<PAGE> 1
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 December 28, 1997
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
incorporation or organization) Identification No.)
5295 Town Center Road, Boca Raton, Florida 33486
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(561) 361-2700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of February 9, 1998, there were 20,743,203 shares issued, 449,800
treasury shares and 20,293,403 shares of Common Stock, $.01 par value per share,
outstanding.
<PAGE> 2
BLUEGREEN CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C> <C>
CONDENSED CONSOLIDATED BALANCE SHEETS AT
DECEMBER 28, 1997 AND MARCH 30, 1997 ........................................ 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - THREE MONTHS
ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996 ............................... 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - NINE MONTHS
ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996................................ 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - NINE MONTHS
ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996 ............................... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ............................. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................................... 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................................ 23
ITEM 2. CHANGES IN SECURITIES ............................................................ 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .................................................. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............................. 23
ITEM 5. OTHER INFORMATION ................................................................ 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................................. 23
SIGNATURES.................................................................................... 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, MARCH 30,
1997 1997
---- ----
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Cash and cash equivalents (including restricted cash of
approximately $13,300 and $8,000 at
December 28, 1997 and March 30, 1997, respectively).... $ 25,124 $ 11,597
Contracts receivable, net................................. 12,646 14,308
Notes receivable, net..................................... 73,116 34,619
Investment in securities.................................. 10,600 11,067
Inventory, net............................................ 112,297 86,660
Property and equipment, net............................... 11,147 4,949
Debt issuance costs, net.................................. 1,782 1,064
Other assets.............................................. 8,096 5,363
-------- --------
TOTAL ASSETS........................................... $254,808 $169,627
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable.......................................... $ 4,590 $ 1,918
Deferred income........................................... 8,322 3,792
Accrued liabilities and other............................. 14,101 10,118
Lines-of-credit and notes payable......................... 61,909 35,906
Deferred income taxes..................................... 6,712 2,856
Receivable-backed notes payable........................... 51,536 21,055
8.00% convertible notes payable to related parties........ 6,000 -
8.25% convertible subordinated debentures................. 34,739 34,739
-------- --------
TOTAL LIABILITIES...................................... 187,909 110,384
Minority interest......................................... 250 -
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000 shares authorized;
none issued............................................ - -
Common stock, $.01 par value, 90,000 shares
authorized; 20,743 and 20,602 shares issued at December 28, 1997
and March 30, 1997, respectively...................... 208 206
Capital-in-excess of par value............................ 71,844 71,410
Accumulated deficit....................................... (4,179) (11,163)
Treasury stock, 450 and 443 common shares at
cost at December 28, 1997 and March 30, 1997,
respectively .......................................... (1,389) ( 1,370)
Net unrealized gains on investments available-for-sale, net
of income taxes........................................ 165 160
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................ 66,649 59,243
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $254,808 $169,627
======== ========
</TABLE>
Note: The condensed consolidated balance sheet at March 30, 1997 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3
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BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Sales of real estate..................................... $44,490 $26,478
Other resort services revenue............................ 1,585 -
Interest income and other................................ 3,190 1,583
------- -------
49,265 28,061
COST AND EXPENSES:
Cost of real estate sold................................. 18,703 13,731
Cost of other resort services............................ 1,509 -
Selling, general and administrative expense.............. 21,610 12,548
Interest expense......................................... 2,726 1,445
Provisions for losses.................................... 568 352
------- -------
45,116 28,076
------- -------
Income (loss) from operations............................... 4,149 (15)
Other (expense) income...................................... (33) 49
------- -------
Income before income taxes.................................. 4,116 34
Provision for income taxes................................. 1,641 14
------- -------
NET INCOME.................................................. $ 2,475 $ 20
======= =======
EARNINGS PER COMMON SHARE:
Basic....................................................... $ .12 $ -
======= =======
Diluted..................................................... $ .11 $ -
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES:
Basic....................................................... 20,358 20,203
======= =======
Diluted..................................................... 26,744 21,031
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Sales of real estate..................................... $122,902 $81,712
Other resort services revenue............................ 1,585 -
Interest income and other................................ 7,324 4,577
-------- -------
131,811 86,289
COST AND EXPENSES:
Cost of real estate sold................................. 55,277 41,384
Cost of other resort services............................ 1,509 -
Selling, general and administrative expense.............. 55,526 38,051
Interest expense......................................... 6,512 3,916
Provisions for losses.................................... 1,349 9,101
-------- -------
120,173 92,452
-------- -------
Income (loss) from operations............................... 11,638 (6,163)
Other income................................................ 120 184
-------- -------
Income (loss) before income taxes........................... 11,758 (5,979)
Provision (benefit) for income taxes........................ 4,774 (2,451)
-------- -------
NET INCOME (LOSS)........................................... $6,984 $(3,528)
======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Basic....................................................... $ .35 $ ( .17)
======== ========
Diluted..................................................... $ .33 $ ( .17)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES:
Basic....................................................... 20,193 20,372
======== ========
Diluted..................................................... 25,467 20,372
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................ $6,984 $(3,528)
Adjustments to reconcile net income (loss) to net
cash flow provided by operating activities,
net of effects of acquisition:
Depreciation and amortization............................ 1,345 807
Loss on REMIC transaction................................ - 96
Gain on sale of property and equipment................... - (44)
Provisions for losses.................................... 1,349 9,101
Interest accretion on investment in securities........... (1,047) (745)
Proceeds from borrowings collateralized by notes
receivable....................................... 26,495 14,004
Payments on borrowings collateralized by notes
receivable....................................... (11,440) (14,060)
Provision (benefit) for deferred income taxes............ 4,774 (2,451)
(INCREASE) DECREASE IN OPERATING ASSETS:
Contracts receivable....................................... 1,662 4,310
Inventory.................................................. 3,944 (3,442)
Other assets............................................... (2,062) (574)
Notes receivable........................................... (22,437) 855
INCREASE (DECREASE) IN OPERATING LIABILITIES:
Accounts payable, accrued liabilities and other............ 4,531 (3,437)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 14,098 892
-------- --------
INVESTING ACTIVITIES:
Acquisition of RDI Group, Inc. and Resort Title Agency,
Inc., net of cash acquired................................. (2,421) -
Purchases of property and equipment........................... (2,909) (998)
Sales of property and equipment............................... 225 586
Cash received from investment in securities................... 1,524 1,114
-------- --------
NET CASH FLOW (USED) PROVIDED BY INVESTING ACTIVITIES............ (3,581) 702
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of 8% convertible notes payable 6,000 -
Proceeds from borrowings under line-of-credit facilities and
other notes payable........................................ 36,136 11,946
Payments under line-of-credit facilities and other notes
payable.................................................... (38,531) (8,877)
Payment of debt issuance costs................................ (900) (206)
Payments for treasury stock................................... (19) (1,245)
Proceeds from exercise of employee stock options.............. 324 115
-------- --------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES................... 3,010 1,733
-------- --------
Net increase in cash and cash equivalents........................ 13,527 3,327
Cash and cash equivalents at beginning of period................. 11,597 11,389
-------- --------
Cash and cash equivalents at end of period....................... 25,124 14,716
Restricted cash and cash equivalents at end of period............ (13,300) (8,617)
-------- --------
Unrestricted cash and cash equivalents at end of period.......... $11,824 $ 6,099
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
BLUEGREEN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING, INVESTING
AND FINANCING ACTIVITIES
Inventory acquired through financing...................... $22,974 $10,630
======= =======
Inventory acquired through foreclosure or
deedback in lieu of foreclosure.......................... $ 2,497 $ 1,490
======= ========
Property and equipment acquired through financing......... $ 812 $ -
======= ========
Investment in securities retained in
connection with REMIC transactions...................... $ - $ 1,774
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
BLUEGREEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles 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 period. The results of
operations for the three- and nine- month periods ended December 28, 1997 are
not necessarily indicative of the results to be expected for the fiscal year
ending March 29, 1998. For further information, refer to the consolidated
financial statements and notes thereto included in Bluegreen Corporation's (the
Company's) Annual Report to Shareholders for the fiscal year ended March 30,
1997.
ORGANIZATION
The Company is a national leisure and lifestyle product company operating
predominantly in the southeastern, southwestern and midwestern United States.
The Company's primary business is (i) the acquisition and development of
timeshare properties which are sold in weekly intervals (Resorts Division) and
(ii) the acquisition, development and sale of residential land (Land Division)
or residential home/lot packages (Communities Division). The Company offers
financing to its Resort, Land and Communities product purchasers.
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. All significant intercompany
transactions are eliminated.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EARNINGS (LOSS) PER COMMON SHARE
In February, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share", which became effective for the Company's quarter ended December 28,
1997. Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) 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 8.00% convertible notes
payable and 8.25% convertible subordinated debentures were converted into common
stock on March 31, 1997 or the date of issuance, if later. The earnings (loss)
per common share and weighted average number of common and common equivalent
shares for the three- and nine-month periods ended December 29, 1996 have been
restated in accordance with SFAS No. 128.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
(In thousands, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
---------------------------------------------------------------
December 28, December 29, December 28, December 29,
1997 1996 1997 1996
---------------------------------------------------------------
Numerator:
Numerator for basic earnings
(loss) per share - net
income (loss) $ 2,475 $ 20 $ 6,984 $(3,528)
Effect of dilutive securities,
(net of tax effects):
8.25% convertible
debentures 426 - 1,277 -
8.00% convertible notes
payable 71 - 85 -
---------------------------------------------------------------
497 - 1,362 -
---------------------------------------------------------------
Numerator for diluted
earnings (loss) per share
- net income (loss) after
assumed conversions $ 2,972 $ 20 $ 8,346 $(3,528)
===============================================================
Denominator:
Denominator for basic
earnings (loss) per share-
weighted-average shares 20,358 20,203 20,193 20,372
Effect of dilutive sercurities:
Stock options 639 828 360 -
8.25% convertible
debentures 4,216 - 4,216 -
8.00% convertible notes
payable 1,531 - 698 -
--------------------------------------------------------------
Dilutive potential common
shares 6,386 828 5,274 -
Denominator for diluted
earnings (loss) per share-
adjusted weighted-average
shares and assumed
conversions 26,744 21,031 25,467 20,372
==============================================================
Basic earnings (loss) per
share $ 0.12 $ - $ 0.35 $ (0.17)
==============================================================
Diluted earnings (loss) per
share $ 0.11 $ - $ 0.33 $ (0.17)
==============================================================
</TABLE>
8
<PAGE> 9
NEW PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" and
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" which are effective for fiscal years beginning after December 15,
1997. Accordingly, the Company plans to adopt SFAS No. 130 and 131 with the
fiscal year beginning March 30, 1998. SFAS No. 130 and No. 131 do not have any
impact on the financial results or financial condition of the Company, but will
result in the disclosure of the components of comprehensive income and in
certain changes in required disclosures of segment information.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
2. ACQUISITION
Effective September 30, 1997, a wholly-owned subsidiary of the Company acquired
all of the issued and outstanding common stock of RDI Group Inc. and Resort
Title Agency, Inc. (collectively "RDI") for a purchase price of $7.5 million
consisting of $6 million cash and a $1.5 million, 9% promissory note due October
3, 1999. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of RDI have been included
in the Company's condensed consolidated financial statements from September 30,
1997. As the net assets acquired from RDI equaled the purchase price, no
goodwill was recognized in connection with the acquisition of RDI.
The Company financed the cash portion of the purchase price pursuant to the
issuance of two, 8% convertible promissory notes in the aggregate principal
amount of $6 million (the Notes) to a member of the Board of Directors of the
Company (the Board) and an affiliate of a Board member. The Notes, which were
executed on September 11, 1997, are due on September 11, 2002, and are
convertible into the Company's common stock at a conversion price of $3.92 per
share, subject to adjustment.
Headquartered in Fort Myers, Florida, RDI was privately-held and presently owns
timeshare resorts in Orlando, Florida and Wisconsin Dells, Wisconsin, as well as
a points-based vacation club. In addition, RDI manages approximately 30 vacation
ownership resorts, located in the southeastern sun-belt states, with a member
base of approximately 70,000.
The following pro forma financial information presents the combined results of
operations of the Company and RDI as if the acquisition had occurred on April 1,
1996, after giving effect to certain adjustments, including increased interest
expense on debt related to the acquisition, and related income tax effects. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and RDI constituted a single
entity during such periods.
<TABLE>
<CAPTION>
Nine months ended
December 28, 1997 December 29, 1996
------------------------- -----------------------
(unaudited - amounts in thousands,
except per share data)
<S> <C> <C>
Net revenues $146,380 $102,859
======== ========
Net income (loss) 8,686 (4,311)
======== ========
Earnings (loss) per share:
Basic $ 0.43 $ (0.21)
======== ========
Diluted $ 0.39 $ (0.21)
======== ========
</TABLE>
3. JOINT VENTURE
On December 15, 1997, the Company invested $250,000 of capital in Bluegreen
Properties N.V. (BPNV), an entity organized in Aruba that previously had no
operations, in exchange for a 50% ownership interest. Concurrently, the Company
and an affiliate of the other 50% owner of BPNV (who is not an affiliate of the
Company), each loaned BPNV $3 million pursuant to promissory notes due on
December 15, 2000 and bearing interest at the prime rate plus 1%. BPNV then
acquired from a third party approximately 8,000 unsold timeshare intervals at
the La Cabana All-Suite Beach Resort, a fully developed timeshare resort in
Oranjestad, Aruba in exchange for $6 million cash and the assumption of
approximately $16.6 million of interest-free debt from a bank in Aruba. The debt
was recorded by BPNV at approximately $12.5 million, which reflects a discount
based on an imputed interest rate of 12%. The debt is to be repaid over
9
<PAGE> 10
five years through release-prices as intervals are sold, subject to minimum
monthly payments of approximately $278,000.
In addition to its 50% ownership interest, the Company will receive a quarterly
management fee from BPNV equal to 7% of BPNV's net sales in exchange for the
Company's involvement in the day-to-day operations of BPNV. The Company also has
majority control of BPNV's board of directors and has a controlling financial
interest in BPNV. Therefore, the accounts of BPNV are included in the Company's
condensed consolidated financial statements as of December 28, 1997. The
operations of BPNV for the 13 days ended December 28, 1997 were not significant.
4. INVENTORY
The Company's inventories by geographic region, which consist of real estate
acquired for sale, are summarized below (amounts in thousands).
<TABLE>
<CAPTION>
DECEMBER 28, 1997
----------------------------------------------------------------------
GEOGRAPHIC REGION LAND RESORTS COMMUNITIES TOTAL
- ----------------- ---- ------- ------------ -----
<S> <C> <C> <C> <C>
Southeast............ $12,520 $20,403 $3,588 $ 36,511
Southwest............ 24,902 - - 24,902
Midwest.............. 4,548 18,118 - 22,666
Caribbean............ - 18,447 - 18,447
Rocky Mountains ..... 3,575 - - 3,575
Mid-Atlantic......... 3,327 - - 3,327
West ................ 2,420 - - 2,420
Northeast............ 397 - - 397
Canada............... 52 - - 52
------- ------- ------ --------
Totals............... $51,741 $56,968 $3,588 $112,297
======= ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 30, 1997
-----------------------------------------------------------------------
GEOGRAPHIC REGION LAND RESORTS COMMUNITIES TOTAL
- ----------------- ---- ------- ------------ -----
<S> <C> <C> <C> <C>
Southeast............ $ 7,998 $15,029 $ 5,684 $28,711
Southwest............ 19,959 - - 19,959
Midwest.............. 8,051 12,495 - 20,546
Rocky Mountains ..... 7,534 - - 7,534
West ................ 5,512 - - 5,512
Mid-Atlantic......... 4,016 - - 4,016
Northeast............ 382 - - 382
------- ------- -------- -------
Totals............... $53,452 $27,524 $ 5,684 $86,660
======= ======= ======== =======
</TABLE>
During 1996 management changed its focus for marketing certain of the Company's
inventories in conjunction with a plan to accelerate the sale of properties
managed under the Communities Division and certain properties managed under the
Land Division. This decision was largely the result of management's focus on
expansion of the Company's Resorts Division and Land Division in certain
locations. Because of the strategy to accelerate sales, management determined
that inventories with a carrying value of $23.2 million should be written-down
by $8.2 million during the nine months ended December 29, 1996. The $8.2 million
in provisions included $4.8 million for certain Communities Division inventories
and $3.4 million for certain Land Division inventories. Management adopted a
plan to aggressively pursue opportunities for the bulk sale of a portion of the
written-down assets and has reduced retail prices on others to increase sales
activity. The Company's Communities Division primarily consists of three North
Carolina properties acquired in 1988. The Company began marketing home/lot
packages in 1995 to accelerate sales at the properties. However, the projects
had been slow moving and yielded low gross profits and little to no operating
profits. A majority of the Land Division parcels subject to write-down were
scattered lots acquired through foreclosure or deedback in lieu of foreclosure,
odd lots from former projects and properties
10
<PAGE> 11
located in parts of the country where the Company has no plans for expansion. As
of December 28, 1997, approximately 73% (measured by historical cost basis) of
the inventories subject to write-down had been sold.
5. CREDIT FACILITY
On December 15, 1997, the Company entered into a short-term credit facility. The
credit facility bears interest at the greater of 10% or the prime rate plus
2.75% and is due no later than 150 days from the first advance on the line
(December 18, 1997). The Company is required to pay a commitment fee equal to 1%
of each advance. Through December 28, 1997, the Company had borrowed $8 million
under the credit facility.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 in order to do so. This report contains
forward-looking statements that involve a number of risks and uncertainties. The
Company wishes to caution readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual results. These factors could also 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. Unless
otherwise indicated, references to "real estate" and "inventory" relate
collectively to the Company's land, timeshare and communities inventories
held for sale.
a) Changes in national, international or regional economic conditions that can
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.
b) The imposition of additional compliance costs on the Company as the
result of changes in 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.
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 and carrying costs of inventories may exceed those
anticipated).
d) Risks associated with an inability to locate suitable inventory for
acquisition.
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 or changes in the
availability of development financing on terms acceptable to the Company.
f) Changes in applicable usury laws or the availability of interest deductions
or other provisions of federal or state tax law.
g) A decreased willingness on the part of banks to extend direct customer lot
financing, which could result in the Company receiving less cash in
connection with the sales of real estate and/or lower sales.
h) The inability of the Company to find external sources of liquidity on
favorable terms to support its operations, acquire, carry and develop land
and timeshare inventories and satisfy its debt and other obligations.
i) The inability of the Company to find sources of capital on favorable terms
for the pledge of land and timeshare notes receivable.
j) 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.
k) Costs to develop inventory for sale and/or selling, general and
administrative expenses exceed those anticipated.
l) An increase or decrease in the number of land or resort properties subject
to percentage of completion accounting which requires deferral of profit
recognition on such projects until development is substantially complete.
12
<PAGE> 13
RESULTS OF OPERATIONS - FOR THE THREE- AND NINE-MONTH PERIODS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and related notes thereto included in the
Company's Annual Report to Shareholders for the fiscal year ended March 30,
1997.
GENERAL
The real estate market is cyclical in nature and highly sensitive to changes in
national, international and regional economic conditions, including, among other
factors, levels of employment and discretionary disposable income, consumer
confidence, available financing and interest rates. Management believes that
general economic conditions have strengthened in many of its principal markets
of operation. A downturn in the economy in general or in the market of real
estate could have a material adverse effect on the Company. In addition, the
Company has been dedicating greater resources to fewer, more capital intensive
land and timeshare projects. As a result, the current results reflect an
increased amount of income deferred under the percentage of completion method of
accounting. Under this method of revenue recognition, income is recognized as
work progresses. Measures of progress are based on the relationship of costs
incurred to date to expected total costs.
The Company has historically experienced seasonal downward fluctuations in its
gross revenues and net earnings in the third fiscal quarter. This seasonality
may cause significant fluctuations in the quarterly operating results of the
Company. In addition, other material fluctuations in operating results may occur
due to the timing of development and the Company's use of the percentage of
completion method of accounting. Management expects that the Company will
continue to invest in projects that will require more substantial development
(with greater capital requirements) than in years prior to fiscal 1998.
DIVISIONAL RESULTS OF OPERATIONS
The Company's leisure products business is currently operated through three
divisions. The Land Division acquires large acreage tracts of real estate, which
are subdivided, improved and sold, typically on a retail basis. The Resorts
Division acquires and develops timeshare property to be sold in vacation
ownership intervals. Vacation ownership is a concept whereby fixed week
intervals or undivided fee simple interests are sold in fully furnished vacation
units. The Communities Division is engaged in the development and sale of
primary residential homes at selected sites together with land parcels. The
Company does not intend to acquire any additional communities-related
inventories and present Communities Division holdings are being divested through
a combination of retail sales and bulk parcel sales.
The following tables set forth the selected financial data for the divisions
comprising the consolidated operations of the Company for the three months ended
December 28, 1997 (the 1997 Quarter) and December 29, 1996 (the 1996 Quarter).
13
<PAGE> 14
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 28, 1997
LAND RESORTS COMMUNITIES TOTAL
------------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of real estate. $27,028 100.0% $16,311 100.0% $1,151 100.0% $44,490 100.0%
Cost of real estate
sold............... 13,328 49.3% 4,229 25.9% 1,146 99.6% 18,703 42.0%
------- ----- ------- ----- ------ ----- ------- -----
Gross profit......... 13,700 50.7% 12,082 74.1% 5 0.4% 25,787 58.0%
Field selling, general
and administrative
expense (1)........ 7,453 27.6% 11,078 67.9% 47 4.1% 18,578 41.8%
------- ----- ------- ----- ------ ----- ------- -----
Field operating
profit (loss) (2).. $ 6,247 23.1% $ 1,004 6.2% $ (42) (3.7)% $ 7,209 16.2%
======= ===== ======= ===== ====== ===== ======= ======
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED DECEMBER 29, 1996
LAND RESORTS COMMUNITIES TOTAL
------------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of real estate. $16,151 100.0% $8,033 100.0% $2,294 100.0% $26,478 100.0%
Cost of real estate
sold............... 9,359 57.9% 2,253 28.0% 2,119 92.4% 13,731 51.9%
------- ----- ------- ----- ------ ----- -------- -----
Gross profit......... 6,792 42.1% 5,780 72.0% 174 7.6% 12,747 48.1%
Field selling, general
and administrative
expense (1)........ 5,112 31.7% 5,214 64.9% 108 4.7% 10,434 39.4%
------- ----- ------- ----- ------ ----- ------- -----
Field operating
profit (2)......... $1,680 10.4% $ 566 7.1% $ 67 2.9% $ 2,313 8.7%
======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
(1) General and administrative expenses attributable to corporate overhead have
been excluded from the tables.
(2) The tables presented above outline selected financial data. Accordingly,
provisions for losses, interest income, interest expense, other income and
income taxes have been excluded.
14
<PAGE> 15
The following tables set forth the selected financial data for the divisions
comprising the consolidated operations of the Company for the nine months ended
December 28, 1997 (the 1997 Period) and December 29, 1996 (the 1996 Period).
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 28, 1997
LAND RESORTS COMMUNITIES TOTAL
------------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of real estate. $78,830 100.0% $39,880 100.0% $4,192 100.0% $122,902 100.0%
Cost of real estate
sold.............. 40,752 51.7% 10,301 25.8% 4,224 100.8% 55,277 45.0%
------- ----- ------- ----- ------ ----- -------- -----
Gross profit (loss).. 38,078 48.3% 29,579 74.2% (32) (0.8)% 67,625 55.0%
Field selling,
general
and administrative
expense (1)........ 21,401 27.1% 25,706 64.5% 177 4.2% 47,284 38.5%
------- ----- ------- ----- ------ ----- -------- -----
Field operating
profit (loss) (2).. $16,677 21.2% $ 3,873 9.7% $ (209) (5.0)% $ 20,341 16.5%
======= ===== ======= ===== ====== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 29, 1996
LAND RESORTS COMMUNITIES TOTAL
------------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of real estate. $54,604 100.0% $20,805 100.0% $6,303 100.0% $81,712 100.0%
Cost of real estate
sold............... 28,983 53.1% 6,355 30.5% 6,046 95.9% 41,384 50.6%
------- ----- ------- ----- ------ ----- ------- -----
Gross profit......... 25,621 46.9% 14,450 69.5% 257 4.1% 40,328 49.4%
Field selling,
general
and administrative
expense (1)........ 17,167 31.4% 13,563 65.2% 815 12.9% 31,545 38.6%
------- ----- ------- ----- ------ ----- ------- -----
Field operating
profit (loss) (2).. $ 8,454 15.5% $ 887 4.3% $ (558) (8.8)% $8,783 10.8%
======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
- -----------------
(1) General and administrative expenses attributable to corporate overhead have
been excluded from the tables.
(2) The tables presented above outline selected financial data. Accordingly,
provisions for losses, interest income, interest expense, other income and
income taxes have been excluded.
Cconsolidated sales of real estate increased 68% to $44.5 million for the 1997
Quarter compared to $26.5 million for the 1996 Quarter. Consolidated sales of
real estate increased 50% to $122.9 million for the 1997 Period compared to
$81.7 million for the 1996 Period. Significant increases in land and timeshare
sales during the 1997 Quarter and 1997 Period were partially offset by lower
communities' sales. The decrease in Communities Division Sales is primarily due
to the continuing divestiture of existing inventories through a combination of
retail sales and bulk parcel sales as the Company's primary focus continues to
be its core lines of business (land and resort interval sales).
As of March 30, 1997, approximately $8.4 million in sales or $3.8 million in
estimated income was deferred under percentage of completion accounting. At
December 28, 1997, approximately $18 million of sales or $8.3 million in
estimated income was deferred and is included on the consolidated balance sheet.
15
<PAGE> 16
LAND DIVISION
During the 1997 and 1996 Quarters, land sales contributed $27.0 million or 61%
and $16.2 million or 61%, respectively, of the Company's total consolidated
revenues from the sale of real estate.
During the 1997 and 1996 Periods, land sales contributed $78.8 million or 64%
and $54.6 million or 67%, respectively, of the Company's total consolidated
revenues from the sale of real estate.
The tables set forth below outline the numbers of parcels sold and the average
sales price per parcel for the Company's Land Division by geographic region for
the fiscal periods indicated, BEFORE giving effect to the percentage of
completion method of accounting and excluding a $2 million bulk land sale during
the 1997 Period. Accordingly, the calculation of multiplying the number of
parcels sold by the average sales price per parcel yields aggregate sales
different than those reported above and on the earlier table (outlining sales
revenue by division AFTER applying percentage of completion method of accounting
and including the $2 million bulk land sale).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 28, 1997 DECEMBER 29, 1996
-------------------------------------- -------------------------------
AVERAGE AVERAGE
GEOGRAPHIC NUMBER OF SALES PRICE NUMBER OF SALES PRICE
REGION PARCELS SOLD PER PARCEL PARCELS SOLD PER PARCEL
- ------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Southwest......... 223 $ 46,701 288 $ 37,739
Southeast......... 73 54,723 29 34,034
Midwest........... 63 37,190 19 17,853
Mid-Atlantic...... 39 39,825 25 21,830
Rocky Mountains. 36 34,661 45 45,511
West.............. 25 181,348 10 166,900
Northeast......... 15 18,373 11 26,730
Canada............ - - 3 10,545
--- --------- --- ----------
Totals............ 474 51,397 430 35,150
=== ===
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 28, 1997 DECEMBER 29, 1996
-------------------------------------- -------------------------------
AVERAGE AVERAGE
GEOGRAPHIC NUMBER OF SALES PRICE NUMBER OF SALES PRICE
REGION PARCELS SOLD PER PARCEL PARCELS SOLD PER PARCEL
- ------ ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Southwest......... 850 $ 44,417 822 $ 37,378
Southeast......... 268 54,021 178 35,375
Midwest........... 195 35,324 137 24,550
Mid-Atlantic...... 148 42,717 123 34,274
Rocky Mountains. 184 35,554 175 41,163
West.............. 59 170,478 20 149,425
Northeast......... 34 14,653 40 22,807
Canada............ 2 10,410 3 10,545
----- -----
Totals............ 1,740 47,449 1,498 37,207
===== =====
</TABLE>
The number of parcels sold and average sales price per parcel increased due to
the following:
* Southwest region - Increases during the 1997 Period are due to the
Company's Bentwater and White Oak Estates projects, which opened in fiscal
1998.
16
<PAGE> 17
* Southeast region - Increases are due to the recently opened Winding River
property in North Carolina. The project will feature a host of amenities
including a beach club, 27-hole championship golf course, club-house,
private marina and bike paths.
* Midwest region - Increases are attributable to the recent opening of two
properties in Tennessee. One project features lake frontage and the other
property lies adjacent to a daily-fee golf course currently under
development by a third party.
* West region -Greater parcel sales and higher average sales prices are
indicative of the Company's Arizona project gaining more momentum as it
enters its third year in marketing and sales. The Arizona property is being
marketed in parcels of at least 36 acres at retail prices ranging from
$100,000 to $185,000.
The Company plans to continue to dedicate greater resources to fewer land
properties located in areas with proven records of strong operating performance.
These locations include, but are not limited to Texas, the Carolinas, Virginia,
Tennessee and Arizona.
The average gross margin for the Land Division was 50.7% and 42.1% for the 1997
and 1996 Quarters, respectively, and was 48.3% and 46.9% for the 1997 and 1996
Periods, respectively. The average gross margin increased primarily due to the
opening of the Company's Winding River Property in North Carolina and increased
sales at the Company's properties in New Mexico and Arizona, which generated
gross margins of 58.6%, 55.2% and 50.9%, respectively, during the nine months
ended December 28, 1997. The Company's Investment Committee, consisting of three
executive officers, approves all property acquisitions. In order to be approved
for purchase by the Committee, all land (and timeshare) properties under
contract for purchase are expected to achieve certain minimum economics
including a minimum gross margin. No assurances can be given that such minimum
economics will be achieved.
RESORTS DIVISION
During the 1997 and 1996 Quarters, sales of timeshare intervals contributed
$16.3 million or 37% and $ 8.0 million or 30%, respectively, of the Company's
total consolidated revenues from the sale of real estate.
During the 1997 and 1996 Periods, sales of timeshare intervals contributed $39.9
million or 32% and $20.8 million or 25%, respectively, of the Company's total
consolidated revenues from the sale of real estate.
The following tables set forth information for sales of intervals associated
with the Company's Resorts Division for the periods indicated, BEFORE giving
effect to the percentage of completion method of accounting and excluding
incremental revenues from the conversion of timeshare interval owners to point
owners in the Company's points-based vacation club. Accordingly, the calculation
of multiplying the number of intervals sold by the average sales price per
interval yields aggregate sales different than that reported above and on the
earlier table (outlining sales revenue by business unit AFTER applying
percentage of completion accounting to sales transactions and including vacation
club conversion revenues).
THREE MONTHS ENDED
------------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
Number of intervals sold..................... 2,068 803
Average sales price per interval............. $8,300 $8,549
Gross margin................................. 74% 72%
17
<PAGE> 18
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
<S> <C> <C>
Number of intervals sold...................... 4,903 2,579
Average sales price per interval.............. $8,695 $8,342
Gross margin.................................. 74% 70%
</TABLE>
The increase in the number of timeshare intervals sold was partially due to two
new resort properties that became operational during fiscal 1998 - Harbour
Lights in Myrtle Beach, South Carolina, and The Falls Village in Branson,
Missouri, which generated 203 and 291 interval sales, respectively, during the
1997 Quarter and 569 and 556 interval sales, respectively, during the 1997
Period. In addition, interval sales increased due to the seasoning of existing
resorts and the increased effectiveness of marketing programs.
The increase in timeshare sales was also partially due to the acquisition of RDI
Group, Inc. on September 30, 1997, which contributed approximately $4.2 million
in timeshare sales during the 1997 Quarter and 1997 Period.
The decrease in average sales price per interval during the 1997 Quarter was due
primarily to the acquisition of RDI Group, Inc., which generated average sales
prices per interval of $7,588 during the 1997 Quarter. The Company's average
sales price per interval, excluding RDI Group, Inc., was $8,536 and $8,826
during the 1997 Quarter and 1997 Period, respectively.
The improvement in gross margins from the Company's resorts was primarily the
result of increases in the retail selling prices, particularly at the Company's
Mountain Loft and Shore Crest resorts, which generated profit margins of
approximately 75% and 74%, respectively, during the nine months ended December
28, 1997.
During both the three- and nine-month periods ended December 28, 1997, other
resort service revenue and related costs were approximately $1.6 million and
$1.5 million, respectively. Other resort services include the resort property
management services, resort title services and certain retail amenity and
lodging operations acquired with RDI Group, Inc. and Resort Title Agency, Inc.
(collectively, RDI). There were no other resort service operations during the
1996 Quarter or 1996 Period.
COMMUNITIES DIVISION
During the three months ended December 28, 1997, the Company's Communities
Division contributed $1.2 million in sales revenue, or approximately 2% of total
consolidated revenues from the sale of real estate. During the three months
ended December 29, 1996, the Communities Division generated $2.3 million in
sales revenue, or approximately 9% of total consolidated revenues from the sales
of real estate.
During the nine months ended December 28, 1997, the Company's Communities
Division contributed $4.2 million in sales revenue, or approximately 4% of total
consolidated revenues from the sale of real estate. During the nine months ended
December 29, 1996, the Communities Division generated $6.3 million in sales
revenue, or approximately 8% of total consolidated revenues from the sales of
real estate.
The decrease in Communities Division sales is primarily due to the continuing
divestiture of existing inventories through a combination of retail sales and
bulk parcel sales as the Company's primary focus continues to be its core lines
of business (land and resort interval sales).
18
<PAGE> 19
INTEREST INCOME AND OTHER
Interest income and other increased 102% to $3.2 million for the three months
ended December 28, 1997 compared to $1.6 million for the three months ended
December 29, 1996. Interest income increased 60% to $7.3 million for the nine
months ended December 28, 1997 compared to $4.6 million for the nine months
ended December 29, 1996. The Company's interest income is earned from its
receivable portfolio, securities retained pursuant to REMIC financings and cash
and cash equivalents.
The increase in interest income is primarily due to an increase in the average
notes receivable balance during the 1997 Quarter and 1997 Period as compared to
the 1996 Quarter and 1996 Period, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (S, G&A Expense)
S, G&A Expense totaled $21.6 million and $12.5 million for the three months
ended December 28, 1997 and December 29, 1996, respectively, and $55.5 million
and $38.1 million for the nine months ended December 28, 1997 and December 29,
1996, respectively. A significant portion of S, G&A Expense is variable relative
to sales and profitability levels, and therefore, increases with growth in sales
of real estate. As a percentage of sales of real estate, S, G&A Expense
(including corporate administrative expense) decreased to 44% in the 1997
Quarter as compared to 45% in the 1996 Quarter and decreased to 42% in the 1997
Period as compared to 44% in the 1996 Period. The decrease in S,G&A Expense as a
percentage of sales is primarily due to the Company's strategic emphasis placed
on controlling costs, coupled with achieving the critical revenue mass in the
Resort Division to support the existing infrastructure.
INTEREST EXPENSE
Interest expense totaled $2.7 million and $1.4 million for the three months
ended December 28, 1997 and December 29, 1996, respectively. The 88.6% increase
in interest expense for the 1997 Quarter was primarily attributable to increased
borrowings associated with the Company's receivable-backed notes payable and for
the acquisition of land. The table set forth below outlines the components of
interest expense for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
INTEREST EXPENSE ON:
- --------------------
Receivable-backed notes payable................. $ 901 $ 481
Lines of credit and notes payable............... 1,246 756
8.00% convertible notes payable to related
parties...................................... 120 -
8.25% convertible subordinated debentures....... 716 716
Other financing costs........................... 554 247
Capitalization of interest...................... (811) (755)
------ ------
Totals.......................................... $2,726 $1,445
====== ======
</TABLE>
Interest expense totaled $6.5 million and $3.9 million for the nine months ended
December 28, 1997 and December 29, 1996, respectively. The 66% increase in
interest expense for the 1997 Period was primarily attributable to increased
borrowings associated with the Company's receivable-backed notes payable and for
the acquisition of land. The table set forth below outlines the components of
interest expense for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 28, DECEMBER 29,
1997 1996
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
INTEREST EXPENSE ON:
Receivable-backed notes payable.................. $ 2,357 $ 1,315
Lines of credit and notes payable................ 3,069 2,005
8.00% convertible notes payable to related
parties....................................... 144 -
8.25% convertible subordinated debentures........ 2,149 2,149
Other financing costs............................ 1,164 702
Capitalization of interest....................... (2,371) (2,255)
-------- --------
Totals........................................... $ 6,512 $ 3,916
======== ========
</TABLE>
19
<PAGE> 20
PROVISIONS FOR LOSSES
The Company recorded provisions for loan losses and for real estate taxes and
other costs associated with delinquent customers of $568,000 and $352,000 during
the three months ended December 28, 1997 and December 29, 1996, respectively and
$1.3 million and $901,000 during the nine months ended December 28, 1997 and
December 29, 1996, respectively. The increase in the provision for losses is
commensurate with the significant increase in timeshare revenues and the
resulting increased receivable portfolio during the 1997 Quarter and 1997
Period.
In addition, during 1996 management changed its focus for marketing certain of
the Company's inventories in conjunction with a plan to accelerate the sale of
properties managed under the Communities Division and certain properties managed
under the Land Division. This decision was largely the result of management's
focus on expansion of the Company's Resorts Division and Land Division in
certain locations. Because of the strategy to accelerate sales, management
determined that inventories with a carrying value of $23.2 million should be
written-down by $8.2 million during the nine months ended December 29, 1996. The
$8.2 million in provisions included $4.8 million for certain Communities
Division inventories and $3.4 million for certain Land Division inventories.
Management adopted a plan to aggressively pursue opportunities for the bulk sale
of a portion of the written-down assets and has reduced retail prices on others
to increase sales activity. The Company's Communities Division primarily
consists of three North Carolina properties acquired in 1988. The Company began
marketing home/lot packages in 1995 to accelerate sales at the properties.
However, the projects had been slow moving and yielded low gross profits and
little to no operating profits. A majority of the Land Division parcels subject
to write-down were scattered lots acquired through foreclosure or feedback in
lieu of foreclosure, odd lots from former projects and properties located in
parts of the country where the Company has no plans for expansion. As of
December 28, 1997, approximately 73% (as measured by historical cost basis) of
the inventories subject to write-down had been sold. As of December 28, 1997,
the Company believes that its reserves are adequate to absorb potential losses
to be incurred upon the disposition of the remaining inventories subject to
write-down.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CAPITAL. 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 of real estate, (ii) downpayments on
real estate and timeshare sales which are financed, (iii) principal and interest
payments on the purchase money mortgage loans arising from land sales and
contracts for deed arising from sales of timeshare intervals (collectively
"Receivables") and (iv) proceeds from the sale of, or borrowings collateralized
by, Receivables. Historically, external sources of liquidity have included
borrowings under secured lines-of-credit, seller and bank financing of inventory
acquisitions and the issuance of debt and equity securities. Currently, the
primary external sources of liquidity include seller and bank financing of
inventory acquisitions and development along with borrowings under secured
lines-of-credit. The Company anticipates that it will continue to require
external sources of liquidity to support its operations and satisfy its debt and
other obligations.
Receivables arising from land and timeshare real estate sales generally are
pledged to institutional lenders. In addition, the Company has historically sold
land loans in connection with private placement REMIC financing. Lenders
currently advance 90% of the face amount of the eligible notes pledged by the
Company. The Company classifies the indebtedness secured by Receivables as
"Receivable-backed notes payable" on the consolidated balance sheets. During the
1997 and 1996 Periods, the Company borrowed $26.5 million and $14.0 million,
respectively, through the pledge of Receivables. During the 1996 Period, the
Company raised an additional $17.0 million net of transaction costs and prior to
the retirement of debt, from the sale of land Receivables under a private
placement REMIC transaction. The Company does not expect to complete a REMIC
transaction for land Receivables during fiscal 1998 because it is anticipated
that a high percentage of such sales will be received in cash. Therefore a
sufficient quantity of land Receivables will not be accumulated to make a REMIC
transaction cost effective.
CREDIT FACILITIES FOR TIMESHARE RECEIVABLES
The Company has various credit facilities with financial institutions that
provide for receivable financing for all of its timeshare projects. The interest
rates charged under these facilities range from the three-month London Interbank
Offered Rate ("LIBOR") plus 4.25% to the prime lending rate plus 2.25%. At
December 28, 1997, the aggregate outstanding principal balance under the credit
agreements was $43.3 million.
20
<PAGE> 21
CREDIT FACILITIES FOR LAND RECEIVABLES
The Company has various credit facilities with financial institutions for the
pledge of land receivables. The Company uses these facilities as temporary
warehouses until it accumulates a sufficient quantity of land receivables to
sell under private placement REMIC transactions. Under the terms of these
facilities, the Company is entitled to advances secured by Receivables equal to
90% of the outstanding principal balance of eligible pledged Receivables. The
interest rates charged on outstanding borrowings range from the prime lending
rate plus .5% to prime plus 2.0%. At December 28, 1997, the aggregate
outstanding principal balance under the facility was $8.2 million.
Over the past three years, the Company has received 80% to 90% of its land sales
in cash. Accordingly, in recent years the Company has reduced the borrowing
capacity under credit agreements secured by land receivables. The Company
attributes the significant volume of cash sales to an increased willingness on
the part of certain local banks to extend more direct customer lot financing.
FINANCING OF INVENTORIES
Historically, the Company has financed the acquisition of land and timeshare
property through seller, bank or financial institution loans. The capital
required for development (for road and utility construction, resort unit
construction, amenities, surveys, and engineering fees) has historically been
funded from internal operations. Terms for repayment under these loans typically
call for interest to be paid monthly and principal to be repaid through
lot/interval releases. The release price is usually defined as a pre-determined
percentage of the gross selling price (typically 25% to 50%) of the parcels in
the subdivision or intervals in the resort. 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.
In addition to term financing for the acquisition of property, the Company has
credit arrangements to be drawn on for the development of certain larger land
and timeshare projects. See also the discussion of capital requirements to
develop the Company's inventories under "Uses of Capital".
During the 1997 Quarter, Bluegreen Properties N.V. (BPNV), the Company's
controlled and 50%-owned subsidiary, assumed approximately $16.6 million of
interest-free debt from a bank in Aruba in connection with the purchase of
approximately 8,000 unsold timeshare intervals at the La Cabana All-Suite Beach
Resort. The debt was recorded by BPNV at approximately $12.5 million, the
discount based on an imputed interest rate of 12%. The debt is to be repaid over
five years through release-prices as intervals are sold, subject to minimum
monthly payments of approximately $278,000. The remaining portion of the $22.6
million purchase price for the intervals was financed through an aggregate of $6
million loaned by the Company and the other 50%-owner of BPNV, pursuant to
promissory notes due December 15, 2000 and bearing interest at the prime rate
plus 1%.
At December 28, 1997, the aggregate outstanding balance on the Company's other
acquisition and development loans was approximately $31.0 million. Interest
rates ranged from the three-month LIBOR plus 4.25% to prime plus 2.75%.
OTHER DEBT ARRANGEMENTS
The Company borrowed $3.8 million dollars during the 1997 Period pursuant to a
term loan with a financial institution. The term loan is secured by certain of
the Company's investments in REMIC certificates and bears interest at the
three-month LIBOR plus 4.5%. The term loan is due in installments through
February 2001. At December 28, 1997, $3.6 million of the term loan is
outstanding.
Also during the 1997 Period, the Company issued $6 million of convertible notes
payable to a member of the Company's Board of Directors and an affiliate of a
Board member. The proceeds of these notes were used to acquire RDI. The notes
bear interest at 8.0%, and are convertible into the Company's common stock at a
conversion price of $3.92 per share, subject to adjustment. Interest is payable
quarterly. The notes are due on September 11, 2002.
On December 15, 1997, the Company entered into a short-term credit facility.
The credit facility bears interest at the greater of 10% or the prime rate plus
2.75% and is due no later than 150
21
<PAGE> 22
days from the first advance on the line (December 18, 1997). The Company is
required to pay a commitment fee equal to 1% of each advance. Through December
28, 1997, the Company had borrowed $8 million under the credit facility.
In addition to the sources of capital available under credit facilities
discussed above, the balance of the Company's unrestricted cash and cash
equivalents was $11.8 million at December 28, 1997. As discussed under "Uses of
Capital", the Company's business has changed in recent years to include
timeshare development and sales. Additionally, the Company has recently invested
greater resources into fewer, more capital intensive land projects. As a result,
capital requirements to develop inventories owned as of December 28, 1997 are
materially higher than those in years prior to 1997. The Company plans to seek
external sources of capital for the development of a substantial portion of its
inventories. Based upon the existing credit relationships, the current financial
condition of the Company and its operating plan, management believes the Company
can obtain adequate financial resources to satisfy its anticipated capital
requirements, although no assurances can be given. In the event that an existing
facility expires and is not amended and/or the Company can not obtain additional
capital under satisfactory terms, the level of the Company's ready-for-sale
inventories would decrease and would result in reduced sales. As a result, the
Company's ability to meet its liquidity and capital resource requirements would
be materially adversely affected.
USES OF CAPITAL. 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) meeting operating expenses and
(iv) satisfying the Company's debt obligations.
The Company's net inventory was $112.6 million at December 28, 1997 and $86.7
million at March 30, 1997. With respect to its inventory, the Company requires
capital (i) to improve land intended for recreational, vacation, retirement or
primary homesite use by purchasers and (ii) to develop timeshare property.
1997 PERIOD VS. 1996 PERIOD
Cash and cash equivalents increased by $13.5 million and $3.3 million during the
1997 Period and 1996 Period, respectively.
Net cash provided by the Company's operations was $14.1 million and $892,000 for
the 1997 Period and 1996 Period, respectively. The increase in cash flow from
operations was primarily attributable to an increase in sales of inventory
during the 1997 Period as well as an increase in net cash provided by the
hypothecation of the Company's notes receivable from land and resort interval
sales.
Net cash used by investing activities was $3.6 million for the 1997 Period. Net
cash provided by investing activities was $702,000 for the 1996 Period. The
decrease in net cash provided by investing activities was due to cash paid to
acquire RDI of $6.2 million (including acquisition costs), net of cash acquired
with RDI of $3.8 million and a $2 million increase in property and equipment
purchases, partially offset by a $400,000 increase in cash received from the
Company's investment in REMIC securities.
Net cash provided by financing activities was $3 million and $1.7 million for
the 1997 Period and 1996 Period, respectively. The increase in net cash provided
by financing activities was due to the $6 million proceeds from the issuance of
the Company's 8% convertible notes payable and a decrease in cash payments for
treasury stock of $1.2 million offset by an increase in the net payments under
the Company's lines-of-credit and other notes payable of $5.5 million.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment relative to the modification or
replacement of portions of its software so that its computer systems
will function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project cost is estimated at approximately $400,000, which
consists of costs to be incurred to acquire upgraded software that will be
capitalized.
The project is estimated to be completed not later than June 30, 1999, which is
prior to any anticipated impact on the Company's operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
22
<PAGE> 23
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
the above are incidental to its business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herein:
(27) Financial Data Schedule (for SEC use only)
(b) The Company filed a Current Report on Form 8-K dated October 6, 1997
reporting under Item 2 thereof the acquisition of the capital stock of
RDI Group, Inc. and Resort Title Agency, Inc. (collectively RDI) and,
in connection therewith, the issuance by the Company of the Convertible
Notes. Such Form 8-K included certain exhibits, including the Stock
Purchase Agreement pursuant to which RDI was acquired and the Note
Purchase Agreement.
On December 18, 1997, the Company filed a Current Report on Form 8-K/A
reporting under Item 2 thereof that, based on the most recent audited
financial statements of RDI, no separate financial statements of RDI
were required to be filed.
23
<PAGE> 24
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: February 11, 1998 By: /s/ George F. Donovan
---------------------
George F. Donovan
President and
Chief Executive Officer
Date: February 11, 1998 By: /s/ John F. Chiste
------------------
John F. Chiste
Treasurer and Chief Financial Officer
(Principal Financial Officer)
Date: February 11, 1998 By: /s/ Anthony M. Puleo
--------------------
Anthony M. Puleo
Chief Accounting Officer
(Principal Accounting Officer)
24
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-29-1998
<PERIOD-START> MAR-31-1997
<PERIOD-END> DEC-28-1997
<CASH> 25,124
<SECURITIES> 10,600
<RECEIVABLES> 94,738
<ALLOWANCES> 8,976
<INVENTORY> 112,297
<CURRENT-ASSETS> 0<F1>
<PP&E> 19,539
<DEPRECIATION> 8,392
<TOTAL-ASSETS> 254,808
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 154,184
0
0
<COMMON> 207
<OTHER-SE> 66,441
<TOTAL-LIABILITY-AND-EQUITY> 254,808
<SALES> 122,902
<TOTAL-REVENUES> 131,811
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<TOTAL-COSTS> 56,786
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<INTEREST-EXPENSE> 6,512
<INCOME-PRETAX> 11,758
<INCOME-TAX> 4,774
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<NET-INCOME> 6,984
<EPS-PRIMARY> 0.35
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<FN>
<F1>THE COMPANY HAS AN UNCLASSIFIED BALANCE SHEET.
</FN>
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