10-Q 1 p17535_10q.txt QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 12, 2003, 448,213,228 units of Class A Beneficial Interests and 137,176,571 units of Class B Beneficial Interests were outstanding. BFA Liquidation Trust Form 10-Q Table of Contents PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations 11 Item 4 Controls and Procedures 13 PART 2 - OTHER INFORMATION Item 1 Legal Proceedings 14 PART I - FINANCIAL INFORMATION Item 1. Financial Statements BFA LIQUIDATION TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION (UNAUDITED)

~~SEPTEMBER~~June 30, ~~DECEMBER~~2003 December 31, 2002 ~~2001~~ ------------- ----------------- ~~(UNAUDITED)~~ ASSETS IN LIQUIDATION AT ESTIMATED FAIR VALUE Cash and cash equivalents $ 71,~~802~~995,~~192~~115 $ 12,~~027~~254,~~598~~806 Receivables, net (note 2) 5750,~~047~~634,~~653~~451 7359,~~877~~434,~~916~~985 Other trust assets, net (notes 3 and 78) 4541,~~219~~891,~~381~~950 5746,~~479~~149,~~167~~276 Restricted cash and cash equivalents 52,~~721~~166,~~421~~153 56,~~214~~631,~~453~~801 Fair value of expected ~~cashflows~~cash flows from settlements (note 4) ~~202,982,967~~-- 19188,~~800~~478,~~000~~673 ------------ ------------ TOTAL ASSETS ~~318~~96,~~773~~687,~~614~~669 ~~157~~302,~~399~~949,~~134~~541 ------------ ------------ LIABILITIES IN LIQUIDATION: ~~Payables~~Accounts Payable and accrued liabilities 41,~~158~~079,~~439~~698 93,~~017~~071,~~702~~617 Notes payable (note 5) 42,~~138~~167,~~705~~328 64,~~995~~126,~~339~~217 Estimated costs to complete liquidation and litigation (note 6) 64,~~918~~666,~~067~~772 126,~~405~~679,~~130~~030 Settlement liability (note 87) ~~182~~3,~~962~~380,~~866~~513 --94,239,336 ------------ ------------ TOTAL LIABILITIES ~~198~~11,~~178~~294,~~077~~311 28108,~~418~~116,~~171~~200 ------------ ------------ Commitments and contingencies (note 9) NET ASSETS IN LIQUIDATION $~~120~~ 85,~~595~~393,~~537~~358 $~~128~~194,~~980~~833,~~963~~341 ============ ============ CLAIMS AGAINST NET ASSETS IN LIQUIDATION CONSIST OF THE FOLLOWING: Class "3A" Certificate, 448,213,228 units outstanding, ~~105~~$.17 per unit at June 30,~~396~~ 2003 and $.36 at December 31,~~825~~ ~~111~~2002 $ 78,~~823~~416,~~670~~796 $162,294,947 Class "3B" Certificate, 137,176,571 units outstanding, 15$.05 per unit at June 30,~~198~~ 2003 and $.24 at December 31,~~712~~ 172002 6,~~157~~976,~~293~~562 32,538,394 ------------ ------------ TOTAL NET ~~ASSET~~ASSETS ~~VALUE~~ $~~120~~ 85,~~595~~393,~~537~~358 $~~128~~194,~~980~~833,~~963~~341 ============ ============

The accompanying notes are an integral part of these Consolidated Financial Statements. 1 BFA LIQUIDATION TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (UNAUDITED)

~~THREE~~Three ~~MONTHS~~months ~~ENDED~~ended ----------------------------------- ~~SEPTEMBER~~June 30, ~~SEPTEMBER~~2003 June 30, 2002 ~~2001~~ ------------- ------------- Net assets in liquidation, ~~June~~April 301, ~~2002~~2003 and ~~June~~April 301, ~~2001~~2002, respectively $ ~~127~~100,~~895~~959,~~794~~333 $ ~~137~~129,~~888~~808,~~441~~985 Interest income on notes receivable (note 2) 1,~~597~~224,~~445~~995 21,~~146~~650,~~222~~221 Interest expense on notes payable (~~143~~note 5) (63,~~203~~374) (~~121~~179,~~963~~978) Changes in fair value of other trust assets ~~(notes~~and 3liabilities ~~and~~(note 78) 1(4,~~146~~470,~~201~~239) 922,~~364~~736,793 Changes in fair value of estimated costs to complete liquidation (note 6) -- (~~894~~504,~~995~~959) ~~75,270~~ Distributions to holders of Class 3A and 3B beneficial interests (912,~~005~~257,~~705~~357) (105,~~125~~615,~~220~~268) ------------- ------------- Net assets in liquidation, ~~September~~June 30, ~~2002~~2003 and ~~September~~June 30, ~~2001~~2002, respectively $ ~~120~~85,~~595~~393,~~537~~358 $ ~~129~~127,~~955~~895,~~114~~794 ============= =============

The accompanying notes are an integral part of these Consolidated Financial Statements. 2 BFA LIQUIDATION TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (UNAUDITED)

~~JANUARY~~Six ~~22,~~months ~~2001~~ended ~~JANUARY 1, 2002~~ - ~~(INCEPTION)~~ ---------------------------------- ~~SEPTEMBER~~June 30, ~~2002~~2003 ~~SEPTEMBER~~June 30, ~~2001~~2002 -------------~~-----~~ -------------~~-----~~ Net assets in liquidation, January 1, ~~2002~~2003 and January 221, ~~2001 (inception)~~2002, respectively $ ~~128~~194,~~980~~833,~~963~~341 $ ~~171~~128,~~414~~980,~~559~~963 Interest income on notes receivable 4(note 2) 2,~~920~~732,~~869~~473 53,~~844~~323,~~754~~424 Interest expense on notes payable (~~526~~note 5) (121,~~858~~958) (~~728~~385,~~959~~940) Changes in fair value of other trust assets ~~(notes~~and 3liabilities ~~and~~(note 78) 3(6,~~486~~224,~~440~~462) (52,097,~~020)~~574 Changes in fair value of estimated costs to complete liquidation (note 6) -- (1504,~~644,904~~959) -- Distributions to holders of Class 3A and 3B beneficial interests (14105,~~620~~826,~~973~~036) (415,~~478~~615,~~220~~268) ------------- ------------- Net assets in liquidation, ~~September~~June 30, ~~2002~~2003 and ~~September~~June 30, ~~2001~~2002, respectively $ ~~120~~85,~~595~~393,~~537~~358 $ ~~129~~127,~~955~~895,~~114~~794 ============= =============

The accompanying notes are an integral part of these Consolidated Financial Statements. 3 BFA LIQUIDATION TRUST AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION 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. The assets will be grouped in a consistent and coherent manner and held, pending sale, by the new subsidiary. The Trust and the it's subsidiary will be 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, New Asset Subsidiary, LLC, an Arizona limited liability company ("NAS"). 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 June 30, 2003 and December 31, 2002 and for the three and six months ended June 30, 2003 and 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. These unaudited 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 4 basis of accounting, the financial statements reflect the estimated costs of liquidating the assets and distributing the proceeds to holders of beneficial interests. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim period presented. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of December 31, 2002 and for the fiscal year ended December 31, 2002 included in the Trust's Form 10 -K as filed with the Securities and Exchange Commission. The results for the three and six months ended June 30, 2003 may not be indicative of the future results for the entire year 2003. 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. TRUST ASSETS The assets of the Trust are carried at estimated fair 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 and receivables transferred to the Trust upon the consummation of the Plan. The estimates of the future cash flows from which the asset values of the Trust were derived are made under the direction of the Trust's management 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 difference 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, it is not practical to estimate their fair value. 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. 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. 5 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 4.25% present value factor at June 30, 2003 and December 31, 2002. These costs, which include personnel, facilities, 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). Given that there is inherent uncertainty in the estimation process, actual results could be materially different. 2. RECEIVABLES, NET Receivables primarily consist of a note receivable from Shea Homes, Inc. ("SHEA") of $45.8 million and $53.0 million at June 30, 2003 and December 31, 2002, respectively. The note receivable from Shea is collateralized by a master planned community, and the remaining other receivables relate to land contracts, mortgage notes receivable and various other commercial receivables. See note 11 for additional information. The following is a summary of gross cash flows and related valuation allowances at:

~~September~~June 30, 2003 December 31, 2002 ~~2001~~ ------------- ----------------- ~~(UNAUDITED)~~ Total gross future cash flows from notes receivable $ ~~140~~88,~~525~~644,~~971~~875 $ ~~167~~138,~~220~~853,~~475~~065 Collectibility discount (7237,~~502~~435,~~740~~544) (7769,~~161~~241,~~296~~041) Present value discount (8-9%) (10574,~~975,578~~880) (1610,~~181~~177,~~263~~039) ------------- ------------- Net receivables $ 5750,~~047~~634,~~653~~451 $ 7359,~~877~~434,~~916~~985 ============= =============

Some of the debtors other than Shea 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. 3. OTHER TRUST ASSETS, NET The other trust assets, net 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:

~~September~~June 30, 2003 December 31, 2002 ~~2001~~ ------------- ----------------- ~~(UNAUDITED)~~ Real estate assets and partnerships, net $ 5139,~~385~~168,~~452~~674 $ 5843,~~368~~601,~~035~~619 Investments in other operating companies, net 35,~~956~~300,~~404~~332 115,~~494~~007,~~171~~029 Other assets, net ~~447~~503,~~147~~618 ~~379~~696,~~322~~956 ------------ ------------ Future value of other trust assets 5544,~~789~~972,~~003~~624 7049,~~241~~305,~~528~~604 Present value discount (~~15%~~various rates) (103,~~569~~080,~~622~~674) (123,~~762~~156,~~361~~328) ------------ ------------ Other trust ~~asset~~assets value $ 4541,~~219~~891,~~381~~950 $ 5746,~~479~~149,~~167~~276 ============ ============

6 4. FAIR VALUE OF EXPECTED CASH FLOWS FROM SETTLEMENTS Settlement proceeds at December 31, 2002 primarily consist of net proceeds from Arthur Andersen ("AA"). The AA settlement consists of gross proceeds of $217 million less legal fees of approximately $32.9 million and litigation expenses incurred for prosecuting the litigation of approximately $4.0 million for a net amount of approximately $180.1 million. Both the Superior Court for the State of Arizona, Maricopa County (the "SUPERIOR COURT") and Bankruptcy Court approved the settlement on September 13, 2002. Interest of approximately $1.1 million was earned on the cash balances held by the Trust for the AA settlement at December 31, 2002 and is reflected in these financial statements. On December 27, 2002, the Trust distributed $6.5 million of the AA settlement to the Class 3A and 3B beneficial interest holders of the Trust and class action members in accordance with the court approved plan of allocation. At December 31, 2002, approximately $174.7 million representing both the Trust and class action share of the AA settlement proceeds remained to be distributed. In addition to the AA settlement, the Trust and class action were able to reach settlements with Henry & Horne, P.L.C., Nelson Lambson & Co., P.L.C., E. A. and Rebecca Kuhn, Jalma W. and Carole Hunsinger and their affiliates, The Arizona Southern Baptist Convention and affiliated entities, Harold D. and Stephanie B. Friend their affiliated entities and L. Dwain Hoover, Beva J. Hoover, D. Hoover & Associates and the D. Hoover & Associates Investments, Inc. Retirement Trust. These settlements aggregately total approximately $15.3 million less discounts and consist of cash and other real property. Litigation expenses related to these settlements total approximately $1.6 million for a net amount of approximately $13.7 million. The court approved plan of allocation states that the Trust is allocated 50% of the proceeds and that the class action is allocated the remaining 50% of the proceeds. On January 23, 2003, the remaining AA settlement funds of $174.7 million were distributed to the Class 3A and 3B beneficial interest holders and class action members in accordance with the court approved plan of allocation. On March 24, 2003 the cash proceeds received from the other litigation settlements of $7.1 million were distributed to the Class 3A and 3B beneficial interest holders and class action members in accordance with the court approved plan of allocation. The remaining non-cash assets of $6.6 million received as part of these additional settlements has been reclassified to the appropriate asset classification. Therefore at June 30, 2003 all cash from litigation settlements had been distributed. 5. NOTES PAYABLE The following is a summary of notes payable to third parties: Gross note payable of approximately $2.2 million to one creditor collateralized by the Shea Homes note receivable, with payment terms of annual principal and interest payments, with an interest rate of 6.75%. See note 11 for additional information. At June 30, 2003, aggregate debt maturities including interest were as follows: 2003 $2,184,287 2004 -- 2005 -- 2006 -- 2007 -- Thereafter -- ---------- 2,184,287 Less present value discount (6.75%) (16,959) ---------- Notes payable $2,167,328 ========== 6. ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION The estimated costs to complete liquidation and litigation of $4,666,772 at June 30, 2003 and $6,679,030 at December 31, 2002 represent the estimated costs of operating the Trust through its expected termination on January 21, 2006, discounted using an 4.25% present value factor. These costs, which include personnel, facilities, Trustee 7 and Board compensation, professional fees and litigation costs, are estimated based on various assumptions regarding the number of employees, the use of outside professionals (including attorneys and accountants) and other matters. Litigation costs contain assumptions based on what management expects the likely course of actions will be regarding litigating and or settling certain contingencies (Note 9). Given that there is inherent uncertainty in the estimation process, actual results could be materially different. 7. SETTLEMENT LIABILITY The settlement liability at June 30, 2003 represents the class action's 50% portion of the settlement proceeds and assets from Jalma W. and Carole Hunsinger and their affiliates and Harold D. and Stephanie B. Friend and their affiliates. The settlement liability relates to assets reported in receivables of approximately $2.4 million and other trust assets of approximately $4.3 million. In January 2003 the courts approved an allocation process for the January 2003 settlements whereby the Trust and the class action each are allocated 50% of the settlement proceeds. From all Litigation Claims, the Trust will distribute its allocated share of the proceeds to the beneficial holders on a pro rata basis in accordance with the Plan. The class action proceeds will be distributed to its investors based on a formula as agreed by its members. The Trust has recorded a settlement liability for the settlement proceeds, net of legal fees, equal to the amount allocated to the class action. The liability will remain until the proceeds are distributed to the class action investors by the Trust. 8. CHANGES IN OTHER TRUST ASSETS During the three months ended June 30, 2003 the valuation of certain other trust assets were adjusted based on current and pending sales offers, new information received by management and actual operating results. These adjustments aggregately total an approximate $4.5 million decrease in other trust assets. Included in actual operating results are sales of approximately $4.4 million for the sale of the Park at Juniper Ridge, property in Casa Grande and various other lots and parcels from Westside Property. During the three months ended June 30, 2002 the valuation of certain other trust assets were adjusted based on current and pending sales offers, new information received by management and actual operating results. These adjustments aggregately total an approximate $2.7 million increase in other trust assets. Included in actual operating results are sales of approximately $2.1 million for the sale of various lots and parcels from Coyote Lakes, Rancho Vistoso and Westside Property. During the six months ended June 30, 2003 the valuation of certain other trust assets were adjusted based on current and pending sales offers, new information received by management and actual operating results. These adjustments aggregately total an approximate $6.2 million decrease in other trust assets. Included in actual operating results are sales of approximately $4.6 million for the sale of the Park at Juniper Ridge, property in Casa Grande and various other lots and parcels from ASC San Antonio and Westside Property. During the six months ended June 30, 2002 the valuation of certain other trust assets were adjusted based on current and pending sales offers, new information received by management and actual operating results. These adjustments aggregately total an approximate $2.1 million increase in other trust assets. Included in actual operating results are sales of approximately $3.4 million for the sale of various lots and parcels from Coyote Lakes, Rancho Vistoso, Show Low Country Club and Westside Property. 9. COMMITMENTS, CONTINGENCIES AND SETTLEMENTS Contingent Liabilities The Trust is involved in various legal proceedings. A number of creditors filed proofs of claims in the Debtors' bankruptcy proceedings. As of June 30, 2003 all of these claims have been resolved and paid in full if any amount was due. Contingent Assets During late 2001, the Trust commenced two (2) separate adversary proceedings in the Bankruptcy Court against 8 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. Trial for this action is scheduled to commence in early 2004. No amount has been recorded in the accompanying consolidated financial statements related to this contingent asset. 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' are working to accumulate all the construction-related documents. Currently, both the Trust and defendants are in a document review process. No amount has been recorded in the accompanying consolidated financial statements related to this contingent asset. 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 regards 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 now has successfully litigated and received judgments on the two state 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 cramdown 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 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 Trust is currently considering filing a Motion for Reconsideration, or in the alternative, an appeal. An amount equal to approximately $137,000 has been recorded in the accompanying consolidated financial statements related to this contingent asset. 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 holds a mortgage on approximately 70 acres of real property located in Maricopa County, Arizona. Additionally, the Trust has recourse against one of the partners of the partnership. All remaining partners have previously paid the Trust cash payments in exchange for release of their of personal recourse liability. A lawsuit has been filed in the Superior Court to foreclose on the mortgage and obtain a judgment against the partnership and the one remaining liable partner. No answers have been filed. No amount has been recorded in the accompanying consolidated financial statements related to future amounts not yet received from this contingent asset. Because of the significant uncertainty associated with the valuation of these contingent assets, it is likely that the amounts ultimately realized could differ from the amounts that are actually reflected in the accompanying consolidated financial statements and the differences could be material. 9 10. CASH RECEIPTS AND DISBURSEMENTS For the three months ended June 30, 2003 and June 30, 2002, the Trust received net cash proceeds from sales of assets, note receivable collections and operations of approximately $12.6 and $7.0 million respectively, consisting of the following:

~~Third~~Three ~~Quarter~~months ~~January~~ended ~~22, 2001~~ ------------------------------ ~~January 1, 2002~~ - ~~(inception)~~ --------- ~~2002~~June ~~2001 September~~ 30, ~~2002~~2003 ~~September~~June 30, ~~2001~~2002 ------------- ------------- --------------~~----~~ ~~------------------~~Notes ~~Net~~receivable ~~assets in liquidation, beginning~~ $ ~~127~~7,~~895~~391,~~794~~536 $ ~~137~~824,~~888,441~~425 $Cash ~~128,980,963~~flows $from ~~171,414,559 Interest on notes receivable 1,597,445 2,146,222 4,920,869 5,844,754 Interest on notes payable (143,203) (121,963) (526,858) (728,959) Changes in fair value of~~ other trust assets ~~1,146,201 92,364 3,486,440 (~~5,~~097~~249,~~020)~~181 ~~Changes in fair value of costs to complete liquidation (894~~6,~~995) 75~~200,~~270~~788 ~~(1,644,904)~~ -- ~~Distributions to holders of Class 3A and 3B beneficial interests (9,005,705) (10,125,220) (14,620,973) (41,478,220)~~ ------------- ------------- ------------- ~~------------- Net assets in liquidation, ending~~ $ ~~120~~12,~~595~~640,~~537~~717 $ ~~129~~7,~~955~~025,~~114~~213 ~~$ 120,595,537 $ 129,955,114~~ ============= ============= ============= =~~============~~

Conversely, for the same respective periods, the Trust paid out to various creditors approximately $17.4 and $11.3 million as follows:

~~NON-CASH~~Three ~~ASSETS~~months INended ~~LIQUIDATION~~------------------------------------------ ATJune ~~ESTIMATED~~30, ~~FAIR~~2003 ~~VALUE~~June ~~SEPTEMBER~~ 30, ~~DECEMBER 31,~~ 2002 ~~2001~~ ------------ ------------------------------ Trust operations $ (~~UNAUDITED~~986,858) ~~Receivables~~$ (1,452,411) ~~net~~Payables $& 57class 5 creditors (2,~~047~~818,~~653~~174) ~~$ 73~~(3,~~877~~735,~~916~~106) ~~Other~~Payments ~~trust~~to ~~assets~~secured notes payables (1,316,594) ~~net~~(460,636) 45Distributions to 3A and 3B (12,~~219~~257,~~381~~357) 57(5,~~479~~615,~~167~~267) ------------ ------------------------------ ~~TOTAL ASSETS~~ $~~102~~(17,~~267~~378,~~034~~983) $~~131~~(11,~~357~~263,~~083~~420) ============ ==============================

11. SUBSEQUENT EVENTS On July 1, 2003 Shea made it's quarterly interest payment of approximately $1.1 million. On July 15, 2003 Shea paid all principal and interest owed on its debt obligation to the Trust in the approximate amount of $44.9 million. From these proceeds the Trust paid all principal and interest due to a creditor secured by the Shea note in the approximate amount of $2.2 million. On July 29, 2003 the Trust and Class Action reached a tentative settlement agreement with National Union Insurance Company in regards to the Trust and Class Action claims for monetary damages from insurance coverage related to the conduct of the former BFA directors and officers. The settlement agreement will now be drafted and must be approved by the bankruptcy court and Class Action members before any amounts may be realized by the Trust and Class Action. No amount has been recorded in the accompanying consolidated financial statements related to this settlement. On August 8, 2003 the Trust distributed approximately $40.0 million to the holders of Class 3A and 3B beneficial interests. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The historical financial data presented below for the three and six months ended June 30, 2003 and June 30, 2002 are derived from our consolidated financial statements. The selected financial data should be read in conjunction with the notes below and the consolidated financial statements and related notes included in Item 1.

Certain statements under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," "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. THREE MONTHS ENDED JUNE 30, 2003 AND 2002 The estimated fair value of the Trust's net assets in liquidation decreased approximately $15.6 million for the three months ended June 30, 2003 as compared to approximately $1.9 million decrease for the three months ended June 30, 2002. Factors which contributed to the net decrease of the net asset value of the Trust's net assets for the three months ended June 30, 2003 include (i) interest income from notes receivables which increased net assets by approximately $1.2 million, (ii) interest expense for notes payable which decreased net assets by approximately $63,000, (iii) decrease in value of certain other trust assets which decreased net assets by approximately $4.5 million and (iv) distributions to holders of Class 3A and 3B beneficial interests which decreased net assets by approximately $12.2 million. Factors which contributed to the net decrease of the net asset value of the Trust's net assets for the three months ended June 30, 2002 include (i) interest income from notes receivable which increased net assets by approximately $1.7 million, (ii) interest expense for notes payable which decreased net assets by approximately $180,000, (iii) increase in value of certain other trust assets which increased net asset by approximately $2.7 million, (iv) increase in estimated costs to liquidate which decreased net assets by approximately $505,000 and (v) 11 distributions to holders of Class 3A and 3B beneficial interests which decreased net assets by approximately $5.6 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 principal payments made by the Trust. The changes in fair value of other trust assets in 2003 as compared to 2002 differed because of changes in the fair market value of assets and certain related liabilities due to pending or current sales offers, receipt of current information and actual operating results of the assets. In the three months ended June 30, 2003, the Trust distributed approximately $12.2 million to holders of Class 3A or 3B beneficial interests. This distribution was made principally from collections on Trust Assets. The Class 3A and 3B beneficial interests were valued at approximately $85.4 million at June 30, 2003 and $194.8 million at December 31, 2002. SIX MONTHS ENDED JUNE 30, 2003 AND 2002 The estimated fair value of the Trust's net assets in liquidation decreased approximately $109.4 million for the six months ended June 30, 2003 as compared to approximately $1.1 million decrease for the six months ended June 30, 2002. Factors which contributed to the net decrease of the net asset value of the Trust's net assets for the six months ended June 30, 2003 include (i) interest income from notes receivables which increased net assets by approximately $2.7 million, (ii) interest expense for notes payable which decreased net assets by approximately $122,000, (iii) decrease in value of certain other trust assets which decreased net assets by approximately $6.2 million and (iv) distributions to holders of Class 3A and 3B beneficial interests which decreased net assets by approximately $105.8 million. Factors which contributed to the net decrease of the net asset value of the Trust's net assets for the six months ended June 30, 2002 include (i) interest income from notes receivable which increased net assets by approximately $3.3 million, (ii) interest expense for notes payable which decreased net assets by approximately $386,000, (iii) increase in value of certain other trust assets which increased net asset by approximately $2.1 million, (iv) increase in estimated costs to liquidate which decreased net assets by approximately $505,000 and (v) distributions to holders of Class 3A and 3B beneficial interests which decreased net assets by approximately $5.6 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 principal payments made by the Trust. The changes in fair value of other trust assets in 2003 as compared to 2002 differed because of changes in the fair market value of assets and certain related liabilities due to pending or current sales offers, receipt of current information and actual operating results of the assets. In the six months ended June 30, 2003, the Trust distributed approximately $105.8 million to holders of Class 3A or 3B beneficial interests. These distributions were made principally from collections on Trust Assets and proceeds from litigation. The Class 3A and 3B beneficial interests were valued at approximately $85.4 million at June 30, 2003 and $194.8 million at December 31, 2002. Non-cash trust assets at June 30, 2003 and December 31, 2002 were comprised of the following:

12 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. At June 30, 2003 and June 30, 2002, the projected monthly cash flows were discounted at various rates to reflect the Trust Assets at estimated fair value. The Trust's consolidated financial statements 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 basis for making judgments about the fair values of assets and liquidation liabilities are not always 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. 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 4.25% present value factor at June 30, 2003 and 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. Item 4. Controls and Procedures Based on their evaluation, as of the end of the period covered by this Form 10-Q, the Trust's Liquidating Trustee (the Trust's principal executive officer) and Assistant to the Liquidating Trustee (the Trust's principal financial officer) have concluded that they have reasonable assurance of the effectiveness of the Trust's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). 13 In connection with this evaluation, the Liquidating Trustee and the Assistant to the Liquidating Trustee identified no change in internal control over financial reporting that occurred during the Trust's fiscal quarter ended June 30, 2003, and that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting. PART II OTHER INFORMATION Item 1. Legal Proceedings 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. Trial for this action is scheduled to commence in early 2004. 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. W.H.H.C. The Trust holds a note receivable from W.H.H.C. in an outstanding amount of approximately $2 million dollars. The Trust through this note holds a mortgage on approximately 70 acres of real property located in Maricopa County, Arizona. Additionally, the Trust has recourse against one of the partners of the partnership. All remaining partners have previously paid the Trust cash payments in exchange for release of their of personal recourse liability. A lawsuit has been filed in the Superior Court to foreclose on the mortgage and obtain a judgment against the partnership and the one remaining liable partner. No answers have yet been filed. 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' are working to accumulate all the construction-related documents. Currently, both the Trust and defendants are in a document review process. 14 William Blair In an effort to avoid repaying $4 million dollars in debt to the Trust, Mr. 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"). Mr. Blair then filed a petition for bankruptcy relief under Chapter 11 to frustrate the collection efforts of the Trust. Separately, Fidelity Title (the "TITLE COMPANY"), the Title Company hired by Mr. Blair to transfer title to portions of the Trust's collateral to third party buyers without lien releases, filed its own lawsuit in a different jurisdiction, seeking a variety of legal and equitable relief. With regard to the petition for bankruptcy relief filed by Mr. Blair in the name of Desert Diamond, in 2002, the Trust successfully opposed a "cramdown" plan of reorganization, and then separately succeeded in converting the Desert Diamond bankruptcy case to a liquidation under the provisions of Chapter 7. The Trust worked with the Chapter 7 Trustee to sell the remaining real property collateral to a third party purchaser. That sale has closed, netting approximately $380,000 to the Trust. The Trust previously recovered approximately $100,000 from other collection efforts, bringing the Trust's recovery to approximately $480,000. 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 regards 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. Additionally the court awarded the Trust legal fees in the amount of $54,931.00 and costs of $1,279.20. The Trust now has successfully litigated and received judgments on the two state 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 cramdown 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 distributed to the Trust. With regard to the remaining action against the Title Company defendants, 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 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 Trust is currently considering filing a Motion for Reconsideration, or in the alternative, an appeal. Disputed Proofs of Claims A number of creditors filed proofs of claims in the Debtors' bankruptcy proceedings. As of June 30, 2003 all of these claims have been resolved and paid in full if any amount was due. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated August 13, 2003 BFA LIQUIDATION TRUST By: /s/ Clifton R. Jessup, Jr. Name: Clifton R. Jessup, Jr. Title: Liquidating Trustee 15

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