10-Q 1 p18817_10q.txt FORM 10-Q 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, 2004 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, 2004, 448,610,056 units of Class A Beneficial Interests and 137,246,636 units of Class B Beneficial Interests were outstanding. BFA Liquidation Trust Form 10-K Table of Contents PART I - FINANCIAL INFORMATION

PART I - FINANCIAL INFORMATION Item 1. Financial Statements BFA LIQUIDATION TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION (UNAUDITED)

- 1 - BFA LIQUIDATION TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (UNAUDITED)

- 2 - BFA LIQUIDATION TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION (UNAUDITED)

- 3 - BFA LIQUIDATION TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The BFA Liquidation Trust (the "TRUST") was formed pursuant to the "First Amended Joint Liquidating Plan of Reorganization of the Debtors Under Chapter 11 of the Bankruptcy Code" proposed by the Baptist Foundation of Arizona ("BFA") and related subsidiaries and affiliates (the "DEBTORS"), Official Collateralized Investors' Committee and Official Joint Committee of Unsecured Creditors, relating to Case No. 99-13275 ECF GBN (the "PLAN"), which was confirmed by the Bankruptcy Court for the District of Arizona ("BANKRUPTCY COURT"), by an order entered on December 22, 2000 and became effective on January 22, 2001 ("EFFECTIVE DATE"). The primary purpose of the Trust is to (i) oversee and direct the liquidation of the assets that were transferred to the Trust pursuant to the Plan (the "TRUST ASSETS") for the benefit of the Trust's beneficiaries; (ii) prosecute all claims and causes of action that the Trust may have against any person or entity (the "LITIGATION CLAIMS") for the benefit of the Trust's beneficiaries; and (iii) distribute any proceeds of the Litigation Claims and the Trust Assets received by the Trust to the Trust's beneficiaries. The Trust is not operated with the objective of continuing or engaging in the conduct of a trade or business, except to the extent reasonably necessary to preserve or enhance the liquidation value of the Trust Assets, consistent with the primary purpose of the Trust. To facilitate the orderly administration of the Trust and to maximize the value of the Trust Assets, the Trust owns one subsidiary, New Asset Subsidiary, LLC ("NAS"). The assets will be grouped in a consistent and coherent manner and held, pending sale, by NAS. The Trust and NAS are charged with the responsibility of appraising the assets, listing them for sale in an orderly manner, and distributing the proceeds from the sale to its beneficiaries on a regular basis. The Trust is expected to terminate after five (5) years on January 22, 2006 unless the Bankruptcy Court determines that an extension of the Trust is necessary for the purposes of the Trust. The Plan provides for the appointment of a liquidating trustee (the "LIQUIDATING TRUSTEE") and a liquidating trust board ("LIQUIDATION TRUST BOARD") to oversee the liquidation of the Trust Assets and to ensure that such liquidation is conducted in a cost-effective manner and in a reasonable time. In addition, the Liquidating Trustee and Liquidating Trust Board are directing the prosecution of the Litigation Claims in an attempt to maximize the Trust's recoveries from such claims. The Liquidating Trustee and the Liquidating Trust Board are making ongoing efforts to dispose of the Trust Assets, to make timely distributions and to minimize the duration of the Trust. The Trust has a wholly-owned subsidiary to assist in liquidating the assets, NAS, an Arizona limited liability company. NAS was formed on the Effective Date, and the Trust is the sole member of that company. The Trust is able to direct NAS to take any actions that the Liquidating Trustee believes will maximize the value of the assets held by NAS. The Trust transferred substantially all of its assets to NAS, which NAS is currently marketing for sale. NAS is not permitted to sell any assets or take any other action unless so directed by the Trust. Collectively, the Trust and NAS are referred to as the "Trust". Basis of Presentation The accompanying consolidated financial statements as of June 30, 2004 and December 31, 2003 and for the three months and six months ended June 30, 2004 and June 30, 2003 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. - 4 - 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 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, 2003 and for the fiscal years ended December 31, 2002 and December 31, 2001 included in the Trust's Form 10-K's as filed with the Securities and Exchange Commission. The results for the three and six months ended June 30, 2004 may not be indicative of the future results for the entire year 2004. 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 market values determined by discounting, at appropriate risk adjusted discount rates, the Trust's current best estimate of cash flows expected to be realized from the collection, liquidation and disposition of assets held by the Trust. Such assets consist principally of notes receivable, income producing real estate and interests in real estate, interests in partnerships and operating companies and miscellaneous other assets, receivables and assets from litigation and/or settlements. The estimates of the future cash flows and discount rates from which the asset values of the Trust were derived are updated quarterly and are made under the direction of the management of the Trust based upon information available and believed to be reliable. These estimates reflect significant judgments regarding assumptions, discount rates, timing of cash flows, market risk and allowable disputed claims. Because of the inherent uncertainty regarding the valuation of these assets there will likely be differences between actual results and the estimated fair values reflected in the accompanying consolidated financial statements and the differences may be material. In addition to the assets described above, the Trust also holds the Litigation Claims, which consist of claims against the former directors and officers of BFA and judgments and deficiencies related to loans made to former borrowers of the Debtors. Because of the significant uncertainties associated with estimating the probability and timing of cash flows related to these claims, there can be no assurance that the Trust will realize any value of such Litigation Claims. However, if realized these Litigation Claims could be material to the Trust. The fair value of Trust Assets is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. For each asset, estimates of income, expenses and net cash flow on a quarterly basis through the expected final disposition date are prepared. The individual asset cash flow estimates are developed based upon factors which include appraisals by independent appraisers, physical inspection of the asset or the collateral underlying the related loans, local market conditions, contractual payments and discussions with the relevant borrower. ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION The estimated costs to complete liquidation represent the estimated cash costs of operating the Trust through its expected termination on January 21, 2006, discounted using a present value factor of 4.25% at June 30, 2004 and 4.00% at December 31, 2003. These costs, which include personnel, facilities, Liquidating Trustee and Liquidating Trust Board compensation, professional fees, litigation costs and other related costs, are estimated based on various assumptions - 5 - 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 5). Given that there is inherent uncertainty in the estimation process, actual results could be materially different. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." FIN No. 46 provides guidance on the identification of entities of which control is achieved through means other than voting rights (""variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. Our adoption of this Interpretation did not have a material impact on our consolidated financial statements or disclosures. 2. RECEIVABLES, NET At June 30, 2004, net receivables consisted primarily of an approximately $1.75 million note from W.H.H.C., an approximately $900,000 note from Clearly Waikoloa, approximately $837,000 from various note receivables related to land contracts, and approximately $690,000 of various other mortgage notes receivable and commercial receivables most of which are collateralized by real estate. At December 31, 2003, net receivables consisted primarily of an approximately $820,000 note from W.H.H.C., an approximately $1.3 million note from Clearly Waikoloa, approximately $1.4 million from various note receivables related to land contracts, and approximately $680,000 of various other mortgage notes receivable and commercial receivables most of which are collateralized by real estate. The following is a summary of gross cash flows and related valuation allowances at:

Some of the debtors are in default on their contractual obligations to the Trust. At this time management does not expect to receive future cash flows related to receivables in default and thus no amount is included in the above stated receivable amount. The Trust is aggressively pursuing collection of these debts by various means including, but not limited to, foreclosure and litigation, and recoveries from these actions, if any, could be material. 3. OTHER TRUST ASSETS, NET The other trust assets are carried at estimated fair values which are the result of discounting, at appropriate discount rates, the currently estimated cash flows projected to be realized from the collection, liquidation and disposition. These valuations include appraisals by independent appraisers of the liquidation value of some assets. These values do not represent the full future cash flow values expected from the sale or operations of these assets due to the discounting of respective cash flows. Such assets consist principally of income producing real estate and interests in real estate, interests in partnerships and operating companies, and miscellaneous other assets transferred to the Trust upon the consummation of the Plan. - 6 - Other trust assets consist of the following:

4. FAIR VALUE OF EXPECTED CASH FLOWS FROM SETTLEMENTS Settlement proceeds at December 31, 2003 primarily consist of the net expected proceeds from the settlement with Chaparral Pines LLC. The Chaparral Pines LLC settlement consists of $300,000 cash and real estate valued at approximately $420,000 net of selling costs. In 2004 the Chaparral Pines settlement agreement was signed by both parties and approved by the Bankruptcy Court. Also during 2003 the Trust settled with National Union Fire Insurance Company of Pittsburgh, PA ("NATIONAL UNION") in regards to insurance claims of the Debtors against former officers and directors. The National Union settlement consists of gross proceeds of $3.75 million less legal fees and expenses of approximately $550,000 for a net amount of approximately $3.2 million. Both the Superior Court for the State of Arizona, Maricopa County (the "SUPERIOR COURT") and Bankruptcy Court approved the settlement on October 17 and 21, 2003, respectively. The National Union Settlement became final and the net proceeds along with approximately $1.7 million in litigation proceeds that was derived from the sale of assets received as part of the litigation settlements with Jalma W. and Carole Hunsinger and their affiliates was distributed on December 19, 2003. 5. ESTIMATED COSTS TO COMPLETE LIQUIDATION AND LITIGATION The estimated costs to complete liquidation and litigation of $4,519,356 at June 30, 2004 and $4,271,302 at December 31, 2003 represent the estimated costs of operating the Trust through its expected termination on January 21, 2006, discounted using a present value factor of 4.25% at June 30, 2004 and 4.00% at December 31, 2003. These costs, which include personnel, facilities, Liquidating Trustee and Liquidating Trust 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. Given that there is inherent uncertainty in the estimation process, actual results could be materially different. 6. SETTLEMENT LIABILITY The settlement liability at June 30, 2004 and December 31, 2003 represents the class action's 50% portion of the remaining settlement 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 other trust assets of approximately $250,000 and receivables of approximately $450,000. 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. All of the class action investors are beneficial holders of the Trust, however not all beneficial holders of the Trust are class action investors. 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. - 7 - 7. CHANGES IN OTHER TRUST ASSETS During the three months ended June 30, 2004, 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 $3.8 million increase in other trust assets. Included in actual operating results are sales of approximately $4.9 million for the sale of various Westside lots, Bloomington building 3, Prescott Country Club lot and various other 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 six months ended June 30, 2004, 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 $3.3 million increase in other trust assets. Included in actual operating results are sales of approximately $5.3 million for the sale of various Westside lots, Bloomington building 3, Prescott Country Club lot and various other assets. 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. 8. COMMITMENTS AND CONTINGENCIES 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, 2004 all of these claims have been resolved and either paid in full (if any amount was due) or fully reserved for (if disputed). Contingent Assets In 2002 a complaint alleging four (4) separate causes of action was filed in the Superior Court against BFA's former limited liability company member, Chaparral Pines, LLC, in the development of the Chaparral Pines property. The complaints center around the mismanagement of the property by the defendant. Chaparral Pines filed a Motion to dismiss the complaint. After briefings and argument, the Superior Court has allowed the Trust to proceed on three of the four counts in the complaint. Discovery has commenced. Because of the substantial nature of the Chaparral Pines project, the defendants' were working to accumulate all the construction-related documents. During that time the Trust was able to reach a settlement agreement with Chaparral Pines LLC consisting of the Trust receiving $300,000 in cash and real estate valued at approximately $420,000 net of selling costs. The settlement agreement has now been signed by both parties and approved by the Bankruptcy Court. The Trust has recorded this asset at its fair value in the accompanying consolidated financial statements. In an effort to avoid repaying $4 million dollars in debt to the Trust, Mr. William Blair has engaged in a number of legal maneuvers. In 2001, the Trust filed a Notice of Trustee's Sale on the collateral securing repayment on one of the Notes (the "DESERT DIAMOND NOTE"). The Trust separately filed a lawsuit and obtained a judgment against Mr. Blair individually as a co-maker under the Desert Diamond Note. That debt has been reduced to judgment in an amount of $1.4 million dollars, plus interest at 19% until paid in full. With regard to Mr. Blair's second obligation (the "CAMPBELL NOTE") the Superior Court entered judgment on March 19, 2003 against both Mr. Blair and his trust in the amount of - 8 - $1,418,329.82 with interest at the rate of 18% from August 13, 2001, until paid. The Trust has authorized the initiation of a new lawsuit to recover a substantial number of real property transfers made by Mr. Blair to mostly third party related entities on the eve of the Superior Court judgments. These claims will be pursued under Arizona state law theories of fraudulent transfer. The Trust now has successfully litigated and received judgments on the two (2) Superior Court actions and defended the Trust's claims against the actions of Mr. Blair in connection with the Desert Diamond bankruptcy. This bankruptcy included a proposed cram down plan and an adversary lawsuit to modify the underlying contract. The assets of the bankruptcy estate have been liquidated and the proceeds from the sale of the assets distributed to the Trust. With regard to the remaining action against Fidelity Title (the "TITLE COMPANY") the Title Company hired by Mr. Blair to transfer title to portions of the Trust's collateral to third parties without lien releases, the Bankruptcy Court recently granted the Title Company's Motion for Reconsideration and reversed its prior ruling. The effect is that the Bankruptcy Court has upheld an alleged contract modification disallowed by a different judge in an earlier litigation. If the Bankruptcy Court's ruling stands as issued, the Trust would be required to release its liens on the remaining real property collateral for a release price of $12,500/lot (a total of $275,000 for the remaining lots). The Title Company also has on file a Motion for Award of Fees seeking an award of approximately $138,000 in fees and costs incurred. The Bankruptcy Court awarded the Title Company an amount of $44,000 for fees and costs. The Trust has appealed both rulings made by the Bankruptcy Court relating to the Title Company matters and a stay has been issued pending the resolution of the appeal. The Trust has included the estimated value of this note receivable at the lot release price less awarded and estimated attorney's fees in the note receivable portion of the accompanying consolidated financial statements. Additionally Mr. Blair has filed for personal bankruptcy protection, which should not affect any recovery under the Desert Diamond Note, but may limit recovery, if any, from the Campbell Note. The Trust holds a note receivable in an outstanding amount of approximately $1.75 million dollars from W.H.H.C. Through this note the Trust has begun foreclosing on approximately 70 acres of real property located in Maricopa County, Arizona as a partial payment on the outstanding note. A lawsuit has been filed in the Superior Court to foreclose on the mortgage and obtain a judgment against the real property. Two (2) of the defendants have made a claim in the form of an affirmative defense, that the Trust has filed a wrongful claim against the real property. Three (3) of the defendants have now filed answers. The remaining four (4) defendants claim no interest in the real property. The estimated value of the 70 acres of real property has been included in the notes receivable portion of the accompanying consolidated financial statements. On November 12, 2003 the Trust filed an adversary proceeding against Glen and Nannie Lou Crotts and the Glen E. Crotts Revocable Trust ("CROTTS"). Glen and Nannie Lou Crotts are the parents of past BFA president William Crotts and Glen Crotts served as president of BFA prior to William Crotts. The complaint sets forth four claims against the Crotts. The first two (2) claims seek to recover monies owed in excess of $750,000 on two (2) promissory notes to the Trust now in default. The third claim asserts that the Crotts assisted BFA senior management in creating misleading financial statements in 1994 and 1995 through participation in real estate transactions. The fourth and final claim is to recover $296,000 withdrawn from the investment accounts held at BFA during the one-year period prior to BFA filing for bankrupcty protection as a preference amount. The Crotts have denied the assertions in all the claims and have filed counterclaims against the Trust for withholding distributions on $537,219 of their investments in BFA and $18,000 from another partnership. The Crotts and the Trust have agreed to a settlement in which the Trust will pay the Crotts $25,000. The settlement was approved by the Bankruptcy Court and paid in August, 2004. At June 30, 2004 this liability of $25,000 has been recorded in the accompanying consolidated financials statements. 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 - 9. CASH RECEIPTS AND DISBURSEMENTS For the three months ended June 30, 2004 and June 30, 2003, the Trust received net cash proceeds from sales of assets, note receivable collections and operations of $4,932,495 and $12,640,717 respectively, consisting of the following: Three months ended -------------------------- June 30, June 30, 2004 2003 ----------- ----------- Principal and interest received from notes $ 524,499 $ 7,391,536 receivable Cash flows from other trust assets 4,407,996 5,249,181 ----------- ----------- Total $ 4,932,495 $12,640,717 =========== =========== Conversely, for the same respective periods, the Trust paid out $6,153,564 and $17,378,983, respectively, as follows: Three months ended ------------------------------ June 30, June 30, 2004 2003 ------------ ------------ Trust operations $ (916,415) $ (986,858) Payable to Class 5 creditors -- (2,818,174) Principal and interest payments on collateralized notes payable -- (1,316,594) Distributions to Class 3A & 3B (5,237,149) (12,257,357) ------------ ------------ Total $ (6,153,564) $(17,378,983) ============ ============ Distributions to Class 3A and 3B include the class action 50% portion of litigation proceeds, if any, and are net of returned distributions and reserves. 16. SUBSEQUENT EVENTS On July 13, 2004 the sale of Building 4 in the Bloomington Industrial Center was completed for approximately $5.4 million. On August 4, 2004 the Trust sold a portion of one of its investments held in an operating company for approximately $2.2 million. - 10 - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. The selected historical financial data presented below for the three and six months ended June 30, 2004 and June 30, 2003 are derived from our consolidated financial statements. The selected financial data should be read in conjunction with 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 Operation," "Business," and elsewhere in this report constitute "forward-looking statements" within the meaning of the rules and regulations promulgated by the Securities and Exchange Commission. This report contains a number of forward-looking statements, which reflect the Trust's current views with respect to future events and financial performance. Such forward-looking statements are based on management's beliefs and assumptions regarding information that is currently available, and are made pursuant to the "safe harbor" provisions of the federal securities laws. These forward-looking statements are subject to certain risks and uncertainties. The Trust's actual performance and results could differ materially from those expressed in the forward-looking statements due to risks and uncertainties that could materially impact the Trust in an adverse fashion and are only predictions of future results, and there can be no assurance that the Trust's actual results will not materially differ from those anticipated in these forward-looking statements. In this report, the words "anticipates", "believes", "expects", "intends", "plans", "may", "future", and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. The Trust has no obligation to publicly update or revise any of the forward-looking statements to reflect events or circumstances that may arise after the date hereof. THREE MONTHS ENDED JUNE 30, 2004 AND 2003 The estimated fair value of the Trust's net assets in liquidation decreased approximately $3.2 million for the three months ended June 30, 2004 as compared to an approximately $15.6 million decrease for the three months ended June 30, 2003. 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, 2004 include (i) interest income from notes receivables which increased net assets by approximately $88,000, and (ii) an increase in the value of certain other trust assets which increased net assets by approximately $3.8 million (iii) an increase in estimated costs to complete liquidation which decreased net assets by approximately $1.9 million, and (iv) distributions to holders of Class 3A and 3B beneficial interests which decreased net assets by approximately $5.2 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, 2003 include (i) interest income from notes receivables which increased net assets by - 11 - 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 including litigation proceeds and related settlement liability 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 $12.3 million. Interest income from notes receivable decreased in 2004 as compared to 2003 because of principal payments received and notes sold. Interest expense on notes payable decreased from 2004 as compared 2003 because the notes were paid off subsequent to June 30, 2003. The changes in fair value of other trust assets in 2004 as compared to 2003 were as a result of variations in the fair market value of assets and certain related liabilities and sales or operations of these assets. In the three months ended June 30, 2004, the Trust distributed approximately $5.2 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 interest were valued at approximately $28.1 million at June 30, 2004. In the three months ended June 30, 2003, the Trust distributed approximately $12.3 million to holders of Class 3A or 3B beneficial interests. This distribution was made principally from collections on Trust Assets and the distribution of the Trust's share of litigation proceeds. The Class 3A and 3B beneficial interest were valued at approximately $85.4 million at June 30, 2003. SIX MONTHS ENDED JUNE 30, 2004 AND 2003 The estimated fair value of the Trust's net assets in liquidation decreased approximately $3.6 million for the six months ended June 30, 2004 as compared to approximately $109.4 million decrease for the six months ended June 30, 2003. 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, 2004 include (i) interest income from notes receivables which increased net assets by approximately $219,000, (ii) increase in value of certain other trust assets which increased net assets by approximately $3.3 million, (iii) an increase in estimated costs to complete liquidation which decreased net assets by approximately $1.9 million, and (iv) distributions to holders of Class 3A and 3B beneficial interests which decreased net assets by approximately $5.2 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, 2003 include (i) interest income from notes receivable which increased net assets by approximately $2.8 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 asset 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. Interest income from notes receivable decreased in 2004 as compared to 2003 because of principal payments received and notes sold. Interest expense on notes payable decreased from 2004 as compared 2003 because the notes were paid off subsequent to June 30, 2003. The changes in fair value of other trust assets in 2004 as compared to 2003 were as a result of variations in the fair market value of assets and certain related liabilities and sales or operations of these assets. In the six months ended June 30, 2004, the Trust distributed approximately $5.2 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 interest were valued at approximately $28.1 million at June 30, 2004. 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. - 12 - Non-cash trust assets at June 30, 2004 and December 31, 2003 were comprised of the following: NON-CASH ASSETS IN LIQUIDATION AT ESTIMATED FAIR VALUE June 30, December 31, 2004 2003 ----------- ----------- Receivables, net $ 4,176,316 $ 4,190,921 Other trust assets, net 26,048,799 27,746,115 Fair value of expected cash flows from settlements -- 420,750 ----------- ----------- TOTAL ASSETS $30,225,115 $32,357,786 =========== =========== The fair value of the Trust Assets is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. For each asset, estimates of income, expenses and net cash flow on a quarterly basis through the expected final disposition date are prepared. The individual asset cash flow estimates are developed based upon factors, which include appraisals by independent appraisers, physical inspection of the asset or the collateral underlying the related loans, local market conditions, contractual payments and discussions with the relevant borrower. At June 30, 2004 and December 31, 2003, the projected monthly cash flows were discounted at various rates, as appropriate, to reflect the Trust Assets at estimated fair market value. The Trust's consolidated financial statements 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 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, 2004 and a 4.00% present value factor at December 31, 2003. o The costs include personnel, facilities, Liquidating Trustee and Liquidating Trust Board compensation, professional fees and litigation costs, and are estimated based on assumptions - 13 - regarding the number of employees, use of outside professionals, and timing of cash flows. 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. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB 51." FIN No. 46 provides guidance on the identification of entities of which control is achieved through means other than voting rights (""variable interest entities" or "VIEs") and how to determine when and which business enterprise should consolidate the VIE (the "primary beneficiary"). In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. Our adoption of this Interpretation did not have a material impact on our consolidated financial statements or disclosures. The following table sets forth, as of June 30, 2004, the aggregate amounts of our contractual obligations and commitments with definitive payment terms that will require cash outlays in the future.

Item 3. Quantitative and Qualitative Disclosures about Market Risk The Trusts principal exposure to risk relates to interest rate risk, credit risk and market risk associated with the types of assets being sold. An adverse change in interest rates would not have a material adverse impact on the Trust's operations or net assets. Adverse changes in credit or market risk could have a material adverse affect of the Trust's operations and net assets. The Trust has attempted to minimize this risk by discounting the Trust Assets based on the asset's exposure to credit or market risk and historical experiences of the asset. 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). 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, 2004, and that has materially affected, or is reasonably likely to materially affect, the Trust's internal control over financial reporting. - 14 - PART II Item 1. Legal Proceedings. Chaparral Pines In 2002 a complaint alleging four (4) separate causes of action was filed in the Bankruptcy Court against BFA's former limited liability company member, Chaparral Pines, LLC, in the development of the Chaparral Pines property. The complaints center around the mismanagement of the property by the defendant. Chaparral Pines filed a Motion to dismiss the complaint. After briefings and argument, the Superior Court has allowed the Trust to proceed on three of the four counts in the complaint. Discovery has commenced. Because of the substantial nature of the Chaparral Pines project, the defendants' were working to accumulate all the construction-related documents. During that time the Trust was able to reach a settlement agreement with Chaparral Pines LLC consisting of the Trust receiving $300,000 in cash and real estate valued at approximately $420,000 net of selling costs. The settlement agreement has now been signed by both parties and approved by the Bankruptcy Court. The Trust has recorded this asset in the accompanying consolidated financial statements. William Blair In an effort to avoid repaying $4 million dollars in debt to the Trust, Mr. William Blair has engaged in a number of legal maneuvers. In 2001, the Trust filed a Notice of Trustee's Sale on the collateral securing repayment on one of the Notes (the "DESERT DIAMOND NOTE"). The Trust separately filed a lawsuit and obtained a judgment against Mr. Blair individually as a co-maker under the Desert Diamond Note. That debt has been reduced to judgment in an amount of $1.4 million dollars, plus interest at 19% until paid in full. With regard to Mr. Blair's second obligation (the "CAMPBELL NOTE") the Superior Court entered judgment on March 19, 2003 against both Mr. Blair and his trust in the amount of $1,418,329.82 with interest at the rate of 18% from August 13, 2001, until paid. The Trust has authorized the initiation of a new lawsuit to recover a substantial number of real property transfers made by Mr. Blair to mostly third party related entities on the eve of the Superior Court judgments. These claims will be pursued under Arizona state law theories of fraudulent transfer. The Trust now has successfully litigated and received judgments on the two (2) Superior Court actions and defended the Trust's claims against the actions of Mr. Blair in connection with the Desert Diamond bankruptcy. This bankruptcy included a proposed cram down plan and an adversary lawsuit to modify the underlying contract. The assets of the bankruptcy estate have been liquidated and the proceeds from the sale of the assets have been distributed to the Trust. With regard to the remaining action against Fidelity Title (the "TITLE COMPANY") the Title Company hired by Mr. Blair to transfer title to portions of the Trust's collateral to third parties without lien releases, the Bankruptcy Court recently granted the Title Company's Motion for Reconsideration and reversed its prior ruling. The effect is that the Bankruptcy Court has upheld an alleged contract modification disallowed by a different judge in an earlier litigation. If the Bankruptcy Court's ruling stands as issued, the Trust would be required to release its liens on the remaining real property collateral for a release price of $12,500/lot (a total of $275,000 for the remaining lots). The Title Company also has on file a Motion for Award of Fees seeking an award of approximately $138,000 in fees and costs incurred. The Bankruptcy Court awarded the Title Company an amount of $44,000 for fees and costs. The Trust has appealed both rulings made by the Bankruptcy Court relating to the Title Company matters and a stay has been put in place pending the resolution of the appeal. The Trust has included the estimated value of this note receivable at the lot release price less awarded and estimated attorney's fees in the note receivable portion of the accompanying consolidated financial statements. Additionally Mr. Blair has filed for personal bankruptcy protection, which should not affect any recovery under the Desert Diamond Note, but may limit recovery, if any, from the Campbell Note. W.H.H.C The Trust holds a note receivable in an outstanding amount of approximately $1.75 million dollars from W.H.H.C. Through this note the Trust has begun foreclosing on approximately 70 acres of real property located in Maricopa County, Arizona as a partial payment on the outstanding note. A lawsuit - 15 - has been filed in the Superior Court to foreclose on the mortgage and obtain a judgment against the real property. Two (2) of the defendants have made a claim in the form of an affirmative defense, that the Trust has filed a wrongful claim against the real property. Three (3) of the defendants have now filed answers. The remaining four (4) defendants claim no interest in the real property. The estimated value of the 70 acres of real property has been included in the notes receivable portion of the accompanying consolidated financial statements. Glen Crotts On November 12, 2003 the Trust filed an adversary proceeding against Glen and Nannie Lou Crotts and the Glen E. Crotts Revocable Trust ("CROTTS"). Glen and Nannie Lou Crotts are the parents of past BFA president William Crotts and Glen Crotts served as president of BFA prior to William Crotts. The complaint sets forth four claims against the Crotts. The first two (2) claims seek to recover monies owed in excess of $750,000 on two (2) promissory notes to the Trust now in default. The third claim asserts that the Crotts assisted BFA senior management in creating misleading financial statements in 1994 and 1995 through participation in real estate transactions. The fourth and final claim is to recover $296,000 withdrawn from the investment accounts held at BFA during the one-year period prior to BFA filing for bankrupcty protection as a preference amount. The Crotts have denied the assertions in all the claims and have filed counterclaims against the Trust for withholding distributions on $537,219 of their investments in BFA and $18,000 from another partnership. The Crotts and the Trust have agreed to a settlement in which the Trust will pay the Crotts $25,000. The settlement was approved by the Bankruptcy Court and paid in August, 2004. At June 30, 2004 this liability has been recorded in the accompanying consolidated financials statements. Disputed Proofs of Claims A number of creditors filed proofs of claims in the Debtors' bankruptcy proceedings. As of June 30, 2004 all of these claims have been resolved and either paid in full (if any amount was due) or fully reserved for (if disputed). 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. BFA LIQUIDATION TRUST August 12, 2004 By: /s/ Clifton R. Jessup, Jr. ------------------------------------------- Name: Clifton R. Jessup, Jr., Title: Liquidating Trustee August 12, 2004 By: /s/ Mark A. Roberts ------------------------------------------- Name: Mark A. Roberts Title: Assistant to the Liquidating Trustee - 16 -

BFA LIQUIDATION TRUST 10-Q