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BFCF > SEC Filings for BFCF > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for BFC FINANCIAL CORP


15-May-2013

Quarterly Report


ITEM 2. 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 a direct controlling interest in BBX Capital Corporation (formerly BankAtlantic Bancorp, Inc.) and its subsidiaries ("BBX Capital") and, through Woodbridge Holdings, LLC ("Woodbridge"), an indirect 54% interest in Bluegreen Corporation and its subsidiaries ("Bluegreen").

We currently hold shares of BBX Capital's Class A Common Stock, which is currently listed for trading on the New York Stock Exchange ("NYSE"), 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. 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 over time as such assets are monetized. In addition, as described in further detail below, on April 2, 2013, BBX Capital invested $71.75 million in Woodbridge upon consummation of Woodbridge's acquisition of Bluegreen in exchange for a 46% equity interest in Woodbridge. We continue to hold the remaining 54% of Woodbridge's outstanding equity interests.

Bluegreen is a sales, marketing and management company primarily focused on the hospitality and vacation ownership industries. 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. When owned by others, Bluegreen earns fees for providing 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 its VOIs, which provides significant interest income to Bluegreen.

BFC also holds interests in other investments and subsidiaries as described herein. Until August 2012, BFC held a significant investment in Benihana Inc. ("Benihana") until August 2012 when Benihana was acquired by Safflower Holdings Corp. ("Safflower").

As of March 31, 2013, we had total consolidated assets of approximately $1.6 billion, and shareholders' equity attributable to BFC of approximately $297.6 million. Net loss attributable to BFC for the three months ended March 31, 2013 and 2012 was approximately $2.6 and $2.7 million, respectively.

BFC's business strategy has been to invest in and acquire businesses in diverse industries either directly or through controlled subsidiaries. Most recently, BFC has focused on providing strategic support to its existing investments with a view to the improved performance of the organization as a whole. As described below, in April 2013, BFC and BBX Capital, through Woodbridge, consummated a cash merger with Bluegreen which resulted in Bluegreen becoming a wholly-owned subsidiary of Woodbridge. Further, in May 2013, we entered into a merger agreement with BBX Capital which contemplates a stock-for-stock merger between the companies, as described in further detail below. In the future, we may also seek to make opportunistic investments outside of our existing portfolio, including investments in real estate based opportunities and middle market operating businesses. However, we do not currently have pre-determined parameters as to 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. BFC's investments or acquisitions may not prove to be successful or even if successful may not initially generate income, or may generate income on an irregular basis or over a long period of time, thus causing our results of operations to vary significantly on a quarterly basis.

On May 7, 2013, BFC, BBX Merger Sub, LLC, a newly formed wholly-owned subsidiary of BFC ("BBX Merger Sub"), and BBX Capital entered into a definitive merger agreement which provides for BBX Capital to merge with and into BBX Merger Sub, with BBX Merger Sub continuing as the surviving company of the merger and a wholly- owned subsidiary of BFC. Under the terms of the merger agreement, BBX Capital's shareholders (other than BFC and shareholders of BBX Capital who exercise and perfect their appraisal rights in accordance with Florida law) will


be entitled to receive 5.39 shares of BFC's Class A Common Stock in exchange for each share of BBX Capital's Class A Common Stock that they hold at the effective time of the merger (as such exchange ratio may be adjusted in accordance with the terms of the merger agreement, the "Exchange Ratio"). Each option to acquire shares of BBX Capital's Class A Common Stock that is outstanding at the effective time of the merger, whether or not then exercisable, will be converted into an option to acquire shares of BFC's Class A Common Stock and be subject to the same terms and conditions as in effect at the effective time of the merger, except that the number of shares which may be acquired upon exercise of the option will be multiplied by the Exchange Ratio and the exercise price of the option will be divided by the Exchange Ratio. In addition, each share of BBX Capital's Class A Common Stock subject to a restricted stock award outstanding at the effective time of the merger will be converted into a restricted share of BFC's Class A Common Stock and be subject to the same terms and conditions as in effect at the effective time of the merger, except that the number of shares subject to the award will be multiplied by the Exchange Ratio. Consummation of the merger is subject to certain closing conditions, including, without limitation, the approval of BFC's and BBX Capital's respective shareholders, BFC's Class A Common Stock being approved for listing on a national securities exchange (or interdealer quotation system of a registered national securities association) at the effective time of the merger, holders of not more than 10% of BBX Capital's Common Stock exercising appraisal rights, and the absence of any "Material Adverse Effect" (as defined in the merger agreement) with respect to either BFC or BBX Capital. BFC has agreed in the merger agreement to vote all of the shares of BBX Capital's Common Stock that it owns in favor of the merger agreement, which would constitute the requisite approval of the merger agreement by BBX Capital's shareholders under Florida law. There is no assurance that the merger will be consummated on the currently contemplated terms or at all.

On April 2, 2013, Bluegreen merged with a wholly-owned subsidiary of Woodbridge in a cash merger transaction (sometimes hereinafter referred to as the "Bluegreen merger"). Pursuant to the terms of the merger agreement, Bluegreen's shareholders (other than Woodbridge) received consideration of $10.00 in cash for each share of Bluegreen's common stock that they held at the effective time of the merger, including unvested restricted shares. In addition, each option to acquire shares of Bluegreen's common stock that was outstanding at the effective time of the merger, whether vested or unvested, was canceled in exchange for a cash payment to the holder in an amount equal to the excess, if any, of the $10.00 per share merger consideration over the exercise price per share of the option. The aggregate merger consideration was approximately $149.0 million. As a result of the merger, Bluegreen, which was the surviving corporation of the merger, became a wholly-owned subsidiary of Woodbridge. Prior to the merger, the Company indirectly through Woodbridge owned approximately 54% of Bluegreen's outstanding common stock. These shares were canceled upon consummation of the merger without any payment therefor.

In connection with the financing of the Bluegreen merger, the Company and Woodbridge entered into a Purchase Agreement with BBX Capital on April 2, 2013 (the "Purchase Agreement"). Pursuant to the terms of the Purchase Agreement, BBX Capital invested $71.75 million in Woodbridge contemporaneously with the closing of the merger in exchange for a 46% equity interest in Woodbridge. BFC continues to hold the remaining 54% of Woodbridge's outstanding equity interests. BBX Capital's investment in Woodbridge consisted of $60 million in cash, which was utilized to pay a portion of the aggregate merger consideration, and a promissory note in Woodbridge's favor in the principal amount of $11.75 million (the "Note"). The Note has a term of five years, accrues interest at a rate of 5% per annum and provides for payments of interest only on a quarterly basis during the term of the Note, with all outstanding amounts being due and payable at the end of the five-year term. In connection with BBX Capital's investment in Woodbridge, the Company and BBX Capital entered into an Amended and Restated Operating Agreement of Woodbridge, which sets forth the Company's and BBX Capital's respective rights as members of Woodbridge and provides for, among other things, unanimity on certain specified "major decisions" and distributions to be made on a pro rata basis in accordance with the Company's and BBX Capital's respective percentage equity interests in Woodbridge.

Additionally, the proceeds from Bluegreen's issuance of $75 million of senior secured notes (the "2013 Notes Payable") on March 26, 2013 in a private transaction and approximately $14 million of Bluegreen's unrestricted cash were utilized in connection with the funding of the $149 million merger consideration indicated above. See Note 9 to the consolidated financial statements included in Item 1 of this report for additional information regarding the 2013 Notes Payable.

Two consolidated class action lawsuits relating to the Bluegreen merger remain pending. As described in detail in the "Legal Proceedings" section of the Company's Annual Report on Form 10-K for the year ended December 31, 2012, these actions include, among others, claims based on alleged breaches of fiduciary duty. The plaintiffs have asserted that the consideration received by Bluegreen's minority shareholders in the transaction was inadequate and


unfair, and are seeking to recover damages in connection with the transaction. The Company believes that these lawsuits are without merit and intends to continue to vigorously defend the actions.

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 and, in the case of Bluegreen, a subsequent dividend or distribution by Woodbridge. The recognition by BFC of income from controlled entities is determined based on the total percent of economic ownership in those entities. At March 31, 2013, BFC had an approximately 53% economic ownership interest in BBX Capital and, through Woodbridge, an approximately 54% economic ownership interest in Bluegreen (in each case excluding restricted shares issued by the applicable company to its officers and directors which were unvested as of March 31, 2013). The Bluegreen merger was consummated on April 2, 2013 resulting in Bluegreen becoming a wholly-owned subsidiary of Woodbridge. As a result of the completion of the transaction, BFC and BBX Capital own 54% and 46%, respectively, of Woodbridge.

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

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.

Forward Looking Statements

This document contains forward-looking statements based largely on current expectations of BFC and its subsidiaries that are subject to a number of risks and uncertainties which are subject to change based on factors which are, in many instances, beyond our control. All opinions, forecasts, projections, future plans or other statements, other than statements of historical fact, are forward-looking statements and can be identified by the use of words or phrases such as "plans," "believes," "will," "expects," "anticipates," "intends," "estimates," "our view," "we see," "would" and words and phrases of similar import. The forward looking statements in this document are also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and involve substantial risks and uncertainties. We can give no assurance that such expectations will prove to have been correct. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements contained herein. When considering forward-looking statements, the reader should keep in mind the risks, uncertainties and other cautionary statements made in this report. The reader should not place undue reliance on any forward-looking statement, which speaks only as of the date made. This document also contains information regarding the past performance of investments and operations, and the reader should note that prior or current performance is not a guarantee or indication of future performance.

Some factors which may affect the accuracy of the forward-looking statements apply generally to the industries in which our subsidiaries operate, including the real estate, resort development and vacation ownership industries in which Bluegreen operates, and the investment and asset management activities of BBX Capital, while other factors apply more specifically to BFC, including, but not limited to, the following:

BFC has negative cash flow and limited sources of cash which may present risks to its ongoing operations;

risks associated with BFC's current business strategy, including the risk that BFC will not be in a position to provide strategic support to its affiliated entities or that such support will not achieve the anticipated benefits and the risk that it will not be in a position to make new investments or that the investments made will not prove to be advantageous;

the risks and uncertainties affecting BFC and its subsidiaries, and their respective results, operations, markets, products, services and business strategies, including with respect to BBX Capital, risks associated with its ability to successfully implement its currently anticipated plans and uncertainties regarding BBX Capital's ability to generate earnings under its new business strategy;

the risk that creditors of the Company's subsidiaries or other third parties may seek to recover from the subsidiaries' respective parent companies, including BFC, distributions or dividends made by such subsidiaries or other amounts owed by such subsidiaries to such creditors or third parties;


BFC's shareholders' interests may be diluted if additional shares of BFC's common stock are issued, and BFC's investments in its subsidiaries may be diluted if such subsidiaries issue additional shares of stock to the public or persons other than BFC;

adverse conditions in the stock market, the public debt market and other capital markets and the impact of such conditions on the activities of BFC and its subsidiaries;

the impact of the economy on BFC, the price and liquidity of its common stock and its ability to obtain additional capital, including the risk that if BFC needs or otherwise believes it is advisable to issue debt or equity securities to fund its operations, it may not be possible to issue any such securities on favorable terms, if at all;

the performance of entities in which BFC has made investments may not be profitable or their results as anticipated;

BFC is dependent upon dividends from its subsidiaries to fund its operations; BFC's subsidiaries may not be in a position to pay dividends or otherwise make a determination to pay dividends to its shareholders; dividend payments may be subject to certain restrictions, including, restrictions contained in its debt instruments; any payment of dividends by a subsidiary of BFC is subject to declaration by such subsidiary's board of directors or managers (which in the case of BBX Capital, is comprised of a majority of independent directors under the listing standards of the NYSE) as well as the boards of directors of both BBX Capital and BFC in the case of dividend payments by Woodbridge; and dividend decisions by subsidiaries which are not 100% owned by BFC, including BBX Capital, Woodbridge and Bluegreen, are outside of the control of BFC and may not be made in BFC's best interests;

risks related to BFC's ability to pay dividends to holders of its preferred stock, which will depend on BFC's financial condition;

risks relating to the Bluegreen merger which was consummated during April 2013, including that the transaction may not result in the realization of the expected benefits, as well as the significant costs incurred related to the transaction, including with respect to the pending litigation regarding the transaction;

risks relating to BFC's currently proposed merger with BBX Capital, including the ability of BFC to obtain the listing of its Class A Common Stock on a national securities exchange, as required by the terms of the merger agreement; the parties' ability to satisfy the other closing conditions contained in the merger agreement; the risk that the merger may not otherwise be consummated on the contemplated terms, or at all; the risk that the merger, if consummated, may not result in the combined company realizing the expected benefits from the merger; the risk that litigation may be brought challenging the merger; and risks related to the costs incurred and to be incurred related to the merger (including legal fees and expenses related to any potential litigation) and the risk that cash payments made to shareholders of BBX Capital who exercise appraisal rights if the merger is consummated may adversely impact BFC's financial condition and cash position;

the preparation of financial statements in accordance with GAAP involves making estimates, judgments and assumptions, and any changes in estimates, judgments and assumptions used could have a material adverse impact on our financial condition and operating results;

risks related to litigation and other legal proceedings involving BFC and its subsidiaries, including (i) the legal and other professional fees and other costs and expenses of such proceedings, as well as the impact of any finding of liability or damages on our financial condition and operating results and (ii) with respect to litigation brought by the Securities and Exchange Commission (the "SEC") against BBX Capital and its Chairman, who also serves as our Chairman, reputational risks and risks relating to the loss of our Chairman's services;

the uncertainty regarding, and the impact on BFC's financial condition and cash position of, the amount of cash that will be required to be paid to former shareholders of Woodbridge Holdings Corporation ("WHC") who exercised appraisal rights in connection with the 2009 merger between BFC and WHC, as well as the legal and other professional fees and other costs and expenses of the appraisal rights proceedings; and

the Company's success at managing the risks involved in the foregoing.

With respect to Bluegreen, the risks and uncertainties include, but are not limited to:

the overall state of the economy, interest rates and the availability of financing may affect Bluegreen's ability to market VOIs;

Bluegreen could incur substantial losses and its liquidity position could be adversely impacted if the customers it finances default on their obligations;

while Bluegreen has attempted to restructure its business to reduce its need for and reliance on financing for liquidity in the short term, there is no assurance that such restructuring will be successful or that


Bluegreen's business and profitability will not otherwise continue to depend on its ability to obtain financing, which may not be available on favorable terms, or at all;

Bluegreen's future success depends on its ability to market its products successfully and efficiently, and Bluegreen's marketing expenses may increase, particularly if Bluegreen's marketing efforts focus on new customers rather than sales to its existing owners;

Bluegreen may not be successful in increasing or expanding its fee-based services relationships and its fee-based services activities may not be profitable, which may have an adverse impact on its results of operations and financial condition;

Bluegreen's results of operations and financial condition may be materially and adversely impacted if Bluegreen Resorts does not continue to participate in exchange networks or its customers are not satisfied with the networks in which it participates;

the resale market for VOIs could adversely affect Bluegreen's business;

Bluegreen is subject to the risks of the real estate market and the risks associated with real estate development, including the decline in real estate values and the deterioration of other conditions relating to the real estate market and real estate development;

adverse outcomes in legal or other regulatory procedures, including claims for development-related defects and the costs and expenses associated with litigation, could adversely affect Bluegreen's financial condition and operating results;

Bluegreen may be adversely affected by federal, state and local laws and regulations and changes in applicable laws and regulations, including the imposition of additional taxes on operations. In addition, results of audits of Bluegreen's tax returns or those of its subsidiaries may have a material and adverse impact on its financial condition;

Bluegreen has outstanding indebtedness which may negatively impact its available cash and its flexibility in the event of a deterioration of economic conditions;

environmental liabilities, including claims with respect to mold or hazardous or toxic substances, could have a material adverse impact on Bluegreen's business;

the ratings of third-party rating agencies could adversely impact Bluegreen's ability to obtain, renew, or extend credit facilities, debt, or otherwise raise capital;

there are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with GAAP, and any changes in estimates, judgments and assumptions used could have a material adverse impact on Bluegreen's operating results and financial condition; and

the loss of the services of Bluegreen's key management and personnel could adversely affect its business.

With respect to BBX Capital, the risks and uncertainties include, but are not limited to the following:

the impact of economic, competitive and other factors affecting BBX Capital and its markets, products and services; decreases in real estate values, and increased unemployment or sustained high unemployment rates on its business generally; the ability of BBX Capital's borrowers to service their obligations; and the value of collateral securing outstanding loans;

credit risks and loan losses, and the related sufficiency of BBX Capital's allowance for loan losses, including the impact of the economy and real estate market values on BBX Capital's assets and the credit quality of its loans;

the risk that loan losses will continue and the risks of additional charge-offs, impairments and required increases in the allowance for loan losses;

the impact of and expenses associated with litigation, including but not limited to, litigation brought by the SEC against BBX Capital and its Chairman;

adverse conditions in the stock market, the public debt market and other financial and credit markets and the impact of such conditions on BBX Capital's activities;

risks associated with the impact of periodic valuation of BBX Capital's assets for impairment;

risks relating to BBX Capital's ability to successfully implement its currently anticipated business plans, which may not be realized as anticipated, if at all, or which may not be profitable, including BBX Capital's investment in Woodbridge, which will be dependent on the results of Bluegreen;

that BBX Capital's Class A Common Stock may not meet the requirements for continued listing on the NYSE;

that the assets retained by BBX Capital in CAM and FAR may not be monetized at the values currently ascribed to them or, in the case of FAR, in amounts sufficient to repay BB&T's full preference amount;

risks associated with the currently proposed merger between BFC and BBX Capital, as described above; and

BBX Capital's success at managing the risks involved in the foregoing.


In addition to the risks and factors identified above, reference is also made to other risks and factors detailed in reports filed by the Company and BBX Capital with the SEC, including those disclosed in the "Risk Factors" sections of such reports. The Company cautions that the foregoing factors are not exclusive.

Critical Accounting Policies

Management views critical accounting policies as accounting policies that are important to the understanding of our financial statements and also involve estimates and judgments about inherently uncertain matters. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated statements of financial condition and assumptions that affect the recognition of income and expenses on the consolidated statements of operations for the periods presented. On an ongoing basis, management evaluates its estimates, including those that relate to the determination of the allowance for loan losses, the estimated future sales value of inventory, the recognition of revenue, including revenue recognition under the percentage-of-completion method of accounting, the recovery of the carrying value of real estate inventories, the fair value of assets measured at, or compared to, fair value on a non-recurring basis such as assets held for sale, intangible assets and other long-lived assets, the evaluation of goodwill, the valuation of securities, as well as the determination of other-than-temporary declines in value, the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans, the determination of the fair value of assets and liabilities in the application of . . .

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