WOODBRIDGE LIQUIDATION TRUST The following discussion of changes in net assets and net assets in liquidation and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements ofWoodbridge Liquidation Trust and the related notes thereto. The Trust, the Remaining Debtors, the Wind-Down Entity and the Wind-Down Subsidiaries, as used herein, are defined in Note 1 to the consolidated financial statements and are collectively referred to herein as the Company. Forward-Looking Statements Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include, without limitation, financial guidance, and projections and statements with respect to expectation of future financial condition, changes in net assets in liquidation, cash flows, plans, targets, goals, objectives, performance, and termination and dissolution of the Trust. Such forward-looking statements also include statements that are preceded by, followed by, or that include the words "believes", "estimates", "plans", "expects", "intends", "is anticipated", "will continue", "project", "may", "could", "would", "should" and similar expressions, and all other statements that are not historical facts. All such forward-looking statements are based on the Trust's current expectations and involve risks and uncertainties which may cause actual results to differ materially from those set forth in such statements. Such risks and uncertainties include the amount of sales proceeds, timing of sales of real estate assets, amount of funds needed for warranty claims, punch list items and holding costs of single-family homes, amount of general and administrative costs, the number and amount of successful litigations and/or settlements and the ability to recover thereon, the amount of funding required to continue litigations, the continuing impact of the COVID-19 pandemic and other global health issues, interest rates, adverse weather conditions in the regions in which properties to be sold are located, inflation, domestic and global economic and political conditions, changes in tax and other governmental rules and regulations applicable to the Trust and its subsidiaries and other risks and uncertainties identified in Part I. Financial Information, Item 1A. Risk Factors of the Company's Annual Report on Form 10-K, or contained in any of the Trust's subsequent filings with theSEC including in Part II. Other Information, Item 1A. Risk Factors of this Form 10-Q. These risks and uncertainties are beyond the ability of the Trust to control, and in many cases, the Trust cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. In connection with the "safe harbor" provisions of the Securities Act of 1933 and the Exchange Act, the Trust has identified and is disclosing important factors, risks and uncertainties that could cause its actual results to differ materially from those projected in forward-looking statements made by the Trust, or on the Trust's behalf. (See "Part II. Other Information, Item 1A. Risk Factors" of this Form 10-Q.) These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of the Trust's subsequent filings with theSEC . Because of these factors, risks and uncertainties, the Trust cautions against placing undue reliance on forward-looking statements. Although the Trust believes that the assumptions underlying forward-looking statements are currently reasonable, any of the assumptions could be incorrect or incomplete, and there can be no assurance that forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made. Except as may be required by law, the Trust does not undertake any obligations to modify, update or revise any forward-looking statement to take into account or otherwise reflect subsequent events, corrections in or revisions of underlying assumptions, or changes in circumstances arising after the date that the forward-looking statement was made.
Overview
Pursuant to the Plan, the Trust was formed onFebruary 15, 2019 to hold, either directly or indirectly through the Wind-Down Entity and the Wind-Down Subsidiaries, the assets and equity interests formerly owned by the Debtors. Each of the real properties formerly owned by the Debtors was transferred, on the effective date of the Plan to one of the Wind-Down Subsidiaries. The purpose of theWind-Down Group is to develop (as applicable), market, and sell those properties to generate cash. Assets formerly owned by the Debtors other than real estate assets and certain cash were transferred on the Plan Effective Date of the Trust. The purpose of the Trust is to receive remittances of cash from the Wind-Down Entity, to resolve disputed claims, to prosecute the Causes of Action, to pay allowed administrative and priority claims, as defined in the Plan, and, subject to the payment of Trust expenses and the retention of various reserves, to make distributions of cash to Interestholders in accordance with the Plan. 22
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Trust operates pursuant to the Plan and the Trust Agreement. The Trust was formed as aDelaware statutory trust and is administered by the Liquidation Trustee under the supervision of its Supervisory Board. The Wind-Down Entity, a wholly-owned subsidiary of the Trust, operates pursuant to the Plan and the Wind-Down Entity LLC Agreement. The Wind-Down Entity was formed as aDelaware limited liability company and is administered by itsBoard of Managers . One member of theBoard of Managers is also a member of the Supervisory Board of the Trust.The Bankruptcy Court has retained certain jurisdictions regarding the Trust, the Liquidation Trustee, the Supervisory Board, the Wind-Down Entity, theBoard of Managers , and assets of the Trust and the Wind-Down Entity, including the determination of all disputes arising out of or related to administration of the Trust and the Wind-Down Entity and its subsidiaries.
As of
Class of Interest Number Outstanding Class A Liquidation Trust Interets 11,514,190 Class B Liquidation Trust Interets 675,617 For each of the classes of Liquidation Trust Interests, the number of Liquidation Trust Interests outstanding will increase to the extent that the disputed claims become allowed claims. In addition, the number of Liquidation Trust Interests outstanding will decrease to the extent that disputed claims are settled by cancelling previously issued Liquidation Trust Interests. Since the Plan Effective Date throughDecember 31, 2022 , the Wind-Down Subsidiaries have disposed of approximately 145 properties for aggregate net sales proceeds of approximately$552.30 million . As ofDecember 31, 2022 , the Company owned five real estate assets (including one single-family home listed for sale and one other real estate asset under contract) with a gross carrying value of approximately$31.40 million . Given the significantly smaller inventory of remaining real estate assets when compared to the inventory as of the Plan Effective Date, the amount of net proceeds from the sale of real estate assets in the future is likely to be less than the amount realized from the Plan Effective Date throughDecember 31, 2022 . The Company expects to complete the liquidation of its assets during the fiscal year endingJune 30, 2024 . 23
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Discussion of the Company's Operations
Three months ended
The following is a summary of the Consolidated Statement of Changes in Net Assets in Liquidation for the three months endedDecember 31, 2022 ($ in thousands): Restricted for All Qualifying Victims Interestholders Total Net assets in liquidation as of September 30, 2022 $ 3,483 $ 34,433$ 37,916
Change in assets and liabilities: Restricted for Qualifying Victims - change in carrying value of assets and liabilities, net
- - -
All Interestholders-
Change in carrying value of assets and liabilities, net - 1,236 1,236
Distributions (declared) reversed, net - - -
Net change in assets and liabilities - 1,236 1,236
Net assets in liquidation, as of December 31, 2022 $ 3,483 $ 35,669 39,152
Net assets in liquidation - Restricted for Qualifying Victims - there was no
change during the three months ended
Net assets in liquidation - All Interestholders increased by approximately$1.24 million during the three-month period endedDecember 31, 2022 . This increase was due to an increase in the carrying value of assets and liabilities of approximately$1.24 million , net.
The components of the changes in the carrying value of assets and liabilities, net are as follows ($ in thousands):
Restricted for All
Qualifying Victims Interestholders Total
Remeasurement of assets and liabilities, net $ - $ 910 $ 910
Settlement recoveries recognized, net (1) - 40 40
Other - 286 286
Change in carrying value of assets and liabilities, net $ - $ 1,236 $ 1,236 (1) Net of 5% payable to the Liquidation Trustee of approximately
reversal of an allowance for uncollectible settlement installment receivables
of approximately
During the three months ended
• Received net proceeds from the sale of Forfeited Assets of approximately
million.
• Completed construction of one single-family home (
• Recorded approximately
net of 5% payable to the Liquidation Trustee and an allowance for uncollectible
installment receivables.
• Paid construction costs of approximately
single-family homes under development.
• Paid holding costs of approximately
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
• Paid general and administrative costs of approximately
approximately
$2.37 million of payroll and other general and administrative costs and approximately$1.61 million of professional fees.
For the three months ended
The following is a summary of the Consolidated Statement of Changes in Net Assets in Liquidation for the three months endedDecember 31, 2021 ($ in thousands): Restricted for All Qualifying Victims Interestholders Total Net assets in liquidation as of September 30, 2021 $ 3,167 $ 131,376$ 134,543
Change in assets and liabilities: Restricted for Qualifying Victims - change in carrying value of assets and liabilities, net
36 - 36
All Interestholders-
Change in carrying value of assets and liabilities, net - 32,752 32,752
Distributions (declared) reversed, net - (39,826 ) (39,826 )
Net change in assets and liabilities - (7,074 ) (7,074 )
Net assets in liquidation, as of December 31, 2021 $ 3,203 $ 124,302 127,505
Net assets in liquidation - Restricted for Qualifying Victims increased by
approximately
Net assets in liquidation - All Interestholders increased approximately$7.07 million during the three months endedDecember 31, 2021 . This increase was due to changes in the carrying value of assets and liabilities, net of approximately$32.75 million and distributions declared (reversed) of approximately$39.82 million .
The components of the change in the carrying value of assets and liabilities, net are as follows ($ in thousands):
Restricted for All
Qualifying Victims Interestholders Total
Causes of Action, net(1):
Comerica Bank $ - $ 23,574 $ 23,574
Other settlement agreements - 408 408
Remeasurement of assets and liabilities, net 36 4,989 5,025
Sales proceeds in excess of carrying value - 3,388 3,388
Other - 393 393
Change in carrying value of assets and liabilities, net $
36 $ 32,752
(1) Net of 5% payable to the Liquidation Trustee of approximately
ended December 31, 2021 .
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
During the three months ended
• Declared a distribution of
$40.02 million .
• Reversed distributions of approximately
disallowed or Class A Interests being cancelled.
• Sold wine and a portion of the gold Forfeited Assets for net proceeds of
approximately
• Sold two single-family homes and settled one secured loan for net proceeds of
approximately$21.24 million . One of the single-family homes was under construction.
• Recorded approximately
actions against
settlement of other Causes of Action, net of 5% payable to the Liquidation
Trustee.
• Paid construction costs of approximately
single-family homes under development.
• Paid holding costs of approximately
• Paid general and administrative costs of approximately
approximately
$1.78 million of payroll and other general and administrative costs and approximately$2.44 million of professional fees.
Six months ended
The following is a summary of the Consolidated Statement of Changes in Net Assets in Liquidation for the six months endedDecember 31, 2022 ($ in thousands): Restricted for All Qualifying Victims Interestholders Total Net assets in liquidation as of June 30, 2022 $ 3,485 $ 30,910$ 34,395
Change in assets and liabilities: Restricted for Qualifying Victims - change in carrying value of assets and liabilities, net
(2 ) - (2 )
All Interestholders-
Change in carrying value of assets and liabilities, net - 2,121 2,121
Distributions (declared) reversed, net - 2,638 2,638
Net change in assets and liabilities - 4,759 4,759
Net assets in liquidation, as of December 31, 2022 $ 3,483 $ 35,669 39,152
Net assets in liquidation - Restricted for Qualifying Victims decreased by
approximately
Net assets in liquidation - All Interestholders increased by approximately$4.76 million during the six-month period endedDecember 31, 2022 . This increase was due to an increase in the carrying value of assets and liabilities of approximately$2.12 million , net and distributions reversed of approximately$2.64 million for disallowed claims and cancelled interests. 26
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The components of the changes in the carrying value of assets and liabilities, net are as follows ($ in thousands):
Restricted for All
Qualifying Victims Interestholders Total
Remeasurement of assets and liabilities, net $ (2 ) $ 1,199 $ 1,197
Settlement recoveries recognized, net (1) - 194 194
Other - 728 728
Change in carrying value of assets and liabilities, net $ (2 ) $ 2,121 $ 2,119 (1) Net of 5% payable to the Liquidation Trustee of approximately
allowance for uncollectible settlement installment receivables of
approximately $27 during the six months ended December 31, 2022 .
During the six months ended
• Reversed distributions of approximately
being disallowed or Class A Interests being cancelled.
• Received net proceeds from the sale of Forfeited Assets of approximately
million.
• Completed construction of one single-family home (
• Recorded approximately
net of 5% payable to the Liquidation Trustee and an allowance for uncollectible
installment receivables.
• Paid construction costs of approximately
single-family homes under development.
• Paid holding costs of approximately
• Paid general and administrative costs of approximately
approximately
$5.40 million of payroll and other general and administrative costs and approximately$3.39 million of professional fees. 27
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
For the six months ended
The following is a summary of the Consolidated Statement of Changes in Net Assets in Liquidation for the six months endedDecember 31, 2021 ($ in thousands): Restricted for All Qualifying Victims Interestholders Total Net assets in liquidation as of June 30, 2021 $ 3,167 $ 126,373$ 129,540
Change in assets and liabilities: Restricted for Qualifying Victims - change in carrying value of assets and liabilities, net
36 - 36
All Interestholders-
Change in carrying value of assets and liabilities, net - 37,657 37,657
Distributions (declared) reversed, net - (39,728 ) (39,728 )
Net change in assets and liabilities - (2,071 ) (2,071 )
Net assets in liquidation, as of December 31, 2021 $ 3,203 $ 124,302 127,505
Net assets in liquidation - Restricted for Qualifying Victims increased by
approximately
Net assets in liquidation - All Interestholders decreased approximately$2.07 million during the six months endedDecember 31, 2021 . This decrease was due to changes in the carrying value of assets and liabilities, net of approximately$37.66 million and distributions declared (reversed) of approximately$39.73 million .
The components of the change in the carrying value of assets and liabilities, net are as follows ($ in thousands):
Restricted for All
Qualifying Victims Interestholders Total
Causes of Action, net(1):
Comerica Bank $ - $ 23,575 $ 23,575
Other settlement agreements - 1,333 1,333
Sales proceeds in excess of carrying value - 6,460 6,460
Remeasurement of assets and liabilities, net 36 5,801 5,837
Other - 488 488
Change in carrying value of assets and liabilities, net $
36 $ 37,657
(1) Net of 5% payable to the Liquidation Trustee of approximately
ended December 31, 2021 .
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
During the six months ended
• Declared a distribution of
$40.02 million .
• Reversed distributions of approximately
disallowed or Class A Interests being cancelled.
• Sold the wine and a portion of the gold Forfeited Assets for net proceeds of
approximately
• Sold four single-family homes and settled one secured loan for net proceeds of
approximately$63.68 million . One of the single-family homes was under construction.
• Recorded approximately
actions against
settlement of other Causes of Action, net of 5% payable to the Liquidation
Trustee.
• Paid construction costs of approximately
single-family homes under development.
• Paid holding costs of approximately
• Paid general and administrative costs of approximately
approximately
$2.92 million of payroll and other general and administrative costs and approximately$5.22 million of professional fees.
Liquidity and Capital Resources
Liquidity
The Company's only sources for meeting its capital requirements are its cash and cash equivalents, proceeds from the sale of its real estate assets, recoveries on Causes of Action and proceeds from the sale of Forfeited Assets1. The Company's primary uses of funds are and will continue to be for distributions, development costs including warranty claims, holding costs and general and administrative costs, all of which the Company expects to be able to adequately fund over the next twelve months from its primary sources of capital. -------------------------------------------------------------------------------- 1 The Trust is required to distribute the net sale proceeds from liquidating the Forfeited Assets to the Qualifying Victims. Qualifying Victims are the former holders of Class 3 and Class 5 Claims and their permitted assigns. Former holders of Class 4 Claims are not Qualifying Victims. Because of the requirement to distribute the net sale proceeds of the Forfeited Assets to the Qualifying Victims only, the Forfeited Assets as ofDecember 31, 2022 are presented in the consolidated statement of net assets as restricted net assets in liquidation. As ofDecember 31, 2022 , 11,436,259 of the 11,514,190 Class A Interests were held by Qualifying Victims. Of the 13,875 Class A Interests relating to unresolved claims as ofDecember 31, 2022 , 1,880 would be held by Qualifying Victims. 29
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Capital Resources
In addition to consolidated cash and cash equivalents as of
• Sales of Real Estate:
selling its real estate assets, all of which are held for sale. One
single-family home is listed for sale and one other real estate asset was under
contract as of
total of five real estate assets with a gross carrying value of approximately
single-family home. Based on the remaining assets of the Company, future net
proceeds will be significantly less than the Company has realized in prior
periods.
• Causes of Action Recoveries: During the three and six months ended December
31, 2022, the Company recognized approximately
respectively, from the settlement of Causes of Action. There can be no
assurance that the amounts the Company recovers from settling Causes of Action
in the future will be consistent with the amount recovered in prior periods. • Forfeited Assets: Forfeited Assets consist of cash and other assets (jewelry,
art, clothing, handbags and shoes). During the three and six months ended
proceeds of approximately
noted earlier, net sale proceeds from liquidating the Forfeited Assets are to
be distributed only to Qualifying Victims.
Uses of Liquidity
The primary uses of the Company's liquidity are to pay (a) distributions payable, (b) development costs including warranty claims, (c) holding costs including maintenance and repair costs, and (d) general and administrative costs. As ofDecember 31, 2022 , the Company's total liabilities were approximately$23.63 million . The total liabilities recorded as ofDecember 31, 2022 may not be indicative of the costs paid in future periods, which may vary materially from the current estimate. Given current cash and cash equivalent balances, projected sales of real estate assets, estimated Causes of Action recoveries, distributions declared, and expected cash needs, the Company does not expect a deficiency in liquidity in the next twelve months. Due to the uncertain nature of future net sales proceeds, recoveries and costs to be incurred, it is not possible to be certain that the current liquidity will be adequate to cover all future financial needs of the Company. Creating contingent obligation agreements and/or seeking methods to reduce professional costs, including legal fees, and administrative costs are strategies that could be undertaken to address liquidity issues should they arise. These strategies could impact the Company's ability to maximize recoveries from the settlement of unresolved Causes of Action.
Distributions
Distributions will be made at the sole discretion of the Liquidation Trustee in accordance with the provisions of the Plan and the Trust Agreement. As ofFebruary 10, 2023 , the Liquidation Trustee has declared ten distributions to the Class A Interestholders. The distributions include a cash distribution on account of the then-allowed claims and a deposit is made into a restricted cash account for amounts that are or may become payable (a) in respect of Class A Interests that may be issued in the future upon the allowance of unresolved bankruptcy claims, (b) in respect of Class A Interests on account of recently allowed claims, (c) for holders of Class A Interests who failed to cash distribution checks mailed in respect of prior distributions, (d) for distributions that were withheld due to pending avoidance actions and (e) for holders of Class A Interests for which the Trust is waiting for further beneficiary information. As claims are resolved, additional Class A Interests may be issued or cancelled (see the Company's Annual Report on Form 10-K filed onSeptember 26, 2022 , "Part 1, Item 1. Business, D. Plan Provisions Regarding the Company, 2. Treatment under the Plan of holders of claims against and equity interests in the Debtors and 3. Assets and liabilities of the Company"). Therefore, the total amount of a distribution declared may change between the date declared and the date paid. The Liquidation Trustee will continue to assess the adequacy of funds held and expects to make additional cash distribution(s) on account of Class A Interests, but does not currently know the timing or amount of any such distribution(s). 30
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Sections 7.6 and 7.18 of the Plan provide that distributions that have not been cashed within 180 calendar days of their issuance shall be null and void and the holder of the associated Liquidation Trust Interests "shall be deemed to have forfeited its rights to any reserved and future Distributions under the Plan," with such amounts to become "Available Cash" of the Trust for all purposes.
On
February 1, 2022 , the Trust sent letters to the holders of the Class A Interests who had failed to cash distribution checks in respect of prior distributions, which checks were issued more than 180 days prior to the date of the letter. The letter informed each recipient that, unless the Trust was contacted on or beforeFebruary 28, 2022 , such recipient's reserved and future distributions would be deemed forfeited in accordance with the Plan The Trust provided this final notice simply as a one-time courtesy and reserves its rights to strictly enforce the Plan's forfeiture provisions, and any other provision of the Plan, against any person (including any recipient of the final notice) at any time in the future, without further notice. The following tables summarize the distributions declared, distributions paid and the activity in the restricted cash account for the periods fromFebruary 15, 2019 (inception) throughDecember 31, 2022 and fromFebruary 15, 2019 (inception) throughFebruary 10, 2023 : During the Period from During the Period from February 15, 2019 (inception) Through February 15, 2019 (inception) Through December 31, 2022 ($ in Millions) February 10, 2023 ($ in Millions) $ per Restricted Restricted Date Class A Total Cash Total Cash Declared Interest Declared Paid Account Declared Paid Account Distributions Declared First 3/15/2019$ 3.75 $ 44.70 $ 42.32 $ 2.38 $ 44.70 $ 42.32 2.38 Second 1/2/2020 4.50 53.43 51.19 2.24 53.43 51.19 2.24 Third 3/31/2020 2.12 25.00 24.19 0.81 25.00 24.19 0.81 Fourth 7/13/2020 2.56 29.97 29.24 0.73 29.97 29.24 0.73 Fifth 10/19/2020 2.56 29.95 29.20 0.75 29.95 29.20 0.75 Sixth 1/7/2021 4.28 50.01 48.67 1.34 50.01 48.67 1.34 Seventh (a) 5/13/2021 2.58 30.02 29.33 0.69 30.02 29.33 0.69 Eighth 10/8/2021 3.44 40.02 39.14 0.88 40.02 39.14 0.88 Ninth 2/4/2021 3.44 39.98 39.15 0.83 39.98 39.15 0.83 Tenth 6/15/2022 5.63 65.02 64.19 0.83 65.02 64.19 0.83 Subtotal$ 34.86 $ 408.10 $ 396.62 $ 11.48 $ 408.10 $ 396.62 $ 11.48 Distributions Returned / (Reversed) Disallowed/cancelled (b) (6.27 ) (6.27 ) Returned (c) 0.74 0.74 Forfeited (d) (1.15 ) (1.14 ) Subtotal (6.68 ) (6.67 ) Distributions Paid from Reserve Account (e) (3.58 ) (3.59 ) Distributions Payable, Net as of 12/31/2022:$ 1.22 as of 2/10/2023:$ 1.22
(a) The seventh distribution included the cash the Trust received from recoveries
of Fair Funds.
(b) As a result of claims being disallowed or Class A Interests cancelled.
(c) Distribution checks returned or not cashed.
(d) Distributions forfeited as Interestholders did not cash checks that were over
180 days old.
(e) Paid as claims are allowed or resolved.
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PART I. FINANCIAL INFORMATION (CONTINUED) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Management believes that, since its inception, the Wind-Down Entity has made substantial progress toward completion of its liquidation activities and is nearing the end of the liquidation of its real estate portfolio. Holders of Liquidation Trust Interests are advised that future distributions from the Trust will be limited. Once the Company's remaining real estate assets have been liquidated and the net proceeds resulting therefrom, net of reserves, have been distributed, further distribution(s) will be materially reliant on future recoveries from litigation, which are uncertain and the amount (if any) and timing of which are difficult to determine.
Contractual Obligations
As ofDecember 31, 2022 , the Company has contractual commitments related to construction contracts totaling approximately$0.40 million . The Company has an office lease that expires inJuly 2023 . The Company has one six-month option to extend the lease. The Company expects that it will continue to lease office space until the liquidation process is completed. The Company has part-time employment agreements with its executive officers throughDecember 31, 2023 .
Critical Accounting Policies and Practices
The Company's consolidated financial statements are prepared in accordance withU.S. GAAP. The accounting policies and practices that the Company believes are the most critical are discussed below. These accounting policies and practices require management to make decisions on subjective and/or complex matters that may inherently be uncertain. Estimates are required to prepare the consolidated financial statements in conformity withU.S. GAAP. Significant estimates, judgments and assumptions are required in a number of areas, including, but not limited to, the sales price of real estate assets, selling costs, development costs, holding costs, potential warranty claims, and general and administrative costs to be incurred until the completion of the liquidation of the Company and estimated reserves for contingent liabilities. In many instances, changes in the accounting estimates are likely to occur from period to period. Actual results may differ from the estimates. The Company believes the current assumptions and other considerations used in preparing the consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in the Company's consolidated financial statements, the resulting changes could have a material adverse effect on the Company's net assets in liquidation.
Liquidation Basis of Accounting
Under the Liquidation Basis of Accounting, all assets are recorded at their estimated net realizable value or liquidation value, which represents the estimated amount of net cash that may be received upon the disposition of the assets (on an undiscounted basis). Liabilities are measured in accordance withU.S. GAAP that otherwise applies to those liabilities. The Company has not recorded any amount from the future settlement of unresolved Causes of Action or recoveries of Fair Funds in the accompanying consolidated financial statements because they cannot be reasonably estimated.
Valuation of Real Estate
The measurement of real estate assets held for sale is based on current
contracts (if any), estimates and other indications of sales value, net of
estimated selling costs. To determine the value of real estate assets held for
sale, the Company considered the three traditional approaches to value (cost,
income and sales comparison) commonly used by the real estate appraisal
community. The applicability and relevancy of each valuation approach as applied
may differ by asset. In most cases, the sales comparison approach was accorded
the greatest weight. This approach compares a property to other properties with
similar characteristics that have recently sold. To validate management's
estimate, the Company also considers opinions from qualified real estate
professionals and local real estate brokers and, in some cases, has obtained
third party appraisals.
Accrued Liquidation Costs
The estimated costs associated with implementing and completing the Company's
plan of liquidation are recorded as accrued liquidation costs. The Company has
also recorded the estimated development costs to be incurred to prepare the
assets for sale as well as the estimated holding, maintenance and repair costs
to be incurred until the projected sale date and the estimated general and
administrative costs to be incurred until the completion of the liquidation of
the Company and estimated reserves for contingent liabilities.
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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Changes in Carrying Value
On a quarterly basis, the Company reviews the estimated net realizable values,
liquidation costs and the estimated date of the completion of the liquidation of
the Company and records any significant changes. The Company will also evaluate
an asset when it is under contract for sale and the buyer's contingencies have
been removed. During the period that this occurs, the carrying value of the
asset and the estimated closing and other costs will be adjusted, if necessary.
If the Company has a change in its plan for the disposition of an asset, the
carrying value will be adjusted to reflect this change in the period that the
change is approved. The change in value may also include a change to the accrued
liquidation costs related to the asset.
All changes in the estimated liquidation value of the Company's assets, real
estate held for sale, or other assets and liabilities are reflected as a change
to the Company's net assets in liquidation.
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PART I. FINANCIAL INFORMATION (CONTINUED)
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