative; however, we may not be successful in doing so.

During the three months ended September 30, 2012:

ˇ We earned income from continuing operations of $14.7 million compared to $12.2 million during the three months ended September 30, 2011.

ˇ VOI system-wide sales, which include sales of third-party inventory, were $109.1 million compared to $91.0 million during the three months ended September 30, 2011. VOI system-wide sales during the three months ended September 30, 2012 included $5.1 million of POA Sales described above.

ˇ We sold $41.7 million of third-party inventory and earned sales and marketing commissions of $27.8 million. Including our resort management, title services, construction management and other fee-based operations, our total fee-based service revenues were $47.2 million, a 12% increase over the same period in 2011.

ˇ We completed the 2012 Term Securitization, a private offering and sale of investment-grade, timeshare loan-backed notes. We received gross proceeds of $100.0 million from the 2012 Term Securitization, which were used, among other things, to repay in full our BB&T Purchase Facility and 2008 Liberty Bank Facility. Additional availability in excess of $60.0 million under our existing receivable-backed credit facilities was created as a result of the 2012 Term Securitization. See "Liquidity and Capital Resources - Other Outstanding Receivable-Backed Notes Payable" below for additional information.

We believe our fee-based service business enables us to leverage our expertise in resort management, sales and marketing, mortgage servicing, title services, and construction management to generate recurring revenues from third parties. Providing these services requires significantly less capital investment than our traditional vacation ownership business. Our goal is for our fee-based services to become an increasing portion of our business over time; however, our efforts to do so may not be successful.

During the three months ended September 30, 2011 and 2012, we sold $34.0 million and $41.7 million, respectively, of third-party inventory and earned sales and marketing commissions of approximately $23.5 million and $27.8 million, respectively. Based on an allocation of our selling, marketing and field general and administrative expenses to these sales, we believe we generated approximately $6.2 million in pre-tax profits by providing sales and marketing fee-based services during each of the three months ended September 30, 2011 and 2012.

During the nine months ended September 30, 2011 and 2012, we sold $77.8 million and $100.8 million, respectively, of third-party inventory and earned sales and marketing commissions of approximately $52.5 million and $66.3 million, respectively. Based on an allocation of our selling, marketing and field general and administrative expenses to these sales, we believe we generated approximately $11.9 million and $15.2 million in pre-tax profits by providing sales and marketing fee-based services during the nine months ended September 30, 2011 and 2012, respectively.

We generated "free cash flow" (cash flow from operating and investing activities) during the nine months ended September 30, 2012 of $138.7 million compared to $116.7 million during the same period of 2011. Free cash flow during the nine months ended September 30, 2012 includes $27.8 million in net proceeds received in connection with the sale of the Bluegreen Communities division to Southstar (prior to the associated debt repayment).

Additionally, consistent with initiatives seeking to improve our liquidity, we continued to seek cash sales and larger customer down payments on financed sales. During the nine months ended September 30, 2012, 55% of our VOI sales were paid in cash in full within approximately 30 days from the contract date. Refer to Liquidity and Capital Resources section below for additional information.

Seasonality

We have historically experienced and expect to continue to experience seasonal fluctuations in our gross revenues and results of operations. This seasonality may result in fluctuations in our quarterly operating results. Although we typically see more potential customers at our sales offices during the quarters ending in June and September, ultimate recognition of the resulting sales during these periods may be delayed due to down payment requirements for recognition of real estate sales under GAAP or due to the timing of development and the requirement that we use the percentage-of-completion method of accounting.

Notes Receivable and Allowance for Loan Losses

We offer financing to buyers of our VOIs who meet certain minimum requirements. Accordingly, we are subject to the risk of defaults by customers. GAAP requires that we reduce sales of VOIs by our estimate of future uncollectible note balances on originated VOI notes receivables, excluding any benefit for the value of future recoveries of defaulted VOI inventory. We update our estimate of such future losses each quarter, and consequently, the charge against sales in a particular period may be impacted, favorably or unfavorably, by a change in our expected losses related to notes originated in prior periods. Bluegreen Communities historically also offered financing to buyers of its homesites on a limited basis. Bluegreen Communities notes receivable portfolio was excluded from the sale to Southstar of the assets which comprised Bluegreen Communities.

We seek to monetize our notes receivable by transferring the notes to warehouse purchase facilities, in which case the notes are legally sold to a special purpose entity for the benefit of a financial institution or conduit, or by pledging the notes as collateral for a receivables hypothecation loan. We attempt to maintain these diversified liquidity sources for our notes receivable in order to mitigate the risks of being dependent on a single source. Each such facility has eligibility standards for the notes receivable that may be sold or pledged under the facility. It is generally contemplated that notes receivable transferred to a warehouse purchase facility will ultimately be included in a future securitization of the transferred notes. The notes receivable securitized are determined during the negotiation of the securitization transaction, with the characteristics of the notes receivable selected determining the terms of the transaction. Notes receivable previously pledged as collateral for a receivable hypothecation loan may also be included in a term securitization transaction, however such notes are generally not included if doing so would result in a significant prepayment penalty. Further, based on the size and timing of the securitization, we may also choose to include newly originated notes receivable. Additionally, the specific characteristics of the notes receivable factor into whether such notes would be desirable to include in a securitization. Such factors may include delinquency status, FICOŽ score, interest rate, remaining term, outstanding balance and whether the obligor is foreign or domestic.

The allowance for loan losses as of December 31, 2011 and September 30, 2012 was as follows (dollars in thousands):

                                                            As of
                                               December 31,      September 30,
                                                   2011               2012

Notes receivable secured by VOIs:
VOI notes receivable - non-securitized        $     154,020     $      130,917
VOI notes receivable - securitized                  459,778            441,951
                                                    613,798            572,868
Allowance for loan losses - non-securitized         (22,739 )          (16,508 )
Allowance for loan losses - securitized             (83,874 )          (71,830 )
VOI notes receivable, net                     $     507,185     $      484,530

Allowance as a % of gross notes receivable               17 %               15 %

Notes receivable secured by homesites:
Notes receivable                              $       5,801     $        5,323
Allowance for loan losses                              (469 )             (413 )
Homesite notes receivable, net                $       5,332     $        4,910

Allowance as a % of gross notes receivable                8 %                8 %

Total notes receivable:
Gross notes receivable                        $     619,599     $      578,191
Allowance for loan losses                          (107,082 )          (88,751 )
Notes receivable, net                         $     512,517     $      489,440

Allowance as a % of gross notes receivable               17 %               15 %

The activity in our allowance for uncollectible notes receivable (including our homesite notes receivable) for the nine months ended September 30, 2012 was as follows (in thousands):

            Balance, December 31, 2011                      $ 107,082
            Provision for loan losses                          21,437
            Less: Write-offs of uncollectible receivables     (39,768 )
            Balance, September 30, 2012                     $  88,751

Our estimates regarding our allowance for loan losses involve interpretation of historical data, the aging of receivables, current default trends by origination year, the impact of loan seasoning, current economic conditions, the economic outlook, and the FICOŽ scores of the borrowers. To the extent that our estimates change, our results of operations could be adversely affected. While we believe our notes receivable are adequately reserved at this time, future defaults may occur at levels greater than we expect. If the future performance of our loans varies from our expectations and estimates, additional charges may be required in the future.

The average annual default rates and delinquency rates (more than 30 days past due) on our notes receivable were as follows:

                                                                    For the 12 Month Period Ended
          Average Annual Default Rates                                      September 30,

  Division                                                       2011                          2012
Notes receivable secured by VOIs:
Loans originated prior to December 15, 2008(1)                    11.1 %                         9.8 %
Loans originated on or after December 15, 2008(1)                  6.5 %(2)                      6.4 %(2)
Notes receivable secured by homesites                             12.2 %                         4.9 %


              Delinquency Rates (3)                                             As of
  Division                                                 December 31, 2011            September 30, 2012
Notes receivable secured by VOIs:
Loans originated prior to December 15, 2008(1)                     4.9 %                         3.5 %
Loans originated on or after December 15, 2008(1)                  3.0 %                         2.2 %
Notes receivable secured by homesites                              3.1 %                         2.5 %

(1) On December 15, 2008, we implemented our FICOŽ score-based credit underwriting program.

(2) Reflects, in management's opinion, the benefits of our FICOŽ score-based credit underwriting standards as well as our policy that loans are not defaulted until after 120 days past due.

(3) The percentage of our notes receivable portfolio that was over 30 days past due as of the dates indicated.

Substantially all defaulted VOI notes receivable result in a recovery of the related VOI that secured the note receivable, typically soon after default and at a nominal cost. We then attempt to resell the recovered VOI in the normal course of business.

Critical Accounting Policies and Estimates

Our discussion and analysis of results of operations and financial condition are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. 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 estimated future sales value of inventory; the recognition of revenue, including revenue recognition under the percentage-of-completion method of accounting; our reserve for loan losses; the recovery of the carrying value of real estate inventories; the fair value of assets measured at, or compared to, fair value on a non-recurring basis such as assets held for sale, intangible assets and other long-lived assets; and the estimate of contingent liabilities related to litigation and other claims and assessments. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions and conditions. If actual results significantly differ from management's estimates, our results of operations and financial condition could be materially, adversely impacted. For a more detailed discussion of these critical accounting policies, see Critical Accounting Policies and Estimates in our Annual Report.

Recent Accounting Pronouncements

Refer to Note 1 to our Condensed Consolidated Financial Statements for a description of accounting pronouncements adopted during the three and nine months ended September 30, 2012.

Results of Operations

On May 4, 2012, we sold substantially all of the assets of Bluegreen Communities to Southstar. The operating results of Bluegreen Communities are classified as a discontinued operation for all periods. See "Discontinued Operations" below. As a result of this sale, our continuing operations relate solely to Bluegreen Resorts.

Information regarding the results of operations of Bluegreen Resorts for the three and nine months ended September 30, 2011 and 2012 is set forth below (dollars in thousands):

                                                   For the Three Months Ended September 30,
                                                   2011                                 2012
                                                         % of System-                       % of System-
                                                        wide sales of                       wide sales of
                                        Amount            VOIs, net           Amount          VOIs, net
System-wide sales of VOIs (1)       $     90,976                           $  109,119
Changes in sales deferred under
timeshare accounting rules                  (335 )                             (2,095 )
System-wide sales of VOIs, net
(1)                                       90,641              100%            107,024            100%
Less: Sales of third-party VOIs          (33,983 )            (37)            (41,698 )          (39)
Gross sales of VOIs                       56,658               63              65,326             61
Estimated uncollectible VOI
notes receivable (2)                     (10,770 )            (19)             (8,354 )          (13)
Sales of VOIs                             45,888               51              56,972             53
Cost of VOIs sold (3)                    (11,349 )            (25)            (12,590 )          (22)
Gross profit (3)                          34,539               75              44,382             78
Fee-based sales commission
revenue                                   23,460               26              27,798             26
Other fee-based services revenue          18,838               21              19,401             18
Cost of other fee-based services         (10,550 )            (12)             (9,083 )           (8)
Net carrying cost of VOI
inventory                                 (2,362 )             (3)             (1,333 )           (1)
Selling and marketing  expenses          (40,734 )            (45)            (49,763 )          (46)
Field general and administrative
expenses (4)                              (5,334 )             (6)             (5,637 )           (5)
Operating profit                    $     17,857               20%         $   25,765             24%

                                                   For the Nine Months Ended September 30,
                                                   2011                                2012
                                                        % of  System-                      % of  System-
                                                        wide sales of                      wide sales of
                                        Amount            VOIs, net          Amount          VOIs, net

System-wide sales of VOIs (1)       $    228,599                          $  280,049
Changes in sales deferred under
timeshare accounting rules                (1,639 )                            (6,249 )
. . .
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