February 16, 2000
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.
Certain statements herein and elsewhere in this report and the Company's other filings with the Securities and
Exchange Commission constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. You may identify these
statements by forward-looking words such as "may", "intend", "expect", "anticipate",
"believe", "estimate", "plan" or other comparable terminology. Such forward-looking
statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control,
that could cause the actual results, performance or achievements of the Company, or industry trends, to differ
materially from any future results, performance, achievements or trends expressed or implied by such forward-looking
statements. Given these uncertainties, investors are cautioned not to place undue reliance on such forward-looking
statements and no assurance can be given that the plans, estimates and expectations reflected in such statements
will be achieved. 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 and could cause the Company's
actual consolidated results to differ materially from those expressed in any forward-looking statements made by,
or on behalf of the Company:
a) 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 or the failure of the Company to comply with any law or regulation.
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 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 and/or sale 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 to the extent that development is not substantially
complete.
m) The failure of the Company to satisfy the covenants contained in the indentures governing certain of its debt
instruments and other credit agreements which, among other things, place certain restrictions on the Company's
ability to incur debt, incur liens and pay dividends.
n) The risk of the Company incurring an unfavorable judgement in any litigation or audit, and the impact of any
related monetary or equity damages.
o) Risks associated with selling Timeshare Interests in foreign countries including, but not limited to, compliance
with legal regulations, labor relations and vendor relationships.
The Company does not undertake to update forward-looking statements, even if the Company's situation may change
in the future.
GENERAL
Real estate markets are cyclical in nature and highly sensitive to changes in national, regional and international
economic conditions, including, among other factors, levels of employment and discretionary disposable income,
consumer confidence, available financing and interest rates. A downturn in the economy in general or in the market
for real estate could have a material adverse effect on the Company.
The Company recognizes revenue on residential land and Timeshare Interest sales when a minimum of 10% of the sales
price has been received in cash, the refund or rescission period has expired, collectibility of the receivable
representing the remainder of the sales price is reasonably assured and the Company has completed substantially
all of its obligations with respect to any development relating to the real estate sold. In cases where all development
has not been completed, the Company recognizes income in accordance with the percentage-of-completion method of
accounting. Under this method of income recognition, income is recognized as work progresses. Measures of progress
are based on the relationship of costs incurred to date to expected total costs. The Company has been dedicating
greater resources to more capital-intensive residential land and timeshare projects. As development on more of
these larger projects is begun, and based on the Company's ability and strategy to pre-sell projects when minimal
development has been completed, the amount of income deferred under the percentage-of-completion method of accounting
may increase significantly.
Costs associated with the acquisition and development of timeshare resorts and residential land properties, including
carrying costs such as interest and taxes, are capitalized as inventory and are allocated to cost of real estate
sold as the respective revenue is recognized.
The Company has historically experienced and expects to continue to experience seasonal fluctuations in its gross
revenues and net earnings. This seasonality may cause significant fluctuations in the quarterly operating results
of the Company. As the Company's timeshare revenues grow as a percentage of total revenues, the Company believes
that the fluctuations in revenues due to seasonality may be mitigated in part. 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
substantial development (with significant capital requirements).
The Company believes that inflation and changing prices have not had a material impact on its revenues and results
of operations during the nine months ended December 27, 1998 or January 2, 2000. Based on the current economic
climate, the Company does not expect that inflation and changing prices will have a material impact on the Company's
revenues or results of operations in the foreseeable future. To the extent inflationary trends affect short-term
interest rates, a portion of the Company's debt service costs may be affected as well as the interest rate the
Company charges on its new receivables from its customers.
The Company's real estate operations are managed under two divisions. The Resorts Division manages the Company's
timeshare operations and the Residential Land and Golf Division acquires large tracts of real estate which are
subdivided, improved (in some cases to include a golf course on the property) and sold, typically on a retail basis.
The results of operations from sales of remaining factory-built manufactured home/lot packages and undeveloped
lots, previously managed under the Company's Communities Division, have been combined with the results of operations
of the Residential Land and Golf Division in the current and prior periods, due to immateriality.
Inventory is carried at the lower of cost, including costs of improvements and amenities incurred subsequent to
acquisition, or fair value, net of costs to dispose.
A portion of the Company's revenues historically has been and is expected to continue to be comprised of gains
on sales of loans. The gains are recorded in the Company's revenues and retained interests in the portfolio are
recorded on its balance sheet (as investments in securities) at the time of sale. The amount of gains recorded
is based in part on management's estimates of future prepayment, default and loss severity rates and other considerations
in light of then-current conditions. If actual prepayments with respect to loans occur more quickly than was projected
at the time such loans were sold, as can occur when interest rates decline, interest would be less than expected
and earnings would be charged in the future when the retained interests are realized, except for the effect of
reduced interest accretion on the Company's retained interest, which would be recognized each period the retained
interests are held. If actual defaults or other factors discussed above with respect to loans sold are greater
than estimated, charge-offs would exceed previously estimated amounts and earnings would be charged in the future
when the retained interests are realized. There can be no assurances that the carrying value of the Company's investments
in securities will be fully realized or that future loan sales will result in gains.
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS) RESIDENTIAL
RESORTS LAND AND GOLF TOTAL
---------------------- ---------------------- ---------------------
THREE MONTHS ENDED DECEMBER 27, 1998
Sales ................................... $ 25,024 100.0 % $ 30,645 100.0 % $ 55,669 100.0 %
Cost of sales (1) ....................... (6,243) (24.9)% (14,536) (47.4)% (20,779) (37.3)%
--------- ----- --------- ----- --------- -----
Gross profit ............................ 18,781 75.1 % 16,109 52.6 % 34,890 62.7 %
Other resort and golf operations revenue 2,757 11.0 % 189 0.4 % 2,946 5.3 %
Cost of other resort and golf operations (2,757) (11.0)% (574) (1.8)% (3,331) (6.0)%
Field selling, general and administrative
expenses(2) ........................... (17,509) (70.0)% (8,195) (26.6)% (25,704) (46.2)%
--------- ----- --------- ----- --------- -----
Field operating profit .................. $ 1,272 5.1 % $ 7,529 24.6 % $ 8,801 15.8 %
========= ===== ========= ===== ========= =====
THREE MONTHS ENDED JANUARY 2, 2000
Sales ................................... $ 24,043 100.0 % $ 21,203 100.0 % $ 45,246 100.0 %
Cost of sales (1) ....................... (5,723) (23.8)% (11,575) (54.6)% (17,298) (38.2)%
--------- ----- --------- ----- --------- -----
Gross profit ............................ 18,320 76.2 % 9,628 45.4 % 27,948 61.8 %
Other resort and golf operations revenue 3,633 15.1 % 531 2.5 % 4,164 9.2 %
Cost of resort and golf operations ...... (2,894) (12.0)% (946) (4.5)% (3,840) (8.5)%
Field selling, general and administrative
expenses(2) ........................... (19,644) (81.7)% (5,781) (27.2)% (25,425) (56.2)%
--------- ----- --------- ----- --------- -----
Field operating (loss) profit ........... $ (585) (2.4)% $ 3,432 16.2 % $ 2,847 6.3 %
========= ===== ========= ===== ========= =====
NINE MONTHS ENDED DECEMBER 27, 1998
Sales ................................... $ 74,885 100.0 % $ 97,845 100.0 % $ 172,730 100.0 %
Cost of sales (1) ....................... (18,433) (24.6)% (44,754) (45.7)% (63,187) (36.6)%
--------- ----- --------- ----- --------- -----
Gross profit ............................ 56,452 75.4 % 53,091 54.3 % 109,543 63.4 %
Other resort and golf operations revenue 8,211 11.0 % 680 0.7 % 8,891 5.1 %
Cost of other resort and golf operations (7,422) (9.9)% (1,184) (1.2)% (8,606) (5.0)%
Field selling, general and administrative
expenses(2) ........................... (50,212) (67.1)% (26,396) (27.0)% (76,608) (44.3)%
--------- ----- --------- ----- --------- -----
Field operating profit .................. $ 7,029 9.4 % $ 26,191 26.8 % $ 33,220 19.2 %
========= ===== ========= ===== ========= =====
NINE MONTHS ENDED JANUARY 2, 2000
Sales ................................... $ 92,237 100.0 % $ 81,375 100.0 % $ 173,612 100.0 %
Cost of sales (1) ....................... (21,638) (23.5)% (38,485) (47.3)% (60,123) (34.6)%
--------- ----- --------- ----- --------- -----
Gross profit ............................ 70,599 76.5 % 42,890 52.7 % 113,489 65.4 %
Other resort and golf operations revenue 10,891 11.8 % 2,060 2.5 % 12,951 7.5 %
Cost of resort and golf operations ...... (8,659) (9.4)% (2,897) (3.6)% (11,556) (6.7)%
Field selling, general and administrative
expenses(2) ........................... (65,858) (71.3)% (20,470) (25.1)% (86,328) (49.8)%
--------- ----- --------- ----- --------- -----
Field operating profit .................. $ 6,973 7.6 % $ 21,583 26.5 % $ 28,556 16.4 %
========= ===== ========= ===== ========= =====
(1) COST OF SALES REPRESENTS THE COST OF INVENTORY INCLUDING THE COST OF
IMPROVEMENTS, AMENITIES AND IN CERTAIN CASES PREVIOUSLY CAPITALIZED
INTEREST AND REAL ESTATE TAXES.
(2) GENERAL AND ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO CORPORATE OVERHEAD HAVE
BEEN EXCLUDED FROM THE TABLES. CORPORATE GENERAL AND ADMINISTRATIVE
EXPENSES TOTALED $3.2 MILLION AND $4.8 MILLION FOR THE THREE MONTHS ENDED
DECEMBER 27, 1998 AND JANUARY 2, 2000, RESPECTIVELY, AND $10.8 MILLION AND
$13.9 MILLION FOR THE NINE MONTHS ENDED DECEMBER 27, 1998 AND JANUARY 2,
2000, RESPECTIVELY.
SALES
Consolidated sales decreased 18.7% from $55.7 million for the three-month period ended December 27, 1998 (the "1999 Quarter") to $45.2 million for the three-month period ended January 2, 2000 (the "2000 Quarter"). Consolidated sales increased 0.5% from $172.7 million for the nine-month period ended December 27, 1998 (the "1999 Period") to $173.6 million for the nine-month period ended January 2, 2000 (the "2000 Period"). Increases in Resorts Division sales during the 2000 Period were partially offset by lower Residential Land and Golf Division sales.
As of January 2, 2000, approximately $2.2 million in estimated income on sales of $4.7 million was deferred under percentage-of-completion accounting. At March 28, 1999, approximately $5.0 million in estimated income on sales of $11.4 million was deferred. All such amounts are included on the Condensed Consolidated Balance Sheets under the caption Deferred Income.
RESORTS DIVISION. During the 1999 Quarter and the 2000 Quarter, sales of Timeshare Interests contributed $25.0 million or 45.0% and $24.0 million or 53.1%, respectively, of the Company's total consolidated sales. During the 1999 Period and the 2000 Period, sales of Timeshare Interests contributed $74.9 million or 43.4% and $92.2 million or 53.1%, respectively, of the Company's total consolidated sales.
The table set forth below outlines the number of Timeshare Interests sold and the average sales price per Timeshare Interest for the Resorts Division for the periods indicated, BEFORE giving effect to the percentage-of-completion method of accounting.
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
DECEMBER 27, JANUARY 2, DECEMBER 27, JANUARY 2,
1998 2000 1998 2000
------------ ---------- ------------ ----------
Timeshare Interests sold 2,969 2,441 9,074 9,864
Average sales price per Timeshare Interest $8,619 $9,086 $8,675 $9,054
Gross margin 75.1% 76.2% 75.4% 76.5%
The increase in the number of Timeshare Interests sold during the 2000 Period was due in part to sales of Timeshare
Interests at the new phase of the Company's Orlando's Sunshine Resort in Orlando, Florida ("OSR II").
OSR II generated sales of 2,164 and 683 Timeshare Interests during the 2000 Period and 2000 Quarter, respectively,
with no corresponding sales during the 1999 Period. Construction on OSR II was completed in the 2000 Period. This
new phase consists of 60 two-bedroom vacation homes and features an outdoor pool, jacuzzi, lighted tennis courts
and a clubhouse. OSR II is estimated to be sold out during the first quarter of fiscal 2001, and is expected to
generate an additional $22.0 million in sales after the 2000 Quarter. There can be no assurances that such sell-out
of OSR II will occur when expected.
In addition, the Company reported sales of 1,158 and 262 Timeshare Interests at Phase II of the Company's Shore
Crest resort in Myrtle Beach, South Carolina ("Shore Crest II") during the 2000 Period and 2000 Quarter,
respectively, with no corresponding sales during the 1999 Period. Shore Crest II consists of 114 two-bedroom vacation
homes featuring balconies overlooking the creeks and marshes of the North Myrtle Beach area, an outdoor pool and
"lazy river" amenity and is across the street from the Company's ocean front Shore Crest Vacation Villas.
As of January 2, 2000, estimated remaining life-of-project sales (aggregate sales of the existing, currently under
construction and planned Timeshare Interests at current retail prices) of Shore Crest II were $65.2 million. Sales
at Phase I of Shore Crest decreased from 1,307 to 689 Timeshare Interests sold from the 1999 Period to the 2000
Period, respectively, and for 358 to 103 Timeshare Interests sold during the 1999 Quarter and 2000 Quarter, respectively,
as the one sales office at the Shore Crest complex now has an expanded product offering to sell, with the opening
of Shore Crest II.
Sales at the Company's Lodge Alley Inn resort in Charleston, South Carolina, which was acquired in September 1998,
consisted of 269 and 107 Timeshare Interests sold during the 2000 Period and 2000 Quarter, respectively, with no
sales during the 1999 Period and 1999 Quarter. The Lodge Alley Inn is an 89-room resort in the historic district
of Charleston and represents the Company's first "urban" timeshare product.
Sales of the Company's Christmas Mountain Village Resort inventory, located in Wisconsin Dells, Wisconsin, decreased
from 1,569 to 356 Timeshare Interests sold in the 1999 Period and the 2000 Period, respectively, and from 644 to
56 Timeshare Interests sold during the 1999 Quarter and 2000 Quarter, respectively. The decrease was due primarily
to the resort's focus on selling the OSR II Timeshare Interest inventory (see discussion above).
Sales at the Company's 50%-owned joint venture at the La Cabana Beach and Racquet Club, located in Aruba, decreased
from 527 Timeshare Interests to 181 Timeshare Interests from the 1999 Quarter to the 2000 Quarter, respectively,
and from 1,354 to 881 Timeshare Interests sold during the 1999 Period and 2000 Period, respectively. The resort
is experiencing a slowdown in operations during the 2000 Period and during the fiscal 2000 fourth quarter to date,
as a result of transitioning its sales staff from an employee leasing arrangement to permanent employee status,
which resulted in some attrition among the sales force.
The Company believes that the remaining decrease during the 2000 Quarter and partially offsetting decrease during
the 2000 Period were primarily due to the adverse impact of Hurricanes Dennis and Floyd on vacation traffic and
therefore sales tour flow at the Company's resorts in the South Carolina area during the Company's second and third
fiscal quarters, as well as the impact on sales during a transition period in the 2000 Quarter during which the
Company's Resorts Division regional management structure was reorganized to better position the Company for future
growth.
Average sales price per Timeshare Interest increased during the 2000 Quarter and the 2000 Period primarily due
to an increase in the average sales prices at the Company's La Cabana resort and the commencement of sales at the
Lodge Alley Inn resort. The average sales price at La Cabana increased from $7,107 to $8,398 from the 1999 Quarter
to the 2000 Quarter, respectively, and from $7,099 to $7,596 from the 1999 Period to the 2000 Period, respectively.
Sales at the Lodge Alley Inn resort commenced in the fourth quarter of Fiscal 1999. The average sales price at
Lodge Alley Inn for the 2000 Period was $12,755, representing the highest average price of all existing resorts.
The Resorts Division's gross margin increased from 75.4% during the 1999 Period to 76.5% during the 2000 Period
primarily due to the increased average sales prices discussed above and the approximately 80% gross margin generated
by sales of the Company's OSR II inventory. In addition, during the 2000 Period the Company recognized approximately
$655,000 of fees charged to existing timeshare owners to convert their fixed-weeks into points-based Timeshare
Interests in the Company's vacation club program ("Conversions"). The costs of Conversions to the Company
are minimal. Also, Bluegreen Properties N.V. ("BPNV"), the Company's 50%-owned joint venture in Aruba,
recognized approximately $525,000 in revenue with no corresponding costs of sales during the 2000 Period, pursuant
to a sales and marketing agreement whereby BPNV sells Timeshare Interests on behalf of a third party in Aruba.
Other resort revenues and related costs increased 31.8% and 5.0%, respectively, during the 2000 Quarter, and 32.6%
and 16.7%, respectively, during the 2000 Period, as compared to the comparable prior year periods, due to the results
of the hotel operations at the Company's Lodge Alley Inn resort. Lodge Alley hotel revenues were $855,000 and $1.1
million for the 2000 Quarter and the 2000 Period, respectively. Related costs were $621,000 and $761,000 for the
2000 Quarter and the 2000 Period, respectively. In addition, revenues generated by Resort Title Agency, Inc. ("Title"),
the Company's wholly-owned title company, increased approximately $1.1 million during the 2000 Period due to the
fact that all of the Company's vacation club sales are now processed through Title (last year not all sales were
vacation club sales). Also, the Company generated approximately $1.6 million and $500,000 during the 2000 Period
and 2000 Quarter, respectively, of management and reservation fee income earned for services provided to Vacation
Club members. Finally, the Company recognized an additional $300,000 of commissions during the 2000 Period as compared
to the 1999 Period which were earned by renting Timeshare Interests on behalf of owners.
Field selling, general and administrative ("SG&A") expenses increased as a percentage of sales for
the Resorts Division during the 2000 Quarter and 2000 Period, from the 1999 Quarter and Period, respectively. The
increases are due in part to decreased sales and increased employee costs as a result of the transition of the
sales staff at the La Cabana resort previously discussed. The La Cabana sales office generated SG&A of $1.9
million and $5.5 million on sales of $1.7 million and $7.2 million during the 2000 Quarter and 2000 Period, respectively.
In addition, the Company opened its fourth off-site sales office in Novi, Michigan (serving the Detroit market)
in November 1999. As this new sales site was still in the start-up phase during the 2000 Quarter, it generated
SG&A expenses totaling $638,000 on sales of $543,000. The Company's more mature off-site sales offices generated
an aggregate field operating profit of $325,000 on sales of $4.2 million during the 2000 Quarter.
The remaining increase in SG&A expenses as a percentage of sales relates to a decrease in the percentage of
marketing tours converted into sales from approximately 10.6% to 8.3% during the 1999 Period and 2000 Period, respectively.
The Company is refocusing the efforts of its sales force to better present the Bluegreen Vacation Club program
to its marketing tours and, as previously mentioned, the Company has also restructured its regional and sales management
to better position the Company to sell its points-based vacation club product and enhance the Company's ability
to grow in the future. There can be no assurances that the Company's efforts in these areas will have a positive
impact on the performance of the Resorts Division in the fourth quarter of fiscal 2000.
RESIDENTIAL LAND AND GOLF DIVISION. During the 1999 Quarter and the 2000 Quarter, residential land and golf sales
contributed $30.6 million or 55.0% and $21.2 million or 46.9%, respectively, of the Company's total consolidated
sales. During the 1999 Period and the 2000 Period, residential land and golf sales contributed $97.8 million or
56.6% and $81.4 million or 46.9%, respectively, to the Company's total consolidated sales.
The table set forth below outlines the number of parcels sold and the average sales price per parcel for the Residential
Land and Golf Division for the periods indicated, BEFORE giving effect to the percentage-of -completion method
of accounting and bulk sales.
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ------------------------------
DECEMBER 27, JANUARY 2, DECEMBER 27, JANUARY 2,
1998 2000 1998 2000
------------ ---------- ------------ ----------
Number of parcels sold 588 344 1,799 1,348
Average sales price per parcel $42,859 $50,375 $46,664 $50,441
Gross margin 52.6% 45.4% 54.3% 52.7%
The aggregate number of parcels sold decreased from the 1999 Quarter to the 2000 Quarter and from the 1999 Period
to the 2000 Period primarily due to several of the Company's projects achieving or approaching sell-out with no
properties being made available to replace Residential Land & Golf Division sales in certain markets. Specifically:
o The Company's Ranches of Sonterra property in Ruidoso, New Mexico, generated sales of 38 parcels and 78 parcels
during the 1999 Quarter and 1999 Period, respectively. No sales were reported in the 2000 Quarter or 2000 Period,
as the remaining inventory was sold out over the second half of Fiscal 1999. The Company has no plans to re-enter
the New Mexico market in the near future.
o Three of the Company's North Carolina properties, Hickory Bluffs, Bay Harbour and Seaside at Winding River, generated
50 aggregate lot sales during the 1999 Period. No sales were reported in the 2000 Period, as all of these properties
sold out over the second half of Fiscal 1999. In addition, lot sales at the Landing at Southport decreased from
25 sales to 2 sales in the 1999 Quarter and the 2000 Quarter, respectively, and from 86 sales to 39 sales in the
1999 Period and the 2000 Period, respectively. Inventory available for sale decreased as this property approached
sell-out in early Fiscal 2000. While the Company is actively seeking additional projects in the North Carolina
area, management does not expect any such properties to be acquired until Fiscal 2001. There can be no assurances
that such properties will be acquired.
o Combined sales at the Company's two Tennessee land properties, Crystal Cove and Woodlake, decreased from 52 parcels
sold in the 1999 Quarter to 19 parcels sold in the 2000 Quarter, and from 146 parcels sold in the 1999 Period to
77 parcels sold in the 2000 Period. Sales at these projects decreased as the properties are approaching the sell-out
phase and less inventory is available. Once these projects are sold out, the Company has no plans to acquire replacement
property in Tennessee in the foreseeable future.
o The Company's Dean's Reserve property, located in Orlando, Florida, generated sales of 28 parcels and 37 parcels
during the 1999 Quarter and 1999 Period, respectively. No sales were reported in the 2000 Quarter or 2000 Period,
as the remaining inventory was sold out in the third quarter of Fiscal 1999. The Company has no plans to re-enter
the Florida market in the near future.
o Lot sales at the Company's Ranch at Lake Ray Roberts property located in Mountain Spring, Texas (near Dallas),
decreased by 21 parcels from the 1999 Quarter to the 2000 Quarter, and by 57 parcels from the 1999 Period to the
2000 Period, as the property sold out in the first half of Fiscal 2000. The Company has already acquired additional
projects in the vicinity of Dallas, Texas, with estimated life-of-project sales of $116.2 million, based on current
pricing. These new projects are expected to commence sales in Fiscal 2001, although there can be no assurances.
o In the 1999 Quarter, 43 parcels were sold at the Lookout at Brushy Creek, compared to 17 parcels sold in the
2000 Quarter. The property, located outside of Austin, Texas, held its grand opening in the 1999 Quarter and generated
greater than average sales volume for that quarter.
o The sale of scattered inventory in areas of the country which are no longer part of the Company's focused residential
land business decreased from 70 sales to 22 sales in the 1999 Quarter and 2000 Quarter, respectively, and from
194 sales to 72 sales in the 1999 Period and 2000 Period, respectively. This reduction in the sales of scattered
inventory parcels had a positive impact on average sales price as these lots are typically sold at reduced prices
to liquidate the inventory.
The average sales price per parcel increased in both the 2000 Quarter and the 2000 Period as compared to the 1999
Quarter and 1999 Period. Average sales price per parcel at The Landing at Southport property in North Carolina
increased from $52,706 to $84,327 in the 1999 Quarter and the 2000 Quarter, respectively, and from $51,499 to $88,308
in the 1999 Period and 2000 Period, respectively. The 2000 Quarter and 2000 Period included sales of larger acreage,
waterfront parcels, compared to lower-priced interior lot sales in the 1999 Quarter and 1999 Period.
The average sales price at Mogollon Ranch, located in Arizona, increased from $74,021 to $114,988 in the 1999 Quarter
and the 2000 Quarter, respectively, and from $74,021 to $103,199 in the 1999 Period and the 2000 Period, respectively.
The increase in the 2000 Quarter and the 2000 Period reflects a sales price increase, which coincided with the
opening of Phase 2 of the property.
Average sales prices at the Company's Winding River Plantation project in North Carolina increased from $61,734
to $86,193 per parcel during the 1999 Quarter and 2000 Quarter, respectively, and from $59,020 to $80,179 per parcel
during the 1999 Period and 2000 Period, respectively. Average sales price per parcel at the Lake Ridge property
in Texas increased from $80,078 to $107,868 in the 1999 Quarter and the 2000 Quarter, respectively, and from $77,456
to $94,327 in the 1999 Period and the 2000 Period, respectively. The increase in average sales at both properties
is primarily the result of the opening of new higher-priced phases of existing properties, some of which feature
water-access parcels.
The average gross margin decreased from the 1999 Quarter to the 2000 Quarter and from the 1999 Period to the 2000
Period primarily due to higher-than-projected road costs associated with the Crystal Cove property, located in
Tennessee. In addition, certain sections of the Company's Lake Ridge property were impacted by temporary restrictions
on land clearing methods which resulted in significantly higher costs. Gross margins were also affected in the
2000 Quarter by the write-off of costs incurred on potential acquisitions located in Colorado and Arizona, on which
the Company has cancelled negotiations.
Included in the 2000 Period is a bulk sale of land and mineral rights in Colorado to a developer of oil and gas
rights, which contributed approximately $5.0 million and $4.3 million to Residential Land and Golf Division sales
and field operating profit, respectively.
INTEREST INCOME
Interest income was $4.1 million and $3.9 million for the 1999 Quarter and 2000 Quarter, respectively, and was
$11.4 million and $11.8 million for the 1999 Period and 2000 Period, respectively. The Company's interest income
is earned from its notes receivable, securities retained pursuant to sales of notes receivable (including REMIC
transactions) and cash and cash equivalents. The decrease in interest income during the 2000 Quarter was primarily
due to a decrease in the average cash and cash equivalent balance during the 2000 Quarter, as compared to the 1999
Quarter. The increase in interest during the 2000 Period was primarily due to an increase in the average cash and
cash equivalent balance during the 2000 Period as compared to the 1999 Period.
GAIN ON SALE OF NOTES RECEIVABLE
During the 1999 Quarter and 2000 Quarter, the Company recognized a $1.1 million and $693,000 gain on sale of notes
receivable, respectively, under a timeshare receivables purchase facility more fully described under "Liquidity
and Capital Resources - Credit Facilities for Timeshare Receivables and Inventories". The gain on sale of
notes receivable was $3.1 million and $1.6 million during the 1999 Period and 2000 Period, respectively.
The gain on sale of notes receivable decreased during the 2000 Quarter and 2000 Period due to an increase in the
weighted average term treasury rate during the 2000 Quarter and 2000 Period as compared to the 1999 Quarter and
1999 Period, respectively. The financial institution to which the Company sells its notes receivable earns a return
on the notes receivable purchased based on the weighted average term treasury rate plus 1.4%, with remaining interest
earned on the notes being paid to the Company after all servicing, custodial and similar fees and expenses have
been paid and a cash reserve fund account has been funded. The increase in the rate of return to the financial
institution resulted in a relatively lower residual interest to the Company in the remaining cash flows from the
portfolio sold, and thus a lower gain on sale.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S, G & A EXPENSES")
The Company's S, G & A Expenses consist primarily of marketing costs, advertising expenses, sales commissions
and field and corporate administrative overhead. S, G & A Expenses totaled $28.9 million and $30.2 million
for the 1999 Quarter and 2000 Quarter, respectively. S, G & A totaled $87.4 million and $100.3 million for
the 1999 Period and 2000 Period, respectively. As a percentage of total revenues, S, G & A Expenses were 45.3%
and 55.7% for the 1999 Quarter and 2000 Quarter, respectively, and were 44.5% and 50.0% for the 1999 Period and
2000 Period, respectively.
The increase in S, G & A Expenses as a percentage of revenues in the 2000 Quarter and 2000 Period was the result
of the growth of the Resorts Division (from 43% to 53% of consolidated sales during the 1999 Period and 2000 Period,
respectively), where S, G & A Expenses are typically higher than for the Residential Land and Golf Division.
See also discussions of increases in S, G & A expenses for the Company's Resorts Division, above.
INTEREST EXPENSE
Interest expense totaled $2.9 million and $3.5 million for the 1999 Quarter and 2000 Quarter, respectively, and
$10.0 million and $10.2 million for the 1999 Period and 2000 Period, respectively. The 20.9% increase in interest
expense for the 2000 Quarter was primarily due to interest incurred on approximately $28.0 million of acquisition
and development borrowings incurred at the end of the second quarter of fiscal 2000.
PROVISION FOR LOAN LOSSES
The Company recorded a provision for loan losses totaling $623,000 and $1.1 million during the 1999 Quarter and
2000 Quarter, respectively, and $1.5 million and $3.4 million during the 1999 Period and 2000 Period, respectively.
The increase in the provision was due to an increase in the notes receivable portfolio during the 2000 Quarter
and Period as compared to the 1999 Quarter and Period, respectively. The increase in the portfolio is due to an
increased amount of timeshare loans (where historical default rates exceed those for land loans), and therefore
higher provisions were recorded.
The allowance for loan losses by division as of March 28, 1999 and January 2, 2000 was (amounts in thousands):
RESIDENTIAL
LAND AND
RESORTS GOLF
DIVISION DIVISION OTHER TOTAL
--------- ---------- ------ -------
MARCH 28, 1999
Notes receivable $54,384 $11,105 $1,209 $66,698
Less: allowance for loan losses (1,983) (335) -- (2,318)
------- ------- ------ -------
Notes receivable, net $52,401 $10,770 $1,209 $64,380
======= ======= ====== =======
Allowance as a % of gross notes receivable 3.6% 3.0% --% 3.5%
====== ======= ====== =======
JANUARY 2, 2000
Notes receivable $65,232 $12,417 $1,169 $78,818
Less: allowance for loan losses (2,441) (459) -- (2,900)
------- -------- ------ -------
Notes receivable, net $62,791 $11,958 $1,169 $75,918
======= ======= ====== =======
Allowance as a % of gross notes receivable 3.7% 3.7% --% 3.7%
======= ======= ====== =======
The allowance for loan losses as a percentage of the gross notes receivable balance increased at January 2, 2000,
for the Residential Land and Golf Division, as the Company exchanged its residual investments in a 1994 REMIC transaction
for the underlying mortgages, a significant portion of which were delinquent. The 1994 REMIC investment was exchanged
during the 2000 Period in connection with the termination of the REMIC, as all of the senior 1994 REMIC security
holders had received all of the required cash flows pursuant to the terms of their REMIC certificates. Although
the Company had previously recorded an unrealized loss of $304,000 on this available-for-sale security, the Company
only realized a $179,000 loss on the exchange.
Other notes receivable primarily include secured promissory notes receivable from commercial enterprises upon their
purchase of bulk parcels from the Company's Residential Land and Golf Division. The Company monitors the collectibility
of these notes and has deemed them to be collectible based on various factors, including the value of the underlying
collateral.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased as a percentage of income before taxes from 40.0% to 39.0% during the
1999 Period and 2000 Period, respectively. The decrease was primarily due to state tax savings generated by a restructuring
of the Company's subsidiaries in a state where the Company has significant operations.
EXTRAORDINARY ITEM
The Company recognized a $1.7 million extraordinary loss on early extinguishment of debt, net of taxes, during
the 1999 Period in connection with the Offering of the Notes described in Note 6 of Notes to Condensed Consolidated
Financial Statements, contained elsewhere herein.
SUMMARY
Based on the factors discussed above, the Company's net income decreased from $4.3 million to a net loss of $785,000
in the 1999 Quarter and 2000 Quarter, respectively, and from $13.8 million to $9.5 million in the 1999 Period and
2000 Period, respectively.
CHANGES IN FINANCIAL CONDITION
Consolidated assets of the Company increased $51.2 million from March 28, 1999 to January 2, 2000. This increase
is primarily due to a net $48.0 million increase in inventory, primarily due to the acquisition of additional properties
with purchase prices totaling $36.7 million, and $62.9 million of development spending on the Company's resort
and residential land properties partially offset by inventory sold during the period. Among the properties acquired
during the 2000 Period was a 1,766 acre tract adjacent to the Company's successful Lake Ridge at Joe Pool Lake
residential land project in Dallas, Texas. The additional tract was acquired for approximately $11.6 million. The
Company also acquired a 6,966 acre tract of land for Mystic Shores, a new residential land project in Canyon Lake,
Texas, for approximately $14.9 million. Also, Brickshire, a new Bluegreen Golf Community situated on 1,135 acres
in New Kent County, Virginia, was acquired for approximately $4.3 million. In addition, as a result of the foreclosure
of property securing certain notes receivable from AmClub, Inc. (see Note 4 of Notes to Condensed Consolidated
Financial Statements), the Company received residential land and land for future resort development at the Shenandoah
Crossing Farm & Club resort in Gordonsville, Virginia with a carrying value of $3.3 million.
Consolidated liabilities increased $48.6 million from March 28, 1999 to January 2, 2000. The increase is primarily
due to an aggregate $52.8 million in borrowings for the acquisition and development of its resort, residential
land and golf projects. This increase was partially offset by $4.6 million of payments on line-of-credit facilities
and other notes payable.
Total shareholders' equity increased $3.0 million during the 2000 Period, primarily due to net income of $9.5 million
and $191,000 of proceeds and related income tax benefits from the exercise of stock options. These increases were
partially offset by the Company's repurchase of $7.0 million of Common Stock (1.4 million shares) to be held in
treasury. The Company's book value per common share increased from $4.76 to $4.87 at March 28, 1999 and January
2, 2000, respectively. The debt-to-equity ratio increased from 1.49:1 to 1.89:1 at March 28, 1999 and January 2,
2000, respectively, primarily due to the treasury stock purchases and additional borrowings discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital resources are provided from both internal and external sources. The Company's primary capital
resources from internal operations are: (i) cash sales, (ii) down payments on lot and timeshare sales which are
financed, (iii) principal and interest payments on the purchase money mortgage loans and contracts for deed arising
from sales of Timeshare Interests and residential land lots (collectively "Receivables") and (iv) proceeds
from the sale of, or borrowings collateralized by, notes receivable. 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 securities. The Company's capital resources are used to support the Company's operations,
including (i) acquiring and developing inventory, (ii) providing financing for customer purchases, (iii) meeting
operating expenses and (iv) satisfying the Company's debt, and other obligations. The Company anticipates that
it will continue to require external sources of liquidity to support its operations, satisfy its debt and other
obligations and to provide funds for future strategic acquisitions, primarily for the Resorts Division.
CREDIT FACILITIES FOR TIMESHARE RECEIVABLES AND INVENTORIES
The Company maintains various credit facilities with financial institutions that provide for receivable financing
for its timeshare projects.
On June 26, 1998, the Company executed a timeshare receivables purchase facility with a financial institution.
Under the purchase facility (the "Purchase Facility"), a special purpose finance subsidiary of the Company
may sell up to $100 million aggregate principal amount of timeshare receivables to the financial institution in
securitization transactions. The Purchase Facility has detailed requirements with respect to the eligibility of
receivables for purchase. Under the Purchase Facility, a purchase price equal to approximately 97% (subject to
adjustment in certain circumstances) of the principal balance of the receivables sold is paid at closing in cash,
with a portion deferred until such time as the purchaser has received their portion of principal payments (as defined
in the Purchase Facility agreement), a return equal to the weighted-average term treasury rate plus 1.4%, all servicing,
custodial and similar fees and expenses have been paid and a cash reserve account has been funded. If the Company
does not sell to such financial institution during the term of the Purchase Facility notes receivable with a cumulative
principal amount of at least $99 million, the return to the purchaser will increase by .05% for each $10 million
shortfall, to a maximum applicable margin of 1.60%. Receivables are sold without recourse to the Company or its
special purpose finance subsidiary except for breaches of representations and warranties made at the time of sale.
The financial institution's obligation to purchase under the Purchase Facility will terminate upon the occurrence
of specified events. The Company acts as servicer under the Purchase Facility for a fee, and is required to make
advances to the financial institution to the extent it believes such advances will be recoverable. The Purchase
Facility includes various conditions to purchase and other provisions customary for a transaction of this type.
The Purchase Facility has a term of two years, which expires in June 2000. Through January 2, 2000, the Company
sold approximately $90.8 million in aggregate principal amount of timeshare receivables under the Purchase Facility.
The Company has a two-year, $35 million timeshare receivables warehouse loan facility, which expires in June 2000,
with the same financial institution. Loans under the warehouse facility bear interest at LIBOR plus 2.75%. The
warehouse facility has detailed requirements with respect to the eligibility of receivables for inclusion and other
conditions to funding. The borrowing base under the warehouse facility is 95% of the outstanding principal balance
of eligible notes arising from the sale of Timeshare Interests. The warehouse facility includes affirmative, negative
and financial covenants and events of default. On June 30, 1999, the Company borrowed $8.9 million under the warehouse
facility, which will be repaid as principal and interest payments are collected on the timeshare notes receivable
which collateralize the loan, but in no event later than June 26, 2000. As of January 2, 2000, the outstanding
balance on this facility was $2.0 million, primarily due to $5.7 million of prepayments during the 2000 Period
in connection with the sale of some of the hypothecated receivables through the Purchase Facility. The Company
is currently negotiating an extension of the maturity date on this recent borrowing. There can be no assurances
that such negotiations will be successful.
In addition, the same financial institution referred to in the preceding paragraphs has provided the Company with
a $25 million acquisition and development facility for its timeshare inventories. The facility includes a two-year
draw down period, which expires in October 2000, and matures in November, 2005. Principal will be repaid through
agreed-upon release prices as Timeshare Interests are sold at the financed resort, subject to minimum required
amortization. The indebtedness under the facility bears interest at the three-month LIBOR plus 3%. With respect
to any inventory financed under the facility, the Company will be required to have provided equity equal to at
least 15% of the approved project costs. On September 14, 1999, the Company borrowed approximately $14 million
under the acquisition and development facility. The principal must be repaid by November 1, 2005, through agreed-upon
release prices as Timeshare Interests in the Company's Lodge Alley Inn resort in Charleston, South Carolina are
sold, subject to minimum required amortization. On December 20, 1999, the Company borrowed approximately $13.9
million under the acquisition and development facility (the borrowing capacity under this facility was increased
to $28.0 million in order to permit this loan). The principal must be repaid by January 1, 2006, through agreed-upon
release prices as Timeshare Interests in the Company's Shore Crest II resort are sold, subject to minimum required
amortization. The outstanding balance under the acquisition and development facility at January 2, 2000 was $27.0
million.
CREDIT FACILITIES FOR RESIDENTIAL LAND AND GOLF RECEIVABLES AND INVENTORIES
The Company has a $20.0 million revolving credit facility with a financial institution for the pledge of Residential
Land and Golf Division Receivables. The Company has historically used the facility as a warehouse until it accumulates
a sufficient quantity of residential land and golf receivables to sell under a private placement REMIC transaction
not registered under the Securities Act. There can be no assurances that the Company will accumulate a sufficient
quantity of receivables to make a REMIC transaction viable. Under the terms of this facility, the Company is entitled
to advances secured by eligible Residential Land and Golf Division receivables up to 90% of the outstanding principal
balance. In addition, up to $8.0 million of the facility can be used for land acquisition and development purposes.
The interest rate charged on outstanding borrowings ranges from prime plus 0.5% to 1.5%. At January 2, 2000, the
outstanding principal balances under the receivables and development portions of this facility were approximately
$7.5 million and $354,000, respectively. All principal and interest payments received on pledged Receivables are
applied to principal and interest due under the facility. The ability to borrow under the facility expires in September
2000. Any outstanding indebtedness is due in September 2002.
The Company has a $35.0 million revolving credit facility, which expires in March 2002, with a financial institution.
The Company uses this facility to finance the acquisition and development of residential land projects and, potentially
to finance land receivables. The facility is secured by the real property (and personal property related thereto)
with respect to which borrowings are made, with the lender to advance up to a specified percentage of the value
of the mortgaged property and eligible pledged receivables, provided that the maximum outstanding amount secured
by pledged receivables may not exceed $20.0 million. The interest charged on outstanding borrowings is prime plus
1.25%. On September 14, 1999, in connection with the acquisition of 1,766 acres adjacent to the Company's Lake
Ridge residential land project in Dallas, Texas ("Lake Ridge II"), the Company borrowed approximately
$12.0 million under the revolving credit facility. Principal payments will be effected through agreed-upon release
prices as lots in Lake Ridge II are sold. The principal must be repaid by September 14, 2004. On October 6, 1999,
in connection with the acquisition of 6,966 acres for a new residential land project in Canyon Lake, Texas, the
Company borrowed $11.9 million under the revolving credit facility. Principal payments will be effected through
agreed-upon release prices as lots in the new project are sold. The principal must be repaid by October 6, 2004.
On September 24, 1999, the Company obtained two lines-of-credit with a bank for the purpose of acquiring and developing
a new residential land and golf course community in New Kent County, Virginia, to be known as Brickshire. The lines-of-credit
have an aggregate borrowing capacity of approximately $15.8 million. On September 27, 1999, the Company borrowed
approximately $2.0 million under one of the lines-of-credit in connection with the acquisition of the Brickshire
property. The outstanding balances under the lines-of-credit bear interest at prime plus 0.5% and interest is due
monthly. Principal payments will be effected through agreed-upon release prices as lots in Brickshire are sold,
subject to minimum required quarterly amortization commencing on April 30, 2002. The principal must be repaid by
January 31, 2004. The loan is secured by the Company's residential land lot inventory in Brickshire.
Concurrent with obtaining the Brickshire lines-of-credit discussed above, the Company also obtained from the same
bank a $4.2 million line-of-credit for the purpose of developing a golf course on the Brickshire property (the
"Golf Course Loan"). The outstanding balances under the Golf Course Loan will bear interest at prime
plus 0.5% and interest is due monthly. Principal payments will be payable in equal monthly installments of $35,000
commencing September 1, 2001. The principal must be repaid by October 1, 2005. The loan is secured by the Brickshire
golf course property. As of January 2, 2000, no amounts were outstanding under the Golf Course Loan.
Over the past three years, the Company has received approximately 85% to 98% of its land sales proceeds 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. No assurances can be given that local
banks will continue to provide such customer financing.
Historically, the Company has funded development for road and utility construction, amenities, surveys and engineering
fees from internal operations and has financed the acquisition of residential land and golf properties through
seller, bank or financial institution loans. Terms for repayment under these loans typically call for interest
to be paid monthly and principal to be repaid through lot 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. 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.
OTHER CREDIT FACILITY
On November 3, 1999, the Company increased the borrowing capacity on its unsecured line-of-credit with a bank from
$5 million to $10 million. Amounts borrowed under the line will bear interest at LIBOR plus 1.75%. Interest is
due monthly and all principal amounts are due on December 31, 2000. Through January 2, 2000, the Company has not
borrowed any amounts under the line.
SUMMARY
The Company intends to continue to pursue a growth-oriented strategy, particularly with respect to its Resorts
Division. In connection with this strategy, the Company may from time to time acquire, among other things, additional
resort properties and completed Timeshare Interests; land upon which additional resorts may be built; management
contracts; loan portfolios of Timeshare Interest mortgages; portfolios which include properties or assets which
may be integrated into the Company's operations; and operating companies providing or possessing management, sales,
marketing, development, administration and/or other expertise with respect to the Company's operations in the timeshare
industry. In addition, the Company intends to continue to focus the Residential Land and Golf Division on larger
more capital intensive projects particularly in those regions where the Company believes the market for its products
is strongest, such as the Southeast, Southwest, Rocky Mountains and Western regions of the United States and to
replenish its residential land and golf inventory in such regions as existing projects are sold-out.
The Company estimates that the total cash required to complete preparation for the sale of its residential land
and golf and timeshare property inventory as of January 2, 2000 is approximately $218.0 million (based on current
costs), expected to be incurred over a five-year period. The Company plans to fund these expenditures primarily
with available capacity on existing or proposed credit facilities and cash generated from operations. There can
be no assurances that the Company will be able to obtain the financing necessary to complete the foregoing plans.
The Company believes that its existing cash, anticipated cash generated from operations, anticipated future permitted
borrowings under existing or proposed credit facilities and anticipated future sales of notes receivable under
the Purchase Facility (as proposed to be amended or any replacement facility) will be sufficient to meet the Company's
working capital, capital expenditures and debt service requirements for the foreseeable future. Based on outstanding
borrowings at January 2, 2000, and the credit facilities described above, the Company has approximately $84.3 million
of available credit at its disposal, subject to customary conditions, compliance with covenants and eligible collateral.
This amount does not include the remaining $9.2 million of unused capacity under the Purchase Facility or the $15.0
million of gross proceeds received by the Company upon the sale of the remaining 1.8 million shares of Common Stock
to the Funds on February 9, 2000, under the Stock Agreement. The Company will be required to renew or replace credit
facilities scheduled to expire in 2000. The Company will, in the future, also require additional credit facilities
or issuances of other corporate debt or equity securities in connection with acquisitions or otherwise. Any debt
incurred or issued by the Company may be secured or unsecured, bear fixed or variable rate interest and may be
subject to such terms as the lender may require and management deems prudent. There can be no assurance that sufficient
funds will be available from operations or under existing, proposed or future revolving credit or other borrowing
arrangements or receivables purchase facilities to meet the Company's cash needs, including, without limitation,
its debt service obligations.
The Company's credit facilities and other outstanding debt include customary conditions to funding, eligibility
requirements for collateral, certain financial and other affirmative and negative covenants, including, among others,
limits on the incurrence of indebtedness, limits on the payment of dividends and other restricted payments, the
incurrence of liens, transactions with affiliates, covenants concerning net worth, fixed charge coverage requirements,
debt-to-equity ratios and events of default. No assurances can be given that such covenants will not limit the
Company's ability to satisfy or refinance its obligations or otherwise adversely affect the Company's operations.
In addition, the Company's future operating performance and ability to meet its financial obligations will be subject
to future economic conditions and to financial, business and other factors, many of which will be beyond the Company's
control.
IMPACT OF YEAR 2000
STATUS
The Company believes it has resolved the potential impact of the year 2000 ("Y2K") issue on its processing
of date sensitive information in its information technology and operation and control systems. The Company, to
date, has not experienced any negative effects due to the Y2K problem, either internally or with its customers
or vendors. If the Company encounters Y2K problems during the year 2000, and if customers or vendors cannot rectify
Y2K issues, the Company could incur additional costs, which may be substantial, to develop alternative methods
of managing its business and replacing non-compliant equipment, and may experience delays in obtaining goods or
services from and making payment to vendors, and making sales and/or providing service to customers. The Company
has no contingency plans for critical functions in the event of non-compliance by its customers and vendors.
COST
The Company utilized both internal and external resources to remediate and test its systems regarding the Y2K issue.
The total cost of the Y2K project was $484,000 of which $421,000 has been capitalized and $63,000 has been expensed.
The Y2K project was funded through operating cash flows. The portion of the costs which were capitalized related
to the purchase of marketing software and hardware which would have been replaced for reasons other than the Y2K
issue. All internal payroll costs relating to the assessment, remediation and testing phases of the Y2K project
were expensed as incurred and are excluded from the above amounts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a complete description of the Company's foreign currency and interest rate related market risks, see the discussion
in the Company's Annual Report on Form 10-K for the year ended March 28, 1999. There has not been a material change
in the Company's exposure to foreign currency and interest rate risks since March 28, 1999.