| BLUEGREEN CORP Item 1A RISK FACTORS |
| 27 Item 1A RISK FACTORS We are subject to various risks and uncertainties relating to or arising out of the nature of our business and general business, economic, financing, legal and other factors or conditions that may affect us |
| Moreover, we operate in a very competitive and rapidly changing environment |
| New risk factors emerge from time to time and it is not possible for management to either predict all risk factors, or assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors may affect our business |
| Investors should also refer to our quarterly reports on Form 10-Q and current reports on Form 8-K for future periods for updates to these risk factors |
| These risks and uncertainties include but are not limited to those referred to under "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations "e and the following: Our continued liquidity depends on our ability to sell or borrow against our notes receivable |
| We offer financing of up to 90prca of the purchase price to purchasers of VOIs and homesites |
| Approximately 95prca of our VOI customers and less than 1prca of our homesite customers utilized our in-house financing during the year ended December 31, 2005 |
| However, we incur selling, marketing and administrative cash expenditures prior to and concurrent with the sale |
| These costs generally exceed the downpayment we receive at the time of the sale |
| Accordingly, our ability to borrow against or sell the notes receivable we receive from our customers is a critical factor in our continued liquidity |
| We generally pledge the receivables arising from our sales of VOIs to institutional lenders |
| We are also a party to a number of customary securitization-type transactions under which we sell receivables to a wholly-owned special purpose entity which, in turn, sells the receivables either directly to third parties or to a trust established for the transaction |
| If our pledged receivables facilities terminate or expire and we are unable to replace them with comparable facilities, or if we are unable to continue in our participation in securitizations on the terms currently available to us, our liquidity and cash flow would be materially and adversely affected |
| If any of our current facilities terminate or expire, there is no assurance that we will be able to negotiate the pledge or sale of such customer notes at favorable rates, or at all |
| We depend on additional funding to finance our operations |
| We anticipate that we will finance our future business activities, in whole or in part, with indebtedness that we obtain pursuant to additional borrowings under our existing credit facilities, under credit facilities that we may obtain in the future, under securitizations in which we may participate in the future or pursuant to other borrowing arrangements |
| However, we cannot assure you that we will be able to obtain sufficient external sources of liquidity on attractive terms, or at all |
| Moreover, we are, and will be, required to seek external sources of liquidity to: o support our operations; o finance the acquisition and development of VOI inventory and residential land; o finance a substantial percentage of our sales; and o satisfy our debt and other obligations |
| Our ability to service or to refinance our indebtedness or to obtain additional financing (including our ability to consummate future notes receivable securitizations) depends on our future performance, which is subject to a number of factors, including our business, results of operations, leverage, financial condition and business prospects, prevailing interest rates, general economic conditions and perceptions about the residential land and vacation ownership industries |
| Our success depends on our ability to market our products efficiently |
| We compete for customers with other hotel and resort properties and vacation ownership resorts |
| Accordingly, the identification of sales prospects and leads, and the marketing of our products to them are essential to our success |
| We have expended and expect to continue to expend significant amounts of our resources to identify and capitalize on future 27 customers and upgrade opportunities |
| Among our marketing initiatives, we utilize our proprietary computer software system to identify and target leads |
| The leads we identify are then contacted and given the opportunity to purchase mini-vacation packages which may sometimes combine hotel stays, cruises and gift premiums |
| Buyers of these mini-vacation packages are then usually required to participate in a vacation ownership sales presentation |
| We have incurred and will incur the expenses associated with these and our other marketing programs in advance of closing sales to the leads that we identify |
| If our lead identification and marketing efforts do not yield enough leads that we are able successfully to convert to a sufficient number of sales, we may be unable to recover the expense of our marketing programs and systems and our business may be adversely affected |
| We would incur substantial losses if the customers we finance default on their obligations to pay the balance of the purchase price |
| Under the terms of our pledged receivables facilities, we may be required, under certain circumstances, to replace receivables or to pay down the loan to within permitted loan to value ratios if our pledged receivables reach certain levels of delinquency |
| Additionally, the terms of our securitization-type transactions require us to repurchase or replace loans if we breach any of the representations and warranties we made at the time we sold the receivables, and include provisions that would require substantially all of our cash flows from the receivable portfolios sold to be diverted to the parties who purchased the receivables from us should defaults exceed certain thresholds |
| Further, if defaults and other performance criteria adversely differ from estimates used to value our retained interests in notes receivable sold in the securitization transactions, we may be required to write down these assets, which could have a material adverse effect on our results of operations |
| As servicer of the notes, we may also be required to advance delinquent payments to the extent we deem them recoverable |
| Accordingly, we bear some risks of delinquencies and defaults by buyers who finance the purchase of their VOIs or residential land through us, regardless of whether or not we sell or pledge the customerapstas loan to a third party |
| As of December 31, 2005, approximately 6prca of our vacation ownership receivables and approximately 12prca of residential land receivables which we held or which third parties held under sales transactions which are serviced by us were more than 30 days past due |
| The delinquency percentage for the overall portfolio serviced was 6prca as of December 31, 2005 |
| Although in many cases we may have recourse against a buyer for the unpaid purchase price, certain states have laws that limit our ability to recover personal judgments against customers who have defaulted on their loans or the cost of doing so may not be justified |
| Historically, we have generally not exercised such recourse against our customers |
| If we are unable to collect the defaulted amount or to obtain a voluntary quitclaim to the interest, if applicable, we traditionally have terminated the customerapstas interest in Bluegreen Vacation Club and then remarket the recovered VOI Irrespective of our remedy in the event of a default we cannot recover the marketing, selling, and administrative costs associated with the original sale, and we would have to incur such costs again to resell the VOI or homesite |
| Our results of operations and financial condition could be adversely impacted if our estimates concerning our notes receivable are incorrect |
| A portion of our revenues historically has been and is expected to continue to be comprised of gains on sales of notes receivable |
| The amount of any gains recognized and the fair value of the retained interests recorded are based in part on managementapstas best estimates of future prepayment, default and loss severity rates, discount rates and other considerations in light of then-current conditions |
| Our results of operations and financial condition could be adversely affected if: o actual prepayments with respect to loans sold occur more quickly than was projected; o actual defaults and/or loss severity rates with respect to loans sold are greater than estimated; or o the portfolio of receivables sold fails to satisfy specified performance criteria or in certain other circumstances |
| In any of these events, the cash flow on the retained interests in notes receivable sold could be reduced until the outside investors were paid or the regular payment formula was resumed |
| If these situations were to occur, it could cause a decline in the fair value of the retained interests and a charge to earnings currently |
| 28 We are subject to the risks of the real estate market and the risks associated with real estate development, including the risks and uncertainties relating to the cost and availability of land and construction materials |
| Real estate markets are cyclical in nature and highly sensitive to changes in national and regional economic conditions, including: o levels of unemployment; o levels of discretionary disposable income; o levels of consumer confidence; o the availability of financing; o overbuilding or decreases in demand; and o interest rates; A downturn in the economy in general or in the market for residential land or VOIs could have a material adverse effect on our business |
| In addition, the availability of land at favorable prices for the development of our Bluegreen Resorts and Bluegreen Communities real estate projects is critical to having adequate inventory to sustain our sales volume and maintain an adequate gross profit on our sales to cover our significant selling, general and administrative expenses, cost of capital and other expenses in order to generate favorable results of operations |
| Land prices increased significantly in 2005 |
| If we were unable to acquire such land or, in the case of Bluegreen Resorts, resort properties at a favorable cost, it could have an adverse impact on our results of operations |
| Another factor impacting the profitability of our real estate development activities is the cost of construction materials and services |
| Should the cost of construction materials and services rise, as recent trends have indicated, the ultimate cost of our Bluegreen Resorts and Bluegreen Communities inventories under development could increase and have a material, adverse impact on our results of operations |
| We may not successfully execute our growth strategy |
| A principal component of our growth strategy is to acquire additional real estate for the development of VOIs or completed VOIs, preferably in markets that also provide us with incremental sales distribution opportunities |
| We seek to acquire properties in destinations that we believe will complement our existing operations |
| In addition, we have to continually acquire additional real estate for Bluegreen Communities to develop and sell |
| Our ability to execute this growth strategy will depend upon a number of factors, including the following: o the availability of attractive real estate opportunities; o our ability to acquire properties for such development opportunities on economically feasible terms; o our ability to market and sell VOIs at newly developed or acquired resorts; o our ability to manage newly developed or acquired resorts in a manner that results in customer satisfaction; o our ability to develop, market and sell acquired real estate for Bluegreen Communities in a manner that results in customer satisfaction; and |
| o our capital structure |
| 29 In particular, the success of our Bluegreen Vacation Club will depend upon our ability to continue to acquire and develop a sufficient number of participating resorts to make membership interests attractive to consumers and to permit the continued growth of our vacation clubapstas membership |
| There is no assurance that we will be successful with respect to any or all of these factors |
| We may face a variety of risks when we expand our operations |
| Our growth strategy includes the expansion of the number of our resorts |
| Risks associated with such expansion include the following: o construction costs may exceed original estimates; o we may be unable to complete construction, conversion or required legal registrations and approvals as scheduled; o we may be unable to control the timing, quality and completion of any construction activity; o our quarterly results may fluctuate due to an increase or decrease in the number of residential land or VOI projects subject to "e percentage of completion accounting, "e which requires that we recognize profit on projects on a pro rata basis as development is completed; o market demand may not be present; o the value of our inventories may decline; and o increased regulation where initiating operations in new states |
| Any of the foregoing could adversely affect profitability in a material way |
| There is no assurance that we will complete all of our planned expansion of our properties or, if completed, that such expansion will be profitable |
| Moreover, to successfully implement our growth strategy, we must integrate the newly acquired or developed properties into our existing sales and marketing programs |
| During the start-up phase of a new resort or residential community project, we could experience lower operating margins at that project until its operations mature |
| The lower margins could be substantial and could negatively impact our cash flow |
| We cannot provide assurance that we will maintain or improve our operating margins as our projects achieve maturity and our new resorts and communities may reduce our overall operating margins |
| Claims for development-related defects could adversely affect our financial condition and operating results |
| We engage third-party contractors to construct our resorts and to develop our communities |
| However, our customers may assert claims against us for construction defects or other perceived development defects, including structural integrity, the presence of mold as a result of leaks or other defects, water intrusion, asbestos, electrical issues, plumbing issues, road construction, water and sewer defects, etc In addition, certain state and local laws may impose liability on property developers with respect to development defects discovered in the future |
| A significant number of claims for development-related defects could adversely affect our liquidity, financial condition, and operating results |
| We may face additional risks as we expand into new markets |
| We currently intend to acquire real estate for the development of VOIs or completed VOIs for Bluegreen Resorts both in the geographic areas where Bluegreen Resorts currently operates and in other areas |
| Bluegreen Communities intends to acquire real estate in the geographic areas where it currently operates as well as other areas where we anticipate successful sales of homesites in residential communities |
| Our prior success in the markets in which we currently operate does not ensure our continued success as we acquire, develop or operate future projects in new markets |
| Accordingly, in 30 connection with expansion into new markets, we may be exposed to a number of additional risks, including the following: o our lack of familiarity and understanding of regional or local consumer preferences; o our inability to attract, hire, train, and retain additional sales, marketing, and resort staff at competitive costs; o our inability to obtain, or to obtain in a timely manner, necessary permits and approvals from state and local government agencies and qualified construction services at acceptable costs; o our inability to capitalize on new marketing relationships and development agreements; and o the uncertainty involved in, and additional costs associated with, marketing VOIs and homesites prior to completion of marketed units |
| Bluegreen Communities primarily depends on third party lenders to finance the purchase of homesites as the majority of our residential land sales are currently financed by customers through local banks and finance companies |
| A decrease in the willingness of such lenders to extend financing to our customers could cause a decline in our sales or require material additional credit facilities in order to enable us to provide financing to our customers |
| The limited resale market for VOIs could adversely affect our business |
| Based on our experience at our resorts and at destination resorts owned by third parties, we believe that resales of VOIs generally are made at net sales prices below their original customer purchase price |
| The relatively lower sales price is partly attributable to the high marketing and sales costs associated with the initial sales of such VOIs |
| Accordingly, the initial purchase of a VOI may be less attractive to prospective buyers |
| Also, buyers who seek to resell their VOIs compete with our efforts to sell our VOIs |
| While VOI resale clearing houses or brokers currently do not have a material impact on our business, if a secondary market for VOIs were to become more organized and liquid, the resulting availability of resale VOIs at lower prices could adversely affect our prices and the number of sales we can close, which in turn would adversely affect our business and results of operations |
| Extensive federal, state and local laws and regulations affect the way we conduct our business |
| The federal government and the states and local jurisdictions in which we conduct business have enacted extensive regulations that affect the manner in which we market and sell VOIs and homesites and conduct our other business operations |
| In addition, many states have adopted specific laws and regulations regarding the sale of VOIs and homesites |
| Many states including the states of Florida and South Carolina, where some of the resorts are located, extensively regulate the creation and management of timeshare resorts, the marketing and sale of timeshare properties, the escrow of purchaser funds and other property prior to the completion of construction and closing, the content and use of advertising materials and promotional offers, the delivery of an offering memorandum and the creation and operation of exchange programs and multi-site timeshare plan reservation systems |
| Moreover, the South Carolina Supreme Court has, through a series of cases, ruled that the closing of real estate and mortgage loan transactions in the State of South Carolina must be conducted under the supervision of an attorney licensed in that state |
| In March 2005, a class action lawsuit was brought in the Court of Common Pleas for the 15th Judicial Circuit in South Carolina against an unaffiliated South Carolina timeshare developer alleging, among other things, that such timeshare developer did not comply with the requirements of the South Carolina Supreme Court decisions |
| That case remains pending and additional cases may be brought against other timeshare developers in South Carolina, including us |
| If such a case were to be brought against us and it is determined that we are in violation of South Carolina law, we may be subject to fines and purchasers of timeshare properties in South Carolina may have the right to rescind their respective transactions and seek the satisfaction of their related timeshare loan, all of which could have a material adverse effect on Bluegreenapstas results of operations and financial position |
| Most states also have other laws that regulate our activities, such as: o timeshare project registration laws; 31 o real estate licensure laws; o sellers of travel licensure laws; o anti-fraud laws; o consumer protection laws; o telemarketing laws; o prize, gift, and sweepstakes laws and o consumer credit laws |
| We currently are authorized to market and sell VOIs and homesites in all states in which our operations are currently conducted |
| If our agents or employees violate applicable regulations or licensing requirements, their acts or omissions could cause the states where the violations occurred to revoke or refuse to renew our licenses, which could materially and adversely affect our business |
| In addition, the federal government and the states and local jurisdictions in which we conduct business have enacted extensive regulations relating to direct marketing and telemarketing generally, including the federal governmentapstas national "e Do Not Call "e list |
| The regulations have impacted our marketing of VOIs and we have taken steps in an attempt to decrease our dependence on restricted calls |
| However, these steps have increased and are expected to continue to increase our marketing costs |
| We cannot predict the impact that these legislative initiatives or any other legislative measures that may be proposed or enacted now or in the future may have on our marketing strategies and results |
| Further, from time to time complaints are filed against the Company by individuals claiming that they received calls in violation of the regulation |
| Currently, most states have taxed VOIs as real estate, imposing property taxes that are billed to the respective property owners &apos associations that maintain the related resorts and have not sought to impose sales tax upon the sale of the VOI or accommodations tax upon the use of the VOI From time to time, however, various states have attempted to promulgate new laws or applying existing laws impacting the taxation of vacation ownership interests, to require that sales tax or accommodations be collected |
| Should new state or local laws be implemented or interpreted to impose sales or accommodations taxes on VOIs, our Resorts business could be materially adversely affected |
| We believe we are in material compliance with applicable federal, state, and local laws and regulations relating to the sale and marketing of VOIs and homesites |
| From time to time, however, consumers file complaints against us in the ordinary course of our business |
| We could be required to incur significant costs to resolve these complaints |
| There is no assurance that we will remain in material compliance with applicable federal, state and local laws and regulations, or that violations of applicable laws will not have adverse implications for us, including, negative public relations, potential litigation, and regulatory sanctions |
| The expense, negative publicity, and potential sanctions associated with any failure to comply with applicable laws or regulations could have a material adverse effect on our results of operations, liquidity or financial position |
| Environmental liabilities, including claims with respect to mold or hazardous or toxic substances, could have a material adverse impact on our business |
| Under various federal, state and local laws, ordinances and regulations, as well as common law, we may be liable for the costs of removal or remediation of certain hazardous or toxic substances, including mold, located on, in, or emanating from property that we own, lease, or operate, as well as related costs of investigation and property damage at such property |
| These laws often impose liability without regard to whether we knew of, or were responsible for, the presence of the hazardous or toxic substances |
| The presence of such substances, or the failure to properly remediate such substances, may adversely affect our ability to sell or lease our property or to borrow money using such real property as collateral |
| Noncompliance with environmental, health or safety requirements may require us to cease or alter operations at one or more of our properties |
| Further, we may be subject to common law claims by third parties based on damages 32 and costs resulting from violations of environmental regulations or from contamination associated with one or more of our properties |
| We could incur costs to comply with laws governing accessibility of facilities by disabled persons |
| A number of state and federal laws, including the Fair Housing Act and the Americans with Disabilities Act, impose requirements related to access and use by disabled persons of a variety of public accommodations and facilities |
| Although we believe our resorts are substantially in compliance with laws governing accessibility by disabled persons, we may incur additional costs to comply with such laws at our existing or subsequently acquired resorts |
| Additional federal, state, and local legislation with respect to access by disabled persons may impose further burdens or restrictions on us |
| We cannot forecast the ultimate cost of compliance with such legislation, but such costs could be substantial and, as a result, could have a material adverse effect on our results of operations, liquidity or capital resources |