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BFCF > SEC Filings for BFCF > Form 10-Q on 11-Aug-2014All Recent SEC Filings

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Form 10-Q for BFC FINANCIAL CORP


11-Aug-2014

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 52% equity interest in BBX Capital Corporation (formerly BankAtlantic Bancorp, Inc.) and its subsidiaries ("BBX Capital") and a direct 54% equity interest in Woodbridge Holdings, LLC ("Woodbridge"), which owns 100% of Bluegreen Corporation and its subsidiaries ("Bluegreen"). As described below, BBX Capital owns the remaining 46% equity interest in Woodbridge.

We hold shares of BBX Capital's Class A Common Stock, which is listed for trading on the New York Stock Exchange ("NYSE"), and Class B Common Stock which together represent an approximately 72% voting interest and 52% 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. BBX Capital's current operations and business plans involve investments in income producing real estate, real estate developments and real estate joint ventures, and investments in middle market operating businesses. BBX Capital also owns a 46% equity interest in Woodbridge.

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 these services. Bluegreen also provides other fee-based services, including 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 generates significant interest income.

As of June 30, 2014, we had total consolidated assets of approximately $1.4 billion and shareholders' equity attributable to BFC of approximately $252.5 million. Net income attributable to BFC for the three and six months ended June 30, 2014 was $9.3 million and $12.4 million, respectively, compared to a net loss attributable to BFC of approximately $1.7 million and $4.2 million for the three and six months ended June 30, 2013, respectively.

BFC's business strategy has been to invest in and acquire businesses in diverse industries either directly or through controlled subsidiaries. In recent years, BFC has focused on providing strategic support to its existing investments with a view to the improved performance of the organization as a whole. Initiatives in furtherance of this strategy include the April 2013 Bluegreen merger and the currently proposed merger with BBX Capital, as well as our investment with BBX Capital in Renin, in each case as described in further detail below. Additionally, we may invest in operating businesses and real estate joint ventures for the development of residential and commercial real estate projects, including those in which our affiliates may participate. In furtherance of this goal, we expect to evaluate various financing transactions, including debt or equity financings as well as other alternative sources of new capital. BFC's investments or acquisitions, and the business and investment strategies of BFC's subsidiaries, may not prove to be successful or even if successful may not initially generate income, or may generate income on an irregular basis and may involve a long term investment, causing our results of operations to vary significantly on a quarterly basis.

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, including BBX Capital, Woodbridge, and Bluegreen, are presented on a consolidated basis in BFC's financial statements. However, except as otherwise noted, the debts and obligations of the consolidated entities 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, as described above.


We currently report the results of our business activities through four segments: Bluegreen Resorts; BBX; FAR; and Renin. Discontinued operations include the results of Bluegreen Communities.

BFC and BBX Capital- Acquisition of Renin Corporation

In October 2013, Renin Holdings, LLC ("Renin"), a newly formed joint venture entity owned 81% by BBX Capital and 19% by BFC, acquired substantially all of the assets and certain liabilities of Renin Corp. (the "Renin Transaction"). Renin Corp. manufactures interior closet doors, wall décor, hardware and fabricated glass products. Renin is headquartered in Canada and has four manufacturing, assembly and distribution facilities in Canada, the United States and the United Kingdom.

BBX Capital- Acquisition of Hoffman's Chocolates and Williams and Bennett

On December 10, 2013, BBX Capital, through its newly formed wholly owned subsidiary BBX Sweet Holdings, LLC ("BBX Sweet Holdings"), acquired Hoffman's Chocolates and its subsidiaries Boca Bons and Good Fortunes (collectively, "Hoffman's"). Hoffman's provides premier chocolate products with a product line of over 70 varieties of confections. Hoffman's currently operates 4 retail stores in South Florida.

On January 13, 2014, BBX Sweet Holdings acquired Williams & Bennett, including its other brand Big Chocolate Dipper. Williams & Bennett is headquartered in Boynton Beach, Florida and is a manufacturer of quality chocolate products serving boutique retailers, big box chains, department stores, national resort properties, corporate customers, and private label brands. The fair value of the identifiable net assets acquired was $2.1 million which included $1.5 million of other intangible assets, $1.1 million of inventory and $0.7 million of liabilities assumed.

Revenues of Hoffman's and Williams and Bennett are highly seasonal with approximately 40% of total revenues earned in the fourth quarter and accordingly, financial results of Hoffman's and Williams and Bennett may vary significantly on a quarterly basis and from year to year and may not initially generate income.

Proposed BFC-BBX Merger

On May 7, 2013, BFC, BBX Merger Sub, LLC, a wholly-owned acquisition subsidiary of BFC ("BBX Merger Sub"), and BBX Capital entered into a merger agreement pursuant to which, subject to the terms and conditions of the agreement, BBX Capital will merge with and into BBX Merger Sub, with BBX Merger Sub continuing as the surviving company and a wholly-owned subsidiary of BFC. Under the terms of the merger agreement, which was approved by a special committee comprised of BBX Capital's independent directors as well as the full boards of directors of both BFC and BBX Capital, if the merger is consummated, 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 (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. At special meetings of the companies' shareholders on April 29, 2014, the shareholders of both BFC and BBX Capital approved the merger. However, consummation of the merger remains subject to certain other closing conditions, including, without limitation, 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 and the absence of any "Material Adverse Effect" (as defined in the merger agreement) with respect to either BBX Capital or BFC.


BFC has been advised by the NYSE and NASDAQ that, subject to a change in their position in the future, they would not consider approval of any application for listing of BFC's Class A Common Stock prior to resolution of the currently pending litigation brought by the SEC against BBX Capital and its Chairman, who also serves as BFC's Chairman. See Note 11 to the consolidated financial statements for additional information regarding this litigation. Accordingly, BFC has not yet filed an application for the listing of its Class A Common Stock and may or may not do so depending on whether a national securities exchange or qualified inter-dealer quotation system indicates an application could be considered for approval prior to resolution of the litigation. The pendency of the SEC action and delays in resolving the action have had the effect of delaying any listing of BFC's Class A Common Stock. There is no assurance as to the timing or resolution of the case, the listing of BFC's shares, or the consummation of the merger. It is not currently expected that the merger will be consummated prior to the first quarter of 2015. Pursuant to the terms of the merger agreement, because the merger was not completed by April 30, 2014, both BFC and BBX Capital have the right to terminate the merger agreement at any time.

A consolidated purported class action lawsuit is pending in the 17th Judicial Circuit in and for Broward County, Florida, which seeks to enjoin the merger or, if it is completed, to recover relief as determined by the presiding court. BFC and BBX Capital believe that the lawsuit is without merit and intend to vigorously defend the action. See Note 11 to the consolidated financial statements for additional information regarding this litigation.

Woodbridge Acquisition of Bluegreen

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" or the "Bluegreen cash 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 $149.2 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, Woodbridge, which was a wholly-owned subsidiary of BFC at that time, owned approximately 54% of Bluegreen's outstanding common stock.

In connection with the financing of the merger, BFC 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 in connection 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. During 2013, BBX Capital paid to Woodbridge a total of approximately $441,000 of interest on the Note. During the six months ended June 30, 2014, Woodbridge recognized approximately $294,000 of interest on the Note. In connection with BBX Capital's investment in Woodbridge, BFC and BBX Capital entered into an Amended and Restated Operating Agreement of Woodbridge, which sets forth BFC's and BBX Capital's respective rights as members of Woodbridge and provides for, among other things, unanimity on certain specified "major decisions" and for distributions by Woodbridge to be made on a pro rata basis in accordance with BFC's and BBX Capital's respective percentage equity interests in Woodbridge. During the six months ended June 30, 2014, Bluegreen paid a total of $33.5 million in cash dividends to Woodbridge, and Woodbridge has declared and paid cash dividends totaling $32.3 million, which were allocated pro rata among BFC and BBX Capital based on their percentage ownership interests in Woodbridge ($17.4 million to BFC and $14.9 million to BBX Capital). During 2013, Bluegreen paid a total of $47.0 million in cash dividends to Woodbridge, and Woodbridge declared and paid cash dividends totaling $44.3 million, which were allocated pro rata among BFC and BBX Capital based on their percentage ownership interests in Woodbridge ($23.9 million to BFC and $20.4 million to BBX Capital).


On March 26, 2013, Bluegreen issued $75 million of senior secured notes (the "2013 Notes Payable") in a private transaction, the proceeds of which, together with approximately $14 million of Bluegreen's unrestricted cash, were utilized in connection with the funding of the $149.2 million merger consideration indicated above. See Note 10 to the consolidated financial statements for additional information regarding the 2013 Notes Payable.

Two consolidated class action lawsuits relating to the Bluegreen merger remain pending. The plaintiffs in these actions have asserted that the consideration received by Bluegreen's minority shareholders in the merger was inadequate and unfair, and are seeking to recover damages in connection with the merger. The Company believes that these lawsuits are without merit and intends to vigorously defend the actions. See Note 11 for additional information regarding these actions.

Forward Looking Statements

This document contains forward-looking statements based largely on current expectations of BFC or its subsidiaries that involve a number of risks and uncertainties. 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. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. 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 resort development and vacation ownership industries in which Bluegreen operates, and the investment, development, and asset management and real estate-related industries in which BBX Capital operates, while other factors apply more specifically to BFC, including, but not limited to, the following:

ˇ BFC has limited sources of cash which may present risks to its ongoing operations;

ˇ 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 BFC will not be in a position to make new investments or that any investments made, including BFC's investment in Renin, will not prove to be advantageous;

ˇ 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;

ˇ the risk that creditors of BFC'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;

ˇ BFC's shareholders' interests will be diluted if additional shares of BFC's common stock are issued, including shares issued in connection with the proposed merger with BBX Capital, 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;

ˇ 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;


ˇ the impact of the economy on BFC, the price and liquidity of BFC's common stock and BFC's 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;

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

ˇ 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 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 currently 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 may not be made in BFC's interests;

ˇ risks relating to the currently proposed merger between BFC and BBX Capital, including the ability to consummate the transaction on the currently contemplated terms, when expected, or at all, and the risk that, if consummated, the merger will not result in the benefits expected for the combined company, and the significant costs, including litigation costs, incurred in connection with the merger;

ˇ risks relating to Woodbridge's April 2013 acquisition of Bluegreen, and the shareholder class action lawsuits relating to the transaction;

ˇ the uncertainty regarding, and the impact on BFC's 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, including the legal and other professional fees and other costs and expenses of such proceedings;

ˇ 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 the financial condition and operating results of BFC or its subsidiaries;

ˇ 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 the financial condition and operating results of BFC or its subsidiaries and (ii) with respect to the pending action brought by the SEC against BBX Capital and its Chairman, who also serves as BFC's Chairman, reputational risks and risks relating to the potential loss of the services of BFC's Chairman as well as the impact of such action on BFC's ability to obtain the listing of its Class A Common Stock on a national securities exchange or qualified inter-dealer quotation system, which is a condition to the consummation of BFC's proposed merger with BBX Capital;

ˇ the risk and uncertainties described below with respect to BBX Capital and Bluegreen; and

ˇ BFC's success at managing the risks involved in the foregoing.

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

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

ˇ the risks related to Bluegreen's notes receivable and loans, including that Bluegreen would incur substantial losses and its liquidity position could be adversely impacted if Bluegreen experiences a significant number of defaults and, if actual default trends differ from Bluegreen's expectations, Bluegreen may be required to further increase its allowance for loan losses and record impairment charges, which may be material, in connection with any such increase;

ˇ the risk that, if financing is required, Bluegreen may not be able to draw down on, or renew or extend, existing credit facilities or successfully securitize additional VOI notes receivable and/or obtain receivable-backed credit facilities on favorable terms, or at all;

ˇ 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, and Bluegreen may need to increase its capital expenditures in the future;


ˇ Bluegreen's future success depends on its ability to market its products successfully and efficiently; Bluegreen's VOI sales may be materially and adversely impacted if it is unable to maintain or enter into new marketing alliances and relationships; Bluegreen's marketing expenses may continue to increase, particularly if Bluegreen's marketing efforts focus on new customers rather than sales to existing owners; and increased marketing efforts and/or expenses may not result in increased sales;

ˇ the risk that if new customers are not sufficiently added to Bluegreen's existing owner base, Bluegreen's ability to continue to sell VOIs to existing owners will diminish over time;

ˇ Bluegreen competes with various high profile and well-established operators, many of which have greater liquidity and financial resources than Bluegreen, and Bluegreen may not be able to compete effectively;

ˇ Bluegreen may not meet its customers' expectations as to the quality, value and efficiency of its products and services, and customer dissatisfaction with Bluegreen's products and services may result in negative publicity and/or decreased sales, or otherwise adversely impact Bluegreen's operating results and financial condition;

ˇ Bluegreen may not be successful in increasing or expanding its fee-based services relationships because of changes in economic conditions or otherwise, and such fee-based service activities may not be profitable, which would have an adverse impact on its results of operations and financial condition;

ˇ 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;

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

ˇ 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;

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

ˇ 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;

ˇ results of audits of Bluegreen's tax returns or those of its subsidiaries may have a material and adverse impact on Bluegreen's financial condition;

ˇ Bluegreen has outstanding indebtedness which may negatively impact its available cash and its flexibility in the event of a deterioration of economic conditions and increase Bluegreen's vulnerability to adverse economic changes and conditions, and Bluegreen's level of indebtedness may increase in the future;

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

ˇ 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;

. . .

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