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BFCF > SEC Filings for BFCF > Form 10-K on 1-Apr-2013All Recent SEC Filings

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Form 10-K for BFC FINANCIAL CORP


1-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

BFC Financial Corporation ("BFC" or, unless otherwise indicated or the context otherwise requires, "we", "us", "our" or the "Company") is a holding company whose principal holdings include direct or indirect controlling interests in BBX Capital Corporation (formerly BankAtlantic Bancorp, Inc.) and its subsidiaries ("BBX Capital") and Bluegreen Corporation and its subsidiaries ("Bluegreen"). We currently hold shares of BBX Capital's Class A Common Stock and Class B Common Stock representing an approximately 75% voting interest and 53% equity interest in BBX Capital. BBX Capital's principal asset until July 31, 2012 was its investment in BankAtlantic, a federal savings bank headquartered in Fort Lauderdale, Florida. As described in further detail below under "Recent Developments - Sale of BankAtlantic," on July 31, 2012, BBX Capital completed its sale to BB&T Corporation ("BB&T") of all of the issued and outstanding shares of capital stock of BankAtlantic. Following the sale of BankAtlantic to BB&T, BBX Capital has managed, and plans to continue to manage, the assets retained by it in the sales transaction and engage in investments in real estate and other business opportunities as well as specialty finance activities over time as such assets are monetized. In addition, as described in further detail below under "Recent Developments - Proposed Bluegreen Merger," it is contemplated that BBX Capital will invest $71.75 million in our subsidiary, Woodbridge Holdings, LLC ("Woodbridge"), upon consummation of Woodbridge's acquisition of Bluegreen, in exchange for a 46% equity interest in Woodbridge. We will continue to hold the remaining 54% of Woodbridge's outstanding equity interests.

We currently hold shares of Bluegreen's common stock representing approximately 54% of the issued and outstanding shares of such stock. Bluegreen is a sales, marketing and management company focused on the vacation ownership industry. Bluegreen markets, sells and manages vacation ownership interests ("VOIs") in resorts, which are generally located in popular, high-volume, "drive-to" vacation destinations, and were either developed or acquired by Bluegreen or developed and owned by others, in which case Bluegreen earns fees for providing such services. Bluegreen also provides property association management services, mortgage servicing, VOI title services, reservation services, and construction design and development services. In addition, Bluegreen provides financing to individual purchasers of VOIs, which provides significant interest income to Bluegreen. As described in further detail below under "Recent Developments - Proposed Bluegreen Merger," we are currently party to a merger agreement with Bluegreen which provides for the acquisition of Bluegreen by Woodbridge in a cash merger.

BFC also holds interests in other investments and subsidiaries as described herein. In addition, BFC held a significant investment in Benihana Inc. ("Benihana") until the acquisition of Benihana by Safflower Holdings Corp. ("Safflower") during August 2012.

As of December 31, 2012, we had total consolidated assets of approximately $1.5 billion and shareholders' equity attributable to BFC of approximately $299.0 million. Net income attributable to BFC for the year ended December 31, 2012 was approximately $166.0 million, including a gain on sale of BankAtlantic of approximately $293 million. Net loss attributable to BFC was approximately $11.3 million and $103.8 million for the years ended December 31, 2011 and 2010, respectively.

BFC's business strategy has been to invest in and acquire businesses in diverse industries either directly or through controlled subsidiaries. However, in the short-term, BFC has focused on providing strategic support to its existing investments with a view to the improved performance of the organization as a whole. In addition to the currently proposed merger with Bluegreen, we expect to consider other opportunities that could alter our ownership in our affiliates. We may also seek to make opportunistic investments outside of our existing portfolio. However, we do not currently have pre-determined parameters as to the industry or structure of any future investment. In furtherance of our goals, we will continue to evaluate various financing transactions, including raising additional debt or equity as well as other alternative sources of new capital.

The following events had a significant financial impact on BFC during 2012:

On July 31, 2012, BBX Capital completed the sale to BB&T of all of the shares of BankAtlantic. In connection with such transaction, BFC, by virtue of its 53% economic ownership interest in BBX Capital, recognized a gain on sale of approximately $293.4 million;


During August 2012, Benihana was acquired by Safflower in a cash merger pursuant to which Benihana's shareholders received $16.30 in exchange for each share of Benihana's common stock that they held at the effective time of the merger. BFC received approximately $24.5 million in exchange for the 1,505,330 shares of Benihana's common stock that it held;

On May 4, 2012, Bluegreen sold substantially all of the assets that comprised its residential communities business, Bluegreen Communities, for a purchase price of $29.0 million in cash;

During April 2012, BFC's 5% Cumulative Preferred Stock was re-classified as a liability at its estimated fair value of approximately $11.5 million;

During April 2012, BFC recognized a $29.9 million deferred gain on settlement of investment in subsidiary relating to the settlement of the debt of its wholly-owned subsidiary, Carolina Oak Homes, LLC ("Carolina Oak"); and

During January 2012, BFC's wholly owned subsidiary, Cypress Creek Holdings, LLC ("Cypress Creek Holdings") sold the office building it owned for approximately $10.8 million and recognized a gain of approximately $4.4 million in connection with the sale.

During 2012, the liability accrual for the appraisal rights litigation related to BFC's 2009 merger with Woodbridge was increased by $7.3 million (from $4.6 million at December 31, 2011 to $11.9 million at December 31, 2012) to reflect the presiding court's fair value determination and award of legal fees and pre and post judgment interest to the dissenting shareholders.

GAAP requires that BFC consolidate the financial results of the entities in which it has controlling interest. As a consequence, the assets and liabilities of all such entities are presented on a consolidated basis in BFC's financial statements. However, except as otherwise noted, the debts and obligations of the consolidated entities, including BBX Capital, Woodbridge, and Bluegreen, are not direct obligations of BFC and are non-recourse to BFC. Similarly, the assets of those entities are not available to BFC absent a dividend or distribution from those entities. The recognition by BFC of income from controlled entities is determined based on the total percent of economic ownership in those entities. At December 31, 2012, BFC had an approximately 53% economic ownership interest in BBX Capital and, through Woodbridge, an approximately 54% economic ownership interest in Bluegreen.

We currently report the results of our business activities through four segments: Real Estate Operations; Bluegreen Resorts; BBX; and Florida Asset Resolution Group.

Discontinued operations include BankAtlantic's Community Banking, Investments, Tax Certificates, and Capital Services components, Bluegreen Communities, Core's commercial leasing projects, and Cypress Creek Holdings. See Note 5 to the consolidated financial statements included in Item 8 of this report for additional information regarding discontinued operations.

Recent Events

Proposed Bluegreen Merger

On November 11, 2011, BFC entered into a definitive merger agreement with Bluegreen (the "2011 merger agreement"). Pursuant to the terms of the 2011 merger agreement and subject to the conditions set forth therein, if the merger contemplated by the 2011 merger agreement (the "2011 merger") had been consummated, Bluegreen would have become a wholly-owned subsidiary of BFC, and Bluegreen's shareholders (other than BFC) would have been entitled to receive eight shares of BFC's Class A Common Stock for each share of Bluegreen's common stock that they held at the effective time of the merger. Consummation of the 2011 merger was subject to certain closing conditions, including the listing of BFC's Class A Common Stock on a national securities exchange at the effective time of the merger. Due to the inability to satisfy all required closing conditions, specifically the listing of BFC's Class A Common Stock on a national securities exchange, effective November 14, 2012, the parties agreed to terminate the 2011 merger agreement and entered into the 2012 merger agreement described below.

On November 14, 2012, BFC and Woodbridge entered into a new definitive merger agreement with Bluegreen (the "2012 merger agreement") providing for the acquisition of Bluegreen by Woodbridge in a cash merger (the "2012 merger") pursuant to which Bluegreen's shareholders (other than BFC, directly or indirectly through Woodbridge, and shareholders of Bluegreen who duly exercise appraisal rights in accordance with Massachusetts law) will receive consideration of $10.00 in cash for each share of Bluegreen's common stock that they hold at the effective time of the merger. Consummation of the 2012 merger is subject to, among other things, the parties' obtaining the financing necessary to consummate the transaction. The aggregate merger consideration is expected to be


approximately $150 million. If the 2012 merger is consummated, Bluegreen will become a wholly owned subsidiary of Woodbridge, and Bluegreen's common stock will no longer be listed for trading on the NYSE or registered under the Exchange Act.

In connection with the financing of the 2012 merger, BFC and BBX Capital entered into a letter agreement relating to a proposed investment by BBX Capital of $71.75 million in Woodbridge. It is contemplated that the proposed investment, which is subject to the execution of definitive agreements by BBX Capital and BFC, would be made by BBX Capital at the effective time of the merger in exchange for a 46% equity interest in Woodbridge. BFC would continue to hold the remaining 54% of Woodbridge's equity interests. It is anticipated that BBX Capital's investment in Woodbridge will consist of approximately $60 million in cash and a promissory note in Woodbridge's favor in the principal amount of approximately $11.75 million. The cash proceeds from the investment are expected to be utilized to pay a portion of the aggregate merger consideration. It is also contemplated that, in connection with the investment, Woodbridge's operating agreement will be amended to set forth BFC's and BBX Capital's respective rights as members of Woodbridge following the investment and provide, among other things, for unanimity on certain specified "major decisions."

On March 26, 2013, Bluegreen issued $75 million of senior secured notes in a private transaction, the proceeds of which will be used to fund a portion of the merger consideration. To the extent that Bluegreen uses its resources to fund a portion of the merger consideration, BFC anticipates that its shareholders' equity will be reduced accordingly. See the "Bluegreen Resorts Liquidity" section below for further information regarding this financing transaction. There is no assurance that the 2012 merger will be consummated on the contemplated terms, or at all.

Following the announcement of the 2011 merger agreement, seven purported class action lawsuits were filed seeking to enjoin the 2011 merger or, if it was completed, to recover relief as determined by the applicable presiding court. Four of these lawsuits were filed in Florida and have been consolidated into a single action. The other three lawsuits, which were filed in Massachusetts, have also been consolidated into a single action, which has been stayed in favor of the consolidated action in Florida. Following the announcement of the termination of the 2011 merger agreement and entry into the 2012 merger agreement, the plaintiffs in the Florida action filed a supplemental complaint alleging that the consideration to be received by Bluegreen's shareholders pursuant to the 2012 merger agreement remains inadequate and continues to be unfair to Bluegreen's minority shareholders. See "Item 3 - Legal Proceedings" for additional information regarding the litigation.

Sale of Bluegreen Communities

On May 4, 2012, Bluegreen sold substantially all of the assets that comprised its residential communities business, Bluegreen Communities, to Southstar Development Partners, Inc. ("Southstar") for a purchase price of $29.0 million in cash. Southstar also agreed to pay an amount equal to 20% of the net proceeds (as calculated in accordance with the terms of the agreement), of its sale, if any, of two specified parcels of real estate purchased by Southstar under the agreement. Southstar sold one of such parcels during 2012 and paid to Bluegreen the proceeds of the sale to which Bluegreen was entitled, which was insignificant. Assets excluded from the sale included primarily Bluegreen's Communities notes receivable portfolio. Bluegreen Communities is classified as a discontinued operation for all periods presented in the accompanying consolidated financial statements. See Note 5 to the consolidated financial statements included herein for additional information regarding discontinued operations.

Benihana's Acquisition by Safflower

As previously described, BFC held a significant investment in Benihana prior to the merger between Benihana and Safflower during August 2012. Pursuant to the merger agreement, Safflower acquired Benihana for a cash purchase price of $16.30 per share of Benihana's common stock. BFC received approximately $24.5 million in exchange for the 1,505,330 shares of Benihana's common stock that it held at the effective time of the transaction.

Prior to Safflower's acquisition of Benihana, BFC sold approximately 77,000 shares of Benihana's common stock during July and August 2012 pursuant to the terms of a Rule 10b5-1 Trading Plan and received net proceeds from such sales of approximately $1.25 million.

BFC recognized a gain on sale of approximately $9.3 million in connection with its sales of shares of Benihana's common stock during July and August 2012 and disposition of its remaining shares of Benihana's common stock pursuant to the merger between Benihana and Safflower during August 2012. In addition, during each of the first three quarters of 2012, BFC received approximately $127,000 of dividend payments with respect to its shares of Benihana's common stock.


Sale of BankAtlantic

On July 31, 2012 BBX Capital completed the sale to BB&T Corporation ("BB&T") of all of the shares of BankAtlantic (the sale and related transactions, the "BankAtlantic Sale"). In connection with the BankAtlantic Sale, BankAtlantic's Community Banking, Investments, Tax Certificates and Capital Services reporting units are reported as discontinued operations for the years ended December 31, 2012 and 2011. BBX Capital's activities during each of the years in the three year period ended December 31, 2012 consisted of managing a commercial loan portfolio which included construction, residential development, land acquisition and commercial business loans. The activities of managing these loan portfolios included renewing, modifying, increasing, extending, refinancing and making protective advances on these loans, as well as managing and liquidating real estate properties acquired through foreclosure.

Pursuant to the terms of the BB&T Agreement, prior to the closing of the Transaction BankAtlantic formed two subsidiaries, BBX Capital Asset Management, LLC ("CAM") and Florida Asset Resolution Group, LLC ("FAR"). BankAtlantic contributed to FAR certain performing and non-performing loans, tax certificates, and real estate owned that had an aggregate carrying value on BankAtlantic's balance sheet of approximately $346 million at July 31, 2012 (the date the BB&T transaction was consummated). FAR assumed all liabilities related to these assets. BankAtlantic also contributed approximately $50 million in cash to FAR on July 31, 2012 and thereafter distributed all of the membership interests in FAR to BBX Capital. At the closing of the Transaction, BBX Capital transferred to BB&T 95% of the outstanding preferred membership interests in FAR in connection with BB&T's assumption of BBX Capital's outstanding TruPs obligations, as described in further detail below. BBX Capital continues to hold the remaining 5% of FAR's preferred membership interests. Under the terms of the Amended and Restated Limited Liability Company of FAR, which was entered into by BBX Capital and BB&T at the closing, BB&T will hold its 95% preferred interest in the net cash flows of FAR until such time as it has recovered $285 million in preference amount plus a priority return of LIBOR + 200 basis points per annum on any unpaid preference amount. At that time, BB&T's interest in FAR will terminate, and BBX Capital will thereafter be entitled to any and all residual proceeds from FAR. It is expected that the assets (other than cash) contributed to FAR will be monetized over a period of seven years, or longer provided BB&T's preference amount is repaid within such seven-year period. BBX Capital entered into an incremental $35 million guarantee in BB&T's favor to further assure BB&T's recovery of the $285 million preference amount within seven years. As such, FAR is considered a variable interest entity ("VIE") and in accordance with the applicable guidance for VIE's, BBX Capital, as the primary beneficiary, is required to consolidate the financial statements of FAR. BB&T's preferred interest in FAR was $197 million as of December 31, 2012.

Prior to the closing of the Transaction, BankAtlantic contributed to CAM certain non-performing commercial loans, commercial real estate owned and previously written off assets that had an aggregate carrying value on BankAtlantic's balance sheet of $125 million as of July 31, 2012. CAM assumed all liabilities related to these assets. BankAtlantic also contributed approximately $82 million in cash to CAM. Prior to the closing of the Transaction, BankAtlantic distributed all of the membership interests in CAM to BBX Capital. CAM remains a wholly owned subsidiary of BBX Capital.

BB&T made a cash payment in connection with the closing of the Transaction of approximately $6.4 million to BBX Capital which was based on a deposit premium of $315.9 million and the net asset value of BankAtlantic as of June 30, 2012, in each case as calculated pursuant to the terms of the Agreement, including, with respect to the net asset value of BankAtlantic, after giving effect to the asset contributions and membership interest distributions by BankAtlantic to BBX Capital.

In connection with the BankAtlantic Sale, BFC recognized a gain on sale of approximately $293.4 million, including approximately $2.8 million of purchase accounting adjustments related to BFC's acquisitions during 2008 of shares of BBX Capital's Class A Common Stock which were accounted for as step acquisitions under the purchase method of accounting then in effect.

At the closing of the Transaction, BB&T assumed the obligations with respect to BBX Capital's approximately $285 million in principal amount of outstanding TruPs, and BBX Capital paid BB&T approximately $51.3 million, representing all accrued and unpaid interest on the TruPs through closing. BBX Capital also paid approximately $2.3 million for certain legal fees and expenses incurred by trustees with respect to the now resolved litigation relating to the Transaction brought by certain trustees and holders of the TruPs. BBX Capital used proceeds received in the Transaction to make these payments.


As a result of their respective historic direct and indirect ownership interests in BankAtlantic, both BBX Capital and BFC were unitary savings and loan holding companies subject to examination and regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Effective July 31, 2012, BBX Capital and BFC were released from registration as savings and loan holding companies because, as a result of the Transaction, they no longer directly or indirectly control a financial institution. As such, both BBX Capital and BFC are no longer subject to regulation by the Federal Reserve or restrictions applicable to financial institution holding companies.

Summary of Consolidated Results of Operations

The table below sets forth the Company's summarized results of operations (in thousands):

                                               For the Years Ended December 31,
                                               2012           2011           2010

Income (loss) from continuing
operations, net of taxes                 $      44,237         (8,437)      (144,678)
income (loss) from discontinued
operations, net of taxes                       267,863        (11,069)       (35,509)
Net income (loss)                              312,100        (19,506)      (180,187)
Less: Net income (loss) attributable to
noncontrolling interests                       146,085         (8,236)       (76,339)
Net income (loss) attributable to BFC          166,015        (11,270)      (103,848)
5% Preferred stock dividends                      (188)          (750)          (750)
Net income (loss) allocable to common
stock                                    $     165,827        (12,020)      (104,598)

The Company reported consolidated net income attributable to BFC of $166.0 million in 2012, which included a $293 million gain realized in connection with BBX Capital's sale of BankAtlantic (which gain is included in discontinued operations). Net loss attributable to BFC for the years ended December 31, 2011 and 2010 of $11.3 million and $103.8 million, respectively. Discontinued operations include the results of BankAtlantic's community banking, investment, capital services and tax certificate reporting units, including the gain on sale of BankAtlantic of approximately $293 million, as well as Bluegreen Communities, Core's commercial leasing projects, and Cypress Creek Holdings. See Note 5 to our consolidated financial statements included in Item 8 of this report for additional information about our discontinued operations. The 5% preferred stock dividend represents the dividend obligations of the Company with respect to its mandatorily redeemable 5% Cumulative Preferred Stock.

Consolidated Financial Condition

Consolidated Assets and Liabilities

Total assets at December 31, 2012 and 2011 were $1.5 billion and $4.8 billion, respectively. The primary changes in components of total assets are summarized below:

Decrease in total assets of $3.3 billion as a result of the sale of BankAtlantic to BB&T during July 2012;

Decrease in securities available for sale reflecting the sales of Benihana's Common Stock during July and August 2012 and subsequent disposition of the remaining shares of Benihana's Common Stock held by us in connection with the acquisition of Benihana by Safflower during August 2012. In connection with the share sales and the merger, we received aggregate proceeds of approximately $25.8 million and recognized a gain of approximately $9.3 million; and

During September 2012, Bluegreen completed a private offering and sale of investment-grade, timeshare loan-backed notes for gross proceeds of $100.0 million, which were used in part to repay in full Bluegreen's BB&T Purchase Facility and Bluegreen's 2008 Liberty Bank Facility. Additional availability in excess of $60 million under Bluegreen's existing receivable-backed credit facilities was created as a result of this securitization transaction.

Total liabilities at December 31, 2012 and 2011 were $1.0 billion and $4.6 billion, respectively. The primary changes in components of total liabilities are summarized below:


Decrease in total liabilities of $3.6 billion as a result of the sale of BankAtlantic to BB&T during July 2012;

In connection with its sale of BankAtlantic, BBX Capital issued to BB&T a $285 million preferred interest in FAR in exchange for BB&T's assumption of BBX Capital's TruPS obligations. BB&T's preferred interest in FAR was paid down to $197 million at December 31, 2012 from cash contributed to FAR in connection with the BankAtlantic Sale as well as net cash inflows from FAR assets;

Increase in shares subject to mandatory redemption of $11.8 million representing the April 2012 reclassification of BFC's 5% cumulative preferred stock to a liability, together with accrued interest; and

During April 2012, BFC recognized a $29.9 million deferred gain on settlement of investment in subsidiary relating to the settlement of Carolina Oak's debt.

Noncontrolling Interests



The following table summarizes the noncontrolling interests held by others in
our subsidiaries (in thousands):




                                            December 31,
                                       2012             2011

BBX Capital                     $        113,425           (7,906)
Bluegreen                                 62,186           39,489
Joint ventures                            33,211           31,693
 Total noncontrolling interests $        208,822           63,276

Consolidated Cash Flows



A summary of our consolidated cash flows is set forth below (in thousands):




                                                   For the Year Ended December 31,
                                                    2012         2011         2011

Cash flows provided by operating activities    $   157,191      219,729      266,857
Cash flows (used in) provided by investing
activities                                        (752,039)     682,605      409,708
Cash flows used in financing activities            (26,260)    (638,047)    (397,949)
  Net (decrease) increase in cash and cash     $
equivalents                                       (621,108)     264,287      278,616

Cash Flows from Operating Activities - The decrease in cash flows from operating activities during 2012 compared to 2011 primarily reflects a decline in proceeds on the sales of loans held for sale and lower interest income on VOI notes receivable due to a decreasing portfolio balance partially offset by higher cash from VOI sales and fee-based services revenue.

The decrease in cash flows from operating activities during 2011 compared to 2010 primarily reflects a decline in proceeds on the sales of loans and net interest income as well as lower customer fee income, partially offset by the generation of more cash from VOI sales and fee-based services, and a reduction of inventory development spending.

Cash Flows from Investing Activities - The decrease in cash flows from investing activities during 2012 compared to 2011 primarily resulted from BBX Capital's sale of BankAtlantic during July 2012 and lower proceeds from the sales of securities available for sale.

The increase in cash flows from investing activities during 2011 compared to 2010 resulted primarily from maturities of short-term securities available for . . .

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