Filed On 3/30/04 11:22am ET ˇ SEC File 0-32859 ˇ Accession Number 950005-4-315
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
3/30/04 Bfa Liquidation Trust 10-K 12/31/03 3:39 Pacific Fin..Printing/FA
Document/Exhibit Description Pages Size
1: 10-K Annual Report 36 211K
2: EX-31 Certifications of Jessup and Roberts 2 15K
3: EX-32 Certification of Jessup and Roberts 1 7K
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-32859
BFA LIQUIDATION TRUST
(Exact name of registrant as specified in its charter)
Arizona 86-1018485
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 N. Central Ave., Suite 900, Phoenix, Arizona 85012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 279-3587
Former Address: 1313 E. Osborn Rd, Suite 250, Phoenix, AZ 85014
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Act [ ] 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 March 29, 2004,
448,610,056 units of Class A Beneficial Interests and 137,246,636 units of Class
B Beneficial Interests were outstanding.
BFA Liquidation Trust
Form 10-K
Table of Contents
PART I
Item 1. Business. 1
Item 2. Properties. 2
Item 3. Legal Proceedings. 2
Item 4. Submission of Matters to a Vote of Security Holders. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data. 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation. 7
Item 7A. Qualitative and Quantitative Disclosures about Market Risk. 11
Item 8. Financial Statements and Supplementary Data. 12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 27
Item 9A. Controls and Procedures. 27
PART III
Item 10. Directors and Executive Officers of the Registrant. 28
Item 11. Executive Compensation. 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. 30
Item 13. Certain Relationships and Related Transactions. 32
Item 14. Principal Accounting Fees and Services. 32
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 32
PART I
Item 1. Business.
The BFA Liquidation Trust (the "TRUST") was formed pursuant to the "First
Amended Joint Liquidating Plan of Reorganization of the Debtors Under Chapter 11
of the Bankruptcy Code" proposed by the Baptist Foundation of Arizona ("BFA")
and related subsidiaries and affiliates (collectively, the "DEBTORS"), Official
Collateralized Investors' Committee and Official Joint Committee of Unsecured
Creditors, relating to Case No. 99-13275 ECF GBN (the "PLAN"), which was
confirmed by the Bankruptcy Court for the District of Arizona (the "BANKRUPTCY
COURT"), by an order entered on December 22, 2000 (the "CONFIRMATION ORDER") and
effective on January 22, 2001 (the "EFFECTIVE DATE").
The primary purpose of the Trust is to (i) oversee and direct the liquidation of
the assets that were transferred to the Trust pursuant to the Plan (the "TRUST
ASSETS") for the benefit of the beneficiaries of the Trust (the "BENEFICIARIES")
in accordance with Treasury Regulation Section 301.7701-4(d), (ii) prosecute all
litigation claims for the benefit of the Trust, and (iii) distribute any
proceeds of the litigation claims and the Trust Assets received by the Trust to
the Beneficiaries. The Trust is not operated with the objective of continuing or
engaging in the conduct of a trade or business, except to the extent reasonably
necessary to preserve or enhance the value of the Trust Assets, and consistent
with the liquidating purpose of the Trust.
Pursuant to the Plan, a liquidating trustee (the "LIQUIDATING TRUSTEE") and a
liquidating trust board (the "LIQUIDATING TRUST BOARD") have been appointed to
oversee the liquidation of the Trust Assets. Currently, the Liquidating Trustee
and the Liquidating Trust Board are overseeing the liquidation of the Trust
Assets ensuring that such liquidation is conducted in a cost-effective manner
and in a reasonable time, with due regard for the risk that undue haste may
minimize the liquidation proceeds of a particular Trust Asset. In addition, the
Liquidating Trustee and the Liquidating Trust Board are using best efforts to
make timely distributions and to minimize the duration of the Trust. In
overseeing the selling of the Trust Assets, the Liquidating Trustee and the
Liquidating Trust Board are using best efforts to maximize the amount of the
proceeds derived there from. The liquidation of the Trust Assets may be
accomplished either through the prosecution, compromise and settlement,
abandonment or dismissal of any or all claims, rights or causes of action, or
otherwise subject to the terms of the Plan.
The Trust is set to terminate on the later of: (i) the date of entry by the
Bankruptcy Court of the final decree which fully and finally closes the Chapter
11 cases (the "FINAL DECREE"); or (ii) the date upon which all of the Trust
Assets have been distributed to the Beneficiaries and there are no remaining
assets expected to be received in the Trust Assets, provided, however, that the
Trust will terminate no later than the fifth (5th) anniversary of the Effective
Date. On or prior to such termination date, the Bankruptcy Court, upon motion by
a party in interest, may extend the term of the Trust upon a finding by the
Bankruptcy Court that the extension is necessary for the liquidating purposes of
the Trust. Extensions may be obtained so long as each extension is approved by
the Bankruptcy Court six (6) months prior to the expiration of the original term
and each extended term.
After the termination of the Trust and for the purpose of liquidating and
winding up the affairs of the Trust, the Liquidating Trustee will continue to
act in such capacity until its duties have been fully performed. Upon
distribution of the entire Trust Assets and entry of the Final Decree and unless
ordered otherwise by the Bankruptcy Court as part of the Final Decree, the
Liquidating Trustee will retain for a period of two (2) years the books,
records, Beneficiary lists, securities register, and certificates and other
documents and files which will have been delivered to or created by the
Liquidating Trustee. Subject to the final decree, at the Liquidating Trustee's
discretion, all of such records and documents may, but need not, be destroyed at
any time after two (2) years from the completion and winding up of the affairs
of the Trust. Except as otherwise specifically provided in the Trust Agreement
dated January 22, 2001 (the "TRUST AGREEMENT"), upon the discharge of all
liabilities of the Trust, final distribution of the entire Trust Assets and
entry of the Final Decree, the Liquidating Trustee will have no further duties
or obligations relating to the Trust.
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Availability of SEC Reports
The Trust' s website address is www.bfalt.org. The Trust makes available free of
charge through its internet website or mail, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
these reports filed or furnished pursuant to Section 13(a) or 15 (d) of the
Securities Exchange Act of 1934, as amended as soon as reasonably practicable
after the Trust electronically files such material with or furnishes it to the
SEC. Materials posted on the Trust' s website are not incorporated by reference
into this annual report on Form 10-K.
Item 2. Properties.
The Trust does not have any material physical properties, except for such
properties that are held for sale.
Item 3. Legal Proceedings.
Arthur Andersen
On January 23, 2003, the Trust distributed approximately $174.7 million
which represented the remaining proceeds of the $217 million settlement with
BFA's former auditor Arthur Andersen, LLP ("AA"), net of legal fees of
approximately $32.9 million and litigation expenses incurred for prosecuting the
litigation of approximately $4.0 million, to the Beneficiaries in conjunction
with a plan of allocation approved by the Superior Court for the State of
Arizona, Maricopa County (the "SUPERIOR COURT"). This distribution marked the
culmination of a year in which the settlement with AA fell apart in the wake of
AA's indictment by the United States Department of Justice, only to be restored
after commencing trial of the action.
The terms of the settlement provided for the bulk of the funds to
remain in escrow and not be distributed to investors until a variety of events
had occurred, including: (i) approval of the settlement by the Bankruptcy Court
and the Superior Court; (ii) approval of a plan of allocation of the settlement
proceeds among investors by the Superior Court; and (iii) resolution of any
appeals taken from orders entered by the courts approving the settlement or plan
of allocation. The Bankruptcy Court and the Superior Court approved the
settlement in July and September 2002, respectively, over the objections of
various parties. Certain of these parties appealed the approval of the
settlement, which delayed the distribution of the funds for several months. In
late December 2002, the last of these appeals was resolved, allowing the Trust
to distribute the funds to investors on January 23, 2003 pursuant to the plan of
allocation approved by the Superior Court.
Jennings Strouss & Salmon PLC
On December 27, 2002, the Trust distributed approximately $18.0 million
which represented the net proceeds of the $21 million settlement with BFA's
former counsel Jennings Strouss & Salmon PLC ("JSS"), net of attorneys fees and
litigation expenses, to investors in conjunction with the same court-approved
plan of allocation governing the AA settlement proceeds. The Trust was able to
obtain this settlement without commencing formal litigation against JSS, which
not only would have resulted in significant expense, but also may have delayed
the trial in the AA action.
Former Directors, Accountants and Affiliated Parties
The Trust has spent substantial time investigating potential claims
against third parties and analyzing insurance policies that could provide
insurance coverage for claims by the Trust against potentially responsible third
parties. As a result of these investigations, which included reviewing thousands
of documents and interviewing dozens of individuals involved in the demise of
the Debtors, the Trust identified multiple parties against whom it possessed
viable claims arising from the Debtors' fraud. As a result, the Trust filed
various adversary proceedings against these potentially responsible parties,
including the following:
- L. Dwain Hoover and Affiliates: On February 15, 2000, BFA
filed an adversary
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proceeding in the Bankruptcy Court against L. Dwain Hoover, a
former BFA director, and the related parties that he owns or
controls (collectively, "HOOVER"). The case alleged, inter
alia, that Hoover had entered into a series of transactions
wherein he and/or his companies borrowed money from companies
managed by BFA and then lent that money to another company, at
higher rates of interest. As a result, Hoover earned large
profits while having little if any risk, at the expense of BFA
and its managed companies. On November 7, 2001 the Trust
brought a second adversary proceeding against L. Dwain Hoover
and several other parties alleging that by breaching their
fiduciary duties as directors, officers or professionals hired
by BFA or its affiliated companies, the defendants had
assisted BFA's senior management in disguising the true
financial condition of BFA.
- Harold Friend and Affiliates: In 2000, BFA filed a lawsuit
against Harold Friend and two companies co-owned by Mr. Friend
and BFA-related companies seeking a full accounting of his
financial records and business dealings with BFA and its
former senior management team. Mr. Friend was reported to be a
benefactor of BFA through much of the time that the fraud
occurred, and engaged in various transactions with BFA. The
Trust alleged that, in reality, Mr. Friend and his affiliated
entities facilitated the fraud through these transactions,
which benefited Mr. Friend to the detriment of BFA.
- Edgar Alan Kuhn: Mr. Kuhn served as the nominal head of
E.V.I.G., Inc. ("EVIG"), a purportedly unrelated entity with
which BFA engaged in numerous real estate transactions. The
Trust alleged that, in reality, EVIG was controlled by BFA,
and was used for the purpose of allowing BFA to record profits
from the sale of non-performing properties at prices
significantly above their true market value. The Trust further
alleged that BFA funded these sales through a series of
"swirl" transactions, through which BFA funneled money to
EVIG, which EVIG then used to purchase the non-performing
assets from BFA at inflated prices, thereby perpetuating the
fraud.
- Jalma Hunsinger and Affiliates: Mr. Hunsinger served as the
nominal head of A.L.O., Inc. ("ALO"), another purportedly
unrelated entity with which BFA engaged in numerous real
estate transactions. Similar to the EVIG matter, the Trust
alleged that ALO was actually controlled by BFA, and was used
for the purpose of hiding losses incurred from non-performing
assets through bogus sale transactions. As in the case of
EVIG, BFA funded these bogus sales through a series of swirl
transactions which perpetuated the fraud.
- Arizona Southern Baptist Convention: BFA was a member
organization of the Arizona Southern Baptist Convention
("ASBC"), and a representative of the ASBC served as an ex
officio member of the BFA Board throughout the period of the
fraud. The Trust alleged that the ASBC breached its fiduciary
duties to BFA by failing to take a more active role in
detecting and halting the fraud.
- Nelson Lambson and Henry & Horne: BFA engaged these two (2)
accounting firms to perform audits ensuring that BFA complied
with relevant IRS regulations to serve as a non-bank passive
custodian of Individual Retirement Accounts. The Trust alleged
that these firms committed malpractice in failing to discover
that BFA had not complied with these requirements.
An agreement to (i) settle both adversary proceedings against Hoover,
and (ii) resolve the claims against Harold Friend and affiliates, Edgar Allen
Kuhn, Jalma Hunsinger and affiliates, ASBC, and Nelson Lambson and Henry &
Horne, was reached in December 2002 for an aggregate settlement of $16.5 million
in cash and real property. In addition, each of the settling parties agreed to
waive all claims totaling $37.0 million filed against BFA with the Bankruptcy
Court. Also as part of the settlement, Mr. Hoover agreed to drop an appeal he
had filed with respect to the Bankruptcy Court's approval of the AA settlement
clearing
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the way for distribution of these funds on January 23, 2003. The cash portions
of these settlements were distributed during 2003.
Crotts and Grabinski
During late 2001, the Trust commenced two (2) separate adversary
proceedings in the Bankruptcy Court against William Crotts and Thomas Grabinski,
the Chief Executive Officer and General Counsel, respectively, of BFA during the
period that the fraud occurred. The Trust alleges that Messrs. Crotts and
Grabinski were the primary architects of the fraud, thereby breaching their
fiduciary duties to BFA and its investors. The Trust has successfully defeated
motions by Crotts and Grabinski to dismiss the action, and since that time has
engaged in extensive discovery with these parties. During this discovery process
the Trust and class action were able to reach a settlement with the defendant's
and Debtors' insurance carrier, National Union, in the gross amount of $3.75
million. The settlement calls for the Trust to dismiss its cases against Messrs.
Crotts and Grabinski. The settlement consists of gross proceeds of $3.75 million
less legal fees and expenses of approximately $550,000 for a net amount of
approximately $3.2 million. Both the Superior Court and Bankruptcy Court
approved the settlement on October 17, 2003 and October 21, 2003, respectively.
The National Union Settlement became final and the funds were distributed on
December 19, 2003.
Cook Charitable Trust Claim and Related Matters
This claim arises out of the Sovereign Sherwood Crossing LLC venture in
which Cook Charitable Trust and Sovereign Realty Advisors ("SRA") were
shareholders. In 1999, BFA exercised its power as trustee of the Cook Charitable
Trust ("CCT") to arrange for CCT to contribute $6.3 million in capital and
substitute for a BFA subsidiary as a shareholder in the entity purchasing the
Sherwood Crossing apartment complex. CCT alleges that, among other things, BFA
breached its fiduciary duties to CCT by investing virtually the entire corpus of
the trust in Sovereign Sherwood Crossing and by permitting SRA to receive a
substantial equity stake in the entity without contributing any capital. CCT
brought an arbitration proceeding against SRA, in which the Trust produced
documents and witnesses. That case was settled in September 2002 with CCT buying
out SRA's interest for $4 million, exclusive of approximately $1.1 million in
prior distributions to SRA. CCT sought to recoup its payments to SRA in its
claim against BFA. The Trust has settled this claim and as of June 30, 2003 no
liability remains outstanding.
Phoebus Communications
With respect to loans that BFA made to Gail Arnall (William Crotts'
sister) and her company, Phoebus Communications, the Trust brought suit on
delinquent promissory notes made by Phoebus Communications and Ms. Arnall.
Judgment was obtained against Phoebus Communications, Ms. Arnall and her
ex-husband in an amount of approximately $175,000 (the full amount of the debt
plus all attorneys' fees and pre- and post-judgment interest). In 2002 the
defendants filed a motion to set aside the default judgment on grounds that they
had inadequate notice. That motion was denied on January 9, 2003. Enforcement
proceedings were initiated in 2002 in Maryland, where Phoebus is located, and
the court denied a motion to dismiss or stay those proceedings on January 10,
2003. In March, 2003 the Trust approved a settlement of $ 140,000 in
satisfaction of the judgment and according to the terms of the settlement
received payment.
Chaparral Pines
In 2002 a complaint alleging four (4) separate causes of action was
filed in the Superior Court against BFA's former limited liability company
member, Chaparral Pines, LLC, in the development of the Chaparral Pines
property. The complaints center around the mismanagement of the property by the
defendant. Chaparral Pines filed a Motion to dismiss the complaint. After
briefings and argument, the Superior Court has allowed the Trust to proceed on
three of the four counts in the complaint. Discovery has commenced. Because of
the substantial nature of the Chaparral Pines project, the defendants' were
working to accumulate all the construction-related documents. During that time
the Trust was able to reach a settlement agreement with Chaparral Pines LLC
consisting of the Trust receiving $300,000 in cash and
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real estate valued at approximately $420,000 net of selling costs. The
settlement agreement must now be signed by both parties and approved by the
Superior Court to become final. The Trust has recorded this asset in its fair
value of expected cash flows from settlements net of various discounts at
December 31, 2003.
William Blair
In an effort to avoid repaying $4 million dollars in debt to the Trust,
Mr. William Blair has engaged in a number of legal maneuvers. In 2001, the Trust
filed a Notice of Trustee's Sale on the collateral securing repayment on one of
the Notes (the "DESERT DIAMOND NOTE"). The Trust separately filed a lawsuit and
obtained a judgment against Mr. Blair individually as a co-maker under the
Desert Diamond Note. That debt has been reduced to judgment in an amount of $1.4
million dollars, plus interest at 19% until paid in full. With regard to Mr.
Blair's second obligation (the "CAMPBELL NOTE") the Superior Court entered
judgment on March 19, 2003 against both Mr. Blair and his trust in the amount of
$1,418,329.82 with interest at the rate of 18% from August 13, 2001, until paid.
The Trust has authorized the initiation of a new lawsuit to recover a
substantial number of real property transfers made by Mr. Blair to mostly third
party related entities on the eve of the Superior Court judgments. These claims
will be pursued under Arizona state law theories of fraudulent transfer. The
Trust now has successfully litigated and received judgments on the two (2)
Superior Court actions and defended the Trust's claims against the actions of
Mr. Blair in connection with the Desert Diamond bankruptcy. This bankruptcy
included a proposed cram down plan and an adversary lawsuit to modify the
underlying contract. The assets of the bankruptcy estate have been liquidated
and the proceeds from the sale of the assets have been distributed to the Trust.
With regard to the remaining action against Fidelity Title (the "TITLE COMPANY")
the Title Company hired by Mr. Blair to transfer title to portions of the
Trust's collateral to third parties without lien releases, the Bankruptcy Court
recently granted the Title Company's Motion for Reconsideration and reversed its
prior ruling. The effect is that the Bankruptcy Court has upheld an alleged
contract modification disallowed by a different judge in an earlier litigation.
If the Bankruptcy Court's ruling stands as issued, the Trust would be required
to release its liens on the remaining real property collateral for a release
price of $12,500/lot (a total of $275,000 for the remaining lots). The Title
Company also has on file a Motion for Award of Fees seeking an award of
approximately $138,000 in fees and costs incurred. The Bankruptcy Court awarded
the Title Company an amount of $44,000 for fees and costs. The Trust is
appealing both rulings made by the Bankruptcy Court relating to the Title
Company matters.
W.H.H.C
The Trust holds a note receivable in an outstanding amount of approximately $2
million dollars from W.H.H.C. Through this note the Trust has begun foreclosing
on approximately 70 acres of real property located in Maricopa County, Arizona
as a partial payment on the outstanding note. A lawsuit has been filed in the
Superior Court to foreclose on the mortgage and obtain a judgment against the
real property. Two (2) of the defendants have made a claim in the form of an
affirmative defense, that the Trust has filed a wrongful claim against the real
property. Three (3) of the defendants have now filed answers. The remaining four
(4) defendants claim no interest in the real property. The estimated value of
the 70 acres of real property has been included in the notes receivable portion
of the accompanying consolidated financial statements.
Glen Crotts
On November 12, 2003 the Trust filed an adversary proceeding against Glen and
Nannie Lou Crotts and the Glen E. Crotts Revocable Trust ("CROTTS"). Glen and
Nannie Lou Crotts are the parents of past BFA president William Crotts and Glen
Crotts served as president of BFA prior to William Crotts. The complaint sets
forth four claims against the Crotts. The first two claims seek to recover
monies owed in excess of $750,000 on two promissory notes to the Trust now in
default. The third claim asserts that the Crotts assisted BFA senior management
in creating misleading financial statements in 1994 and 1995 through
participation in real estate transactions. The fourth and final claim is to
recover $296,000 withdrawn from the investment accounts held at BFA during the
one-year period prior to BFA filing for bankrupcty protection as a preference
amount. The Crotts have denied the assertions in all the claims and
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have filed counterclaims against the Trust for withholding distributions on
$537,219 of their investments in BFA and $18,000 from another partnership. The
Crotts and the Trust have agreed to mediation, which is scheduled to start on
May 3, 2004. No amount has been recorded in the accompanying consolidated
financials statements related to these claims and counterclaims.
Disputed Proofs of Claims
A number of creditors filed proofs of claims in the Debtors' bankruptcy
proceedings. As of December 31, 2003 all of these claims have been resolved and
either paid in full (if any amount was due) or fully reserved for (if disputed).
Item 4. Submission of Matters to a Vote of Security Holders.
The Trust has no outstanding voting securities and, thus, no matters were
submitted to a vote of security holders during the year ended December 31, 2003.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
Class 3A and 3B beneficial interests are not listed or traded on a public
exchange.
The following is a schedule of cash distributions NET OF DISPUTED ACCOUNT
RESERVES made to holders of Class 3A and 3B Trust beneficial interest holders
and other classes for the years ending December 31, 2003 and December 31 ,2002:
ˇ Enlarge/Download Table
January 1, 2003 to January 1, 2002 to
December 31, 2003 December 31, 2002
--------------------- ---------------------
Class 3A and 3B holders - Trust Asset proceeds $75,750,000 $20,950,000
Class 3A and 3B holders - Trust's share of litigation proceeds (*) 93,470,000 12,250,000
All Other Class holders 6,330,000 4,350,000
--------------------- ---------------------
Total Distributions $175,550,000 $37,550,000
===================== =====================
Note (*) - During 2003 the Trust distributed approximately $186.9 million in
litigation proceeds. On December 27, 2002 the Trust distributed approximately
$24.5 million in litigation proceeds. Per the court approved plan of allocation,
50% of these proceeds were allocated to the Trust and the remaining 50 % was
distributed to the class action members. The amount detailed in this schedule
reflects only the Trust's 50% share of these proceeds for 2003 and 2002.
Item 6. Selected Financial Data.
The selected historical financial data presented below for the year ended
December 31, 2003, for the year ended December 31, 2002 and for the period from
January 22, 2001 to December 31, 2001 are derived from our consolidated
financial statements. The selected financial data should be read in conjunction
with Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and related
notes included in Item 8.
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ˇ Enlarge/Download Table
January 1, January 1, January 22,
2003 to 2002 to 2001 to
December 31, December 31, December 31,
2003 2002 2001
---------------- --------------- ---------------
Net Assets in liquidation, beginning $ 194,833,341 $ 128,980,963 $ 171,414,559
Interest on notes receivable 3,324,670 6,230,184 7,409,609
Interest on notes payable (120,579) (564,192) (1,057,361)
Changes in fair value of other trust assets and liabilities (2,023,541) 92,189,547 (1,705,848)
Changes in fair value of estimated costs to complete liquidation (1,032,616) 675,351 --
Distributions to holders of Class 3A and 3B beneficial interests (163,315,462) (32,678,512) (47,079,996)
------------- ------------- -------------
Net assets in liquidation, ending $ 31,665,813 $ 194,833,341 $ 128,980,963
============= ============= =============
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Certain statements under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operation," "Business," and elsewhere in this
report constitute "forward-looking statements" within the meaning of the rules
and regulations promulgated by the Securities and Exchange Commission.
This report contains a number of forward-looking statements, which reflect the
Trust's current views with respect to future events and financial performance.
Such forward-looking statements are based on management's beliefs and
assumptions regarding information that is currently available, and are made
pursuant to the "safe harbor" provisions of the federal securities laws. These
forward-looking statements are subject to certain risks and uncertainties. The
Trust's actual performance and results could differ materially from those
expressed in the forward-looking statements due to risks and uncertainties that
could materially impact the Trust in an adverse fashion and are only predictions
of future results, and there can be no assurance that the Trust's actual results
will not materially differ from those anticipated in these forward-looking
statements. In this report, the words "anticipates", "believes", "expects",
"intends", "plans", "may", "future", and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
the forward-looking statements contained herein, which speak only as of the date
hereof. The Trust has no obligation to publicly update or revise any of the
forward-looking statements to reflect events or circumstances that may arise
after the date hereof.
FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO
THE YEAR ENDED DECEMBER 31, 2002
The estimated fair value of the Trust's net assets in liquidation decreased
approximately $163.2 million for the year ended December 31, 2003 as compared to
an approximately $65.9 million increase for the year ended December 31, 2002.
Factors which contributed to the net decrease of the net asset value of the
Trust's net assets for the year ended December 31, 2003 include (i) interest
income from notes receivables which increased net assets by approximately $3.3
million, (ii) interest expense for notes payable which decreased net assets by
approximately $121,000, (iii) a decrease in the value of certain other trust
assets which decreased net assets by approximately $2.0 million, (iv) increase
in estimated costs to liquidate which decreased net assets by approximately $1.0
million and (v) distributions to holders of Class 3A and 3B beneficial interests
which decreased net assets by approximately $163.3 million. Factors which
contributed to the net increase of the net asset value of the Trust's net assets
for the year ended December 31, 2002 include (i) interest income from notes
receivables which increased net assets by approximately $6.2 million, (ii)
interest expense for notes payable which decreased net assets by approximately
$564,000, (iii) appreciation in value of certain other trust assets including
litigation proceeds and related settlement liability which increased net assets
by approximately $92.2 million, (iv) a decrease in estimated costs to liquidate
which increased net assets by approximately $675,000 and (v) distributions to
holders of Class 3A and 3B beneficial interests which decreased net assets by
approximately $32.7 million.
Interest income from notes receivable decreased in 2003 as compared to 2002
because of principal payments received. Interest expense on notes payable
decreased from 2003 as compared 2002 because of
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principal payments made by the Trust during 2003. The changes in fair value of
other trust assets in 2003 as compared to 2002 changed because of the changes in
the fair market value of assets and certain related liabilities. The primary
change in the fair value of other trust assets in 2002 was related to the
settlement liability account, which was reduced in 2002 because of the approval
by the courts of an allocation agreement whereby the Trust recognized only 50%
of the litigation proceeds, as compared to prior periods where the settlement
liability was recorded at 100% due to the substantial uncertainty as to the
approval of the allocation process. The changes in the estimated costs to
complete liquidation in 2003 were the result of a revised budget for the final
years of the Trust.
In 2003, the Trust distributed approximately $163.3 million to holders of Class
3A or 3B beneficial interests. This distribution was made principally from
collections on Trust Assets and the distribution of the Trust's share of
litigation proceeds. The Trust distributed an additional approximately $93.5
million of litigation proceeds during 2003 (which represented the class action's
share of such litigation proceeds) to holders of Class 3A or 3B beneficial
interests. The Class 3A and 3B beneficial interest were valued at approximately
$31.7 million at December 31, 2003.
In 2002, the Trust distributed approximately $32.7 million to holders of Class
3A or 3B beneficial interests. This distribution was made principally from
collections on Trust Assets and the distribution of the Trust's share of
litigation proceeds. The Trust distributed an additional approximately $12.25
million of litigation proceeds during 2002 (which represented the class action's
share of such litigation proceeds) to holders of Class 3A or 3B beneficial
interests. The Class 3A and 3B beneficial interest were valued at approximately
$194.8 million at December 31, 2002.
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO
THE PERIOD FROM JANUARY 22, 2001 (INCEPTION) TO DECEMBER 31, 2001
The estimated fair value of the Trust's net assets in liquidation increased
approximately $65.9 million in the year ended December 31, 2002 as compared to
approximately $42.4 million decrease for the period of January 22, 2001
(inception) to December 31, 2001. Factors which contributed to the net increase
of the net asset value of the Trust's net assets for the year ended December 31,
2002 include (i) interest income from notes receivables which increased net
assets by approximately $6.2 million, (ii) interest expense for notes payable
which decreased net assets by approximately $564,000, (iii) an appreciation in
the value of certain other trust assets including litigation proceeds and
related settlement liability which increased net assets by approximately $92.2
million and (iv) distributions to holders of Class 3A and 3B beneficial
interests which decreased net assets by approximately $32.7 million. Factors
which contributed to the net decrease of the net asset value of the Trust's net
assets for the period from January 22, 2001 to December 31, 2001 include (i)
interest income from notes receivable which increased net assets by
approximately $7.4 million, (ii) interest expense for notes payable which
decreased net assets by approximately $1 million, (iii) an appreciation in the
value of certain other trust assets which increased net asset by approximately
$1.7 million, (iv) a decrease in estimated costs to liquidate which increased
net assets by approximately $675,000 and (v) distributions to holders of Class
3A and 3B beneficial interests which decreased net assets by approximately $47.1
million.
Interest income from notes receivable decreased in 2002 as compared to 2001
because of principal payments received. Interest expense on notes payable
decreased from 2002 as compared 2001 because of principal payments made by the
Trust during 2002. The changes in fair value of other trust assets increased in
2002 as compared to 2001 because of changes in the fair market value of assets
and certain related liabilities. The primary change in the fair value of other
trust assets was related to the settlement liability account, which was reduced
in 2002 because of the approval by the courts of an allocation agreement whereby
the Trust recognized only 50% of the litigation proceeds, as compared to prior
periods where the settlement liability was recorded at 100% due to the
substantial uncertainty as to the approval of the allocation process. The
changes in the estimated costs to complete liquidation in 2002 were the result
of a revised budget for the final years of the Trust.
-8-
In 2002, the Trust distributed approximately $32.7 million to holders of Class
3A or 3B beneficial interests. This distribution was made principally from
collections on Trust Assets and the distribution of the Trust's share of
litigation proceeds. The Trust distributed an additional approximately $12.25
million of litigation proceeds during 2002 (which represented the class action's
share of such litigation proceeds) to holders of Class 3A or 3B beneficial
interests. The Class 3A and 3B beneficial interest were valued at approximately
$194.8 million at December 31, 2002.
For the period from January 22, 2001 (inception) to December 31, 2001, the Trust
distributed approximately $47.1 million to holders of Class 3A or 3B beneficial
interests. This distribution was made principally from collections on Trust
Assets in 2001 and January 22, 2001 cash balances. The Class 3A and 3B
beneficial interests were valued at approximately $129.0 million at December 31,
2001.
Non-cash trust assets at December 31, 2003 and December 31, 2002 were comprised
of the following:
NON-CASH ASSETS IN LIQUIDATION AT ESTIMATED FAIR VALUE
ˇ Enlarge/Download Table
December 31, December 31,
2003 2002
---------------- -----------------
Receivables, net $4,190,921 $59,434,985
Other trust assets, net 27,746,115 46,149,276
Fair value of expected cash flows from settlements 420,750 6,594,000
---------------- -----------------
TOTAL ASSETS $32,357,786 $112,178,261
================ =================
The fair value of the Trust Assets is reassessed at least quarterly and
adjustments to estimated fair values are reflected in the period in which they
become known. For each asset, estimates of income, expenses and net cash flow on
a quarterly basis through the expected final disposition date are prepared. The
individual asset cash flow estimates are developed based upon factors, which
include appraisals by independent appraisers, physical inspection of the asset
or the collateral underlying the related loans, local market conditions,
contractual payments and discussions with the relevant borrower. At December 31,
2003 and December 31, 2002, the projected monthly cash flows were discounted at
various rates, as appropriate, to reflect the Trust Assets at estimated fair
market value.
The Trust's consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America and in accordance with the liquidating basis of accounting. During
preparation of these consolidated financial statements, the Trust is required to
make estimates and assumptions that affect the reported amounts of assets at
estimated fair value, liquidation liabilities, resolution of disputed claims,
estimates of liquidating costs to be incurred, resolution of current and
potential litigation and the fair value of and related disclosure of contingent
assets and liabilities. On an on-going basis the Trust evaluates and updates its
estimates and assumptions. The Trust bases its estimates and assumptions on
historical experience and on various other assumptions that the Trust believes
are reasonable under the circumstances. The results for the basis for making
judgments about the fair values of assets and liquidation liabilities are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Trust believes the following critical accounting policies affect
the Trust's more significant estimates and assumptions used in the preparation
of our consolidated financial statements, which have been prepared in accordance
with the liquidation basis of accounting:
o Receivables are recorded at fair value, which represents our discounted
expected future cash flows calculated based on the following factors:
receivable payment history, financial performance of debtor, and
underlying collateral of the Trust.
-9-
o Other assets consist of real estate partnerships, interests in
operating companies and other assets and are recorded at fair value,
which represents discounted expected future cash flows, based on
estimates and assumptions regarding timing of sales, timing of
payments, projected cash flows and appropriate discount factors.
o Payables, accrued liabilities and notes payable are recorded based on
expected cash outflows which require estimates and assumptions relating
to the timing of the payments and discount factors.
o Estimated costs to complete liquidation and litigation represent the
estimated costs of operating the Trust to its expected termination on
January 21, 2006, discounted using a 4.00% present value factor at
December 31, 2003 and a 4.25% present value factor at December 31,
2002.
o The costs include personnel, facilities, Liquidating Trustee
and Liquidating Trust Board compensation, professional fees
and litigation costs, and are estimated based on assumptions
regarding the number of employees, use of outside
professionals, and timing of cash flows.
o Contingent Assets, Litigation Settlements and related liabilities are
recorded at the Trust's estimated future cash flows which require a
significant amount of estimates and assumptions regarding
collectibility, probable outcomes, timing of cash flows and various
other factors.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and replaces
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and should be initially measured at
fair value. Under EITF Issue No. 94-3, a liability for such costs is recognized
as of the date of an entity's commitment to an exit plan. The provisions of SFAS
No. 146 are effective for exit or disposal activities that we initiated after
December 31, 2002. Our adoption of SFAS No. 146 did not have a material effect
on our consolidated statement of net assets in liquidation or statement of
changes in net assets.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires certain guarantees to
be recorded at fair value and also requires a guarantor to make certain
disclosures regarding guarantees. FIN No. 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. Our adoption of this Interpretation
did not have a material impact on our consolidated financial statements or
disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure." This statement amends SFAS No. 123,
""Accounting for Stock-Based Compensation I An Amendment of SFAS No. 123."
Although SFAS 148 does not require use of the fair value method of accounting
for stock-based employee compensation, it does provide alternative methods of
transition. It also amends the disclosure provisions of SFAS 123 and APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies or the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. SFAS 148's
amendment of the transition and annual disclosure requirements is effective for
fiscal years ending after December 15, 2002. The amendment of disclosure
requirements of APB Opinion No. 28 is effective for interim periods beginning
after December 15, 2002. Our adoption of this pronouncement did not have a
material impact on our consolidated financial statements or disclosures.
-10-
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." FIN No. 46 provides guidance on the
identification of entities of which control is achieved through means other than
voting rights (""variable interest entities" or "VIEs") and how to determine
when and which business enterprise should consolidate the VIE (the "primary
beneficiary"). In addition, FIN No. 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. The transitional disclosure requirements of FIN
No. 46 are required in all financial statements initially issued after January
31, 2003, if certain conditions are met. Our adoption of this Interpretation did
not have a material impact on our consolidated financial statements or
disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including certain
derivative instruments embedded in other contracts) and hedging activities that
fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective prospectively for contracts
entered into or modified after June 30, 2003, with certain exceptions, and for
hedging relationships designated after June 30, 2003. Our adoption of SFAS No.
149 did not have a material impact on our consolidated financial statements or
disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting and disclosure requirements for certain financial
instruments that, under previous guidance, could be classified as equity. The
guidance in SFAS No. 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material impact on our consolidated
financial statements or disclosures.
The following table sets forth, as of December 31, 2003, the aggregate amounts
of our contractual obligations and commitments with definitive payment terms
that will require cash outlays in the future.
ˇ Enlarge/Download Table
Payments Due by Period
Total Less than 1 Year 2-3 Years 4-5 Years After 5 Years
----- ---------------- --------- --------- -------------
Operating Leases $41,064 $41,064 $ - $ -
-------------------------------------------------------------------
Total Contractual Commitments $41,064 $41,064 $ - $ -
===================================================================
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Trusts principal exposure to risk relates to interest rate risk, credit risk
and market risk associated with the types of assets being sold. An adverse
change in interest rates would not have a material adverse impact on the Trust's
operations or net assets. Adverse changes in credit or market risk could have a
material adverse affect of the Trust's operations and net assets. The Trust has
attempted to minimize this risk by discounting the Trust Assets based on the
asset's exposure to credit or market risk and historical experiences of the
asset.
[Remainder of Page Intentionally Left Blank]
-11-
Item 8. Financial Statements and Supplementary Data.
Report of Independent Auditors
To the Liquidating Trustee, Board of Directors
And holders of the beneficial interests of the
BFA Liquidation Trust:
We have audited the accompanying consolidated statements of net assets in
liquidation of BFA Liquidation Trust and its subsidiaries as of December 31,
2003 and 2002, and the related consolidated statements of changes in net assets
in liquidation for each of the years ended December 31, 2003 and 2002, and for
the period from January 22, 2001 (inception) to December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1, these financial statements have been prepared on the
liquidation basis of accounting.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the net assets in liquidation of BFA
Liquidation Trust and its subsidiaries at December 31, 2003 and December 31,
2002, and the statements of changes in net assets in liquidation for each of the
years ended December 31, 2003 and 2002 and for the period January 22, 2001
(inception) to December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America applied on the basis
described in the preceding paragraph.
As described in Note 1, these financial statements have been prepared on the
liquidation basis of accounting, which requires management to make significant
assumptions and estimates regarding the fair value of assets, the resolution of
disputed claims, the estimate of liquidating costs to be incurred, and the
resolution and valuation of current and potential litigation. Because of the
inherent uncertainty related to these estimates and assumptions, there will
likely be differences between these estimates and the actual results and those
differences may be material.
PricewaterhouseCoopers, LLP
Phoenix, Arizona
March 29, 2004
-12-
BFA LIQUIDATION TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
ˇ Enlarge/Download Table
December 31, 2003 December 31, 2002
----------------- -----------------
ASSETS IN LIQUIDATION AT ESTIMATED FAIR VALUE
Cash and cash equivalents (note 2) $ 4,032,941 $ 2,254,806
Receivables, net (note 3) 4,190,921 59,434,985
Other trust assets, net (note 4) 27,746,115 46,149,276
Restricted cash and cash equivalents (note 5) 630,884 6,631,801
Fair value of expected cash flows from settlements (note 6) 723,937 188,478,673
----------- ------------
TOTAL ASSETS 37,324,798 302,949,541
----------- ------------
LIABILITIES IN LIQUIDATION
Accounts Payable and accrued liabilities (note 7) 1,037,939 3,071,617
Notes payable (note 8) -- 4,126,217
Estimated costs to complete liquidation (note 9) 4,271,302 6,679,030
Settlement liability (note 10) 349,744 94,239,336
----------- ------------
TOTAL LIABILITIES 5,658,985 108,116,200
----------- ------------
Commitments and contingencies (note 13)
NET ASSETS IN LIQUIDATION $31,665,813 $194,833,341
=========== ============
CLAIMS AGAINST NET ASSETS IN LIQUIDATION CONSIST OF THE FOLLOWING:
Class "3A" Certificate, 448,610,056 units outstanding, $.06 per
unit at December 31, 2003 and $.36 per unit at December 31, 2002 $26,949,857 $162,294,947
Class "3B" Certificate, 137,246,636 units outstanding, $.03 per
unit at December 31, 2003 and $.24 per unit at December 31, 2002 4,715,956 32,538,394
----------- ------------
TOTAL NET ASSETS $31,665,813 $194,833,341
=========== ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
-13-
BFA LIQUIDATION TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
ˇ Enlarge/Download Table
JANUARY 22,
JANUARY 1, JANUARY 1, 2001
2003 - 2002 - (INCEPTION) -
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------- ------------- -------------
Net assets in liquidation, January 1, 2003, January 1,
2002 and January 22, 2001, respectively $ 194,833,341 $ 128,980,963 $ 171,414,559
Interest on notes receivable (note 3) 3,324,670 6,230,184 7,409,609
Interest on notes payable (note 8) (120,579) (564,192) (1,057,361)
Changes in fair value of other trust assets and
liabilities (notes 10 & 11) (2,023,541) 92,189,547 (1,705,848)
Changes in fair value of estimated costs to complete
liquidation (note 9) (1,032,616) 675,351 --
Distributions to holders of Class 3A and 3B beneficial
interests (note 12) (163,315,462) (32,678,512) (47,079,996)
------------- ------------- -------------
Net assets in liquidation, December 31, 2003, December
31, 2002 and December 31, 2001, respectively $ 31,665,813 $ 194,833,341 $ 128,980,963
============= ============= =============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
-14-
BFA LIQUIDATION TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The BFA Liquidation Trust (the "TRUST") was formed pursuant to the "First
Amended Joint Liquidating Plan of Reorganization of the Debtors Under Chapter 11
of the Bankruptcy Code" proposed by the Baptist Foundation of Arizona ("BFA")
and related subsidiaries and affiliates (the "DEBTORS"), Official Collateralized
Investors' Committee and Official Joint Committee of Unsecured Creditors,
relating to Case No. 99-13275 ECF GBN (the "PLAN"), which was confirmed by the
Bankruptcy Court for the District of Arizona ("BANKRUPTCY COURT"), by an order
entered on December 22, 2000 and became effective on January 22, 2001
("EFFECTIVE DATE").
The primary purpose of the Trust is to (i) oversee and direct the liquidation of
the assets that were transferred to the Trust pursuant to the Plan (the "TRUST
ASSETS") for the benefit of the Trust's beneficiaries; (ii) prosecute all claims
and causes of action that the Trust may have against any person or entity (the
"LITIGATION CLAIMS") for the benefit of the Trust's beneficiaries; and (iii)
distribute any proceeds of the Litigation Claims and the Trust Assets received
by the Trust to the Trust's beneficiaries.
The Trust is not operated with the objective of continuing or engaging in the
conduct of a trade or business, except to the extent reasonably necessary to
preserve or enhance the liquidation value of the Trust Assets, consistent with
the primary purpose of the Trust. To facilitate the orderly administration of
the Trust and to maximize the value of the Trust Assets, the Trust owns one
subsidiary, New Asset Subsidiary, LLC ("NAS"). The assets will be grouped in a
consistent and coherent manner and held, pending sale, by NAS. The Trust and NAS
are charged with the responsibility of appraising the assets, listing them for
sale in an orderly manner, and distributing the proceeds from the sale to its
beneficiaries on a regular basis. The Trust is expected to terminate after five
(5) years on January 22, 2006 unless the Bankruptcy Court determines that an
extension of the Trust is necessary for the purposes of the Trust.
The Plan provides for the appointment of a liquidating trustee (the "LIQUIDATING
TRUSTEE") and a liquidating trust board ("LIQUIDATION TRUST BOARD") to oversee
the liquidation of the Trust Assets and to ensure that such liquidation is
conducted in a cost-effective manner and in a reasonable time. In addition, the
Liquidating Trustee and Liquidating Trust Board are directing the prosecution of
the Litigation Claims in an attempt to maximize the Trust's recoveries from such
claims. The Liquidating Trustee and the Liquidating Trust Board are making
ongoing efforts to dispose of the Trust Assets, to make timely distributions and
to minimize the duration of the Trust.
The Trust has a wholly-owned subsidiary to assist in liquidating the assets,
NAS, an Arizona limited liability company. NAS was formed on the Effective Date,
and the Trust is the sole member of that company. The Trust is able to direct
NAS to take any actions that the Liquidating Trustee believes will maximize the
value of the assets held by NAS. The Trust transferred substantially all of its
assets to NAS, which NAS is currently marketing for sale. NAS is not permitted
to sell any assets or take any other action unless so directed by the Trust.
Collectively, the Trust and NAS are referred to as the "Trust".
BASIS OF PRESENTATION
The accompanying consolidated financial statements as of December 31, 2003 and
December 31, 2002 include the accounts of the Trust and NAS. All intercompany
transactions and accounts are eliminated in consolidation. The Trust's
investments in certain wholly-owned entities are included in these financial
statements at their estimated fair value since the Trust expects to liquidate
the investments by selling the entire individual businesses as going concerns.
-15-
These audited consolidated financial statements have been prepared based on the
liquidation basis of accounting, accordingly assets and liabilities have been
recorded at estimated fair values. In accordance with the liquidation basis of
accounting, the financial statements reflect the estimated costs of liquidating
the assets and distributing the proceeds to holders of beneficial interests.
The Trust's management has made certain estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America.
Under the liquidation basis of accounting, assets and liabilities have been
recorded at their estimated fair values. Given that there is inherent
uncertainty in the valuation process, the amounts actually realized or settled
could be materially different from those reflected in the accompanying
consolidated financial statements.
CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
The Trust considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. The Trust maintains balances in
various operating and money market accounts in excess of federally insured
limits. At December 31, 2003 and December 31, 2002, substantially all cash
balances were in excess of federally insured limits. In accordance with the
terms of the Liquidating Trust Agreement, all cash balances are invested in
"Eligible Institutions" and into "Eligible Investments" as defined by the Trust
agreement. Restricted cash and cash equivalents represent reserves for disputed
claims as required under the Plan and other pledged assets per prior written
agreements.
TRUST ASSETS
The assets of the Trust are carried at estimated fair market values determined
by discounting, at appropriate risk adjusted discount rates, the Trust's current
best estimate of cash flows expected to be realized from the collection,
liquidation and disposition of assets held by the Trust. Such assets consist
principally of notes receivable, income producing real estate and interests in
real estate, interests in partnerships and operating companies and miscellaneous
other assets, receivables and assets from litigation and/or settlements. The
estimates of the future cash flows and discount rates from which the asset
values of the Trust were derived are updated quarterly and are made under the
direction of the management of the Trust based upon information available and
believed to be reliable. These estimates reflect significant judgments regarding
assumptions, discount rates, timing of cash flows, market risk and allowable
disputed claims. Because of the inherent uncertainty regarding the valuation of
these assets there will likely be differences between actual results and the
estimated fair values reflected in the accompanying consolidated financial
statements and the differences may be material.
In addition to the assets described above, the Trust also holds the Litigation
Claims, which consist of claims against the former directors and officers of BFA
and judgments and deficiencies related to loans made to former borrowers of the
Debtors. Because of the significant uncertainties associated with estimating the
probability and timing of cash flows related to these claims, there can be no
assurance that the Trust will realize any value of such Litigation Claims.
However, if realized these Litigation Claims could be material to the Trust.
The fair value of Trust Assets is reassessed at least quarterly and adjustments
to estimated fair values are reflected in the period in which they become known.
For each asset, estimates of income, expenses and net cash flow on a quarterly
basis through the expected final disposition date are prepared. The individual
asset cash flow estimates are developed based upon factors which include
appraisals by independent appraisers, physical inspection of the asset or the
collateral underlying the related loans, local market conditions, contractual
payments and discussions with the relevant borrower.
-16-
CONTINGENT LIABILITIES
Management does not believe that there will be any future material cash outflows
as a result of any claims against the Trust, thus no amount is included in these
accompanying consolidated financial statements (Note 13).
OTHER LIQUIDATION LIABILITIES
Accounts payable and accrued liabilities are reflected at their estimated
settlement amounts which in the opinion of the Trust approximate their fair
value.
Notes payable are reported in the accompanying consolidated financial statements
at their stated amounts. In the opinion of the Trust these amounts approximate
their estimated fair value since the respective interest rates approximate the
market rates of interest for similar instruments.
ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION
The estimated costs to complete liquidation represent the estimated cash costs
of operating the Trust through its expected termination on January 21, 2006,
discounted using a present value factor of 4.00% at December 31, 2003 and 4.25%
at December 31, 2002. These costs, which include personnel, facilities,
Liquidating Trustee and Liquidating Trust Board compensation, professional fees,
litigation costs and other related costs, are estimated based on various
assumptions regarding the number of employees, the use of outside professionals
(including attorneys and accountants) and other costs. Litigation costs contain
assumptions based on what management expects the likely course of actions will
be regarding litigating and or settling certain contingencies (Note 6 and 9).
Given that there is inherent uncertainty in the estimation process, actual
results could be materially different.
INCOME TAXES
For federal income tax purposes, the distribution/transfer of the Debtor's
assets to the Trust on the Effective Date is treated as a distribution of these
assets directly to the Beneficiaries. Each Beneficiary is deemed as owning a
proportionate share of the Trust Assets and has a tax basis in such assets equal
to such holder's share of the fair market value of such assets at the Effective
Date. For tax purposes, any item of income or loss is allocated among the
holders. Therefore, no provision has been made for income taxes in the
accompanying consolidated financial statements.
USE OF ESTIMATES
Management of the Trust has made certain estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America.
Under the liquidation basis of accounting, assets and liabilities have been
recorded at their estimated fair values. Given that there is inherent
uncertainty in the valuation process, the amounts actually realized or settled
could be materially different from those reflected in the accompanying
consolidated financial statements.
RECLASSIFICATION
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation. These reclassifications have no impact on the
previously reported net assets in liquidation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and replaces
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs
-17-
Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred and should be initially measured at fair value. Under EITF Issue No.
94-3, a liability for such costs is recognized as of the date of an entity's
commitment to an exit plan. The provisions of SFAS No. 146 are effective for
exit or disposal activities that we initiated after December 31, 2002. Our
adoption of SFAS No. 146 did not have a material effect on our consolidated
statement of net assets in liquidation or statement of changes in net assets.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires certain guarantees to
be recorded at fair value and also requires a guarantor to make certain
disclosures regarding guarantees. FIN No. 45's initial recognition and initial
measurement provisions are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. Our adoption of this Interpretation
did not have a material impact on our consolidated financial statements or
disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation I An Amendment of SFAS No. 123."
Although SFAS 148 does not require use of the fair value method of accounting
for stock-based employee compensation, it does provide alternative methods of
transition. It also amends the disclosure provisions of SFAS 123 and APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies or the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. SFAS 148's
amendment of the transition and annual disclosure requirements is effective for
fiscal years ending after December 15, 2002. The amendment of disclosure
requirements of APB Opinion No. 28 is effective for interim periods beginning
after December 15, 2002. Our adoption of this pronouncement did not have a
material impact on our consolidated financial statements or disclosures.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." FIN No. 46 provides guidance on the
identification of entities of which control is achieved through means other than
voting rights ("variable interest entities" or "VIEs") and how to determine when
and which business enterprise should consolidate the VIE (the "primary
beneficiary"). In addition, FIN No. 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. The transitional disclosure requirements of FIN
No. 46 are required in all financial statements initially issued after January
31, 2003, if certain conditions are met. Our adoption of this Interpretation is
not expected to have a material impact on our consolidated financial statements
or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies the accounting guidance on derivative instruments (including certain
derivative instruments embedded in other contracts) and hedging activities that
fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective prospectively for contracts
entered into or modified after June 30, 2003, with certain exceptions, and for
hedging relationships designated after June 30, 2003. Our adoption of SFAS No.
149 did not have a material impact on our consolidated financial statements or
disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting and disclosure requirements for certain financial
instruments that, under previous guidance, could be classified as equity. The
guidance in SFAS No. 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 did not have a material impact on our consolidated
financial statements or disclosures.
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2. CASH AND CASH EQUIVALENTS
The Trust maintains balances in various operating and money market accounts in
excess of federally insured limits. Cash and cash equivalents were $4,032,941 at
December 31, 2003 and $2,254,806 at December 31, 2002.
3. RECEIVABLES, NET
At December 31, 2003, net receivables consisted primarily of an approximately
$820,000 note from W.H.H.C., an approximately $1.3 million note from Clearly
Waikoloa, approximately $1.4 million from various note receivables related to
land contracts, and approximately $680,000 of various other mortgage notes
receivable and commercial receivables most of which are collateralized by real
estate. At December 31, 2002 receivables consisted primarily of a note
receivable from Shea Homes, Inc. ("SHEA") of $53.0 million. At December 31,
2002, the note receivable from Shea was collateralized by a master planned
community, and the remaining other receivables relate to land contracts,
mortgage notes receivable and various other commercial receivables. During July
2003 the Shea note receivable was paid in full.
The following is a summary of gross cash flows and related valuation allowances
at:
ˇ Enlarge/Download Table
December 31, 2003 December 31, 2002
----------------- -----------------
Total gross future cash flows from notes receivable $ 42,870,365 $ 138,853,065
Collectibility discount (38,391,751) (69,241,041)
Present value discount (8-9%) (287,693) (10,177,039)
------------ -------------
Net receivables $ 4,190,921 $ 59,434,985
============ =============
Some of the debtors are in default on their contractual obligations to the
Trust. At this time management does not expect to receive future cash flows
related to receivables in default and thus no amount is included in the above
stated receivable amount. The Trust is aggressively pursuing collection of these
debts by various means including, but not limited to, foreclosure and
litigation, and recoveries from these actions, if any, could be material.
4. OTHER TRUST ASSETS, NET
The other trust assets are carried at estimated fair values which are the result
of discounting, at appropriate discount rates, the currently estimated cash
flows projected to be realized from the collection, liquidation and disposition.
These valuations include appraisals by independent appraisers of the liquidation
value of some assets. These values do not represent the full future cash flow
values expected from the sale or operations of these assets due to the
discounting of respective cash flows. Such assets consist principally of income
producing real estate and interests in real estate, interests in partnerships
and operating companies, and miscellaneous other assets transferred to the Trust
upon the consummation of the Plan.
Other trust assets consist of the following:
ˇ Download Table
December 31, 2003 December 31, 2002
----------------- -----------------
Real estate assets and partnerships, net $ 24,932,982 $ 51,151,619
Investments in other operating companies, net 5,212,277 5,007,029
Other assets, net 295,842 696,956
------------ ------------
Future value of other trust assets 30,441,101 56,855,604
Present value discount (various rates) (2,694,986) (10,706,328)
------------ ------------
Other trust assets value $ 27,746,115 $ 46,149,276
============ ============
Real estate assets and partnership interests consist of the following at
December 31, 2003
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