<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
------------
FAIRFIELD COMMUNITIES, INC.
(Name of Registrant as Specified in its Charter)
FAIRFIELD COMMUNITIES, INC.
(Name of Person(s) Filing Proxy Statement)
------------
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Not Applicable
(2) Aggregate number of securities to which transaction applies: Not
Applicable
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1 Not Applicable
(4) Estimated maximum aggregate value of transaction: $42,175,000
____________________
1 Set forth the amount on which the filing fee is calculated and state
how it was determined.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: Not Applicable
(2) Form, Schedule or Registration Statement No.: Not Applicable
(3) Filing Party: Not Applicable
(4) Date Filed: Not Applicable
===============================================================================
<PAGE>
Fairfield Communities, Inc.
2800 Cantrell Road
Little Rock, Arkansas 72202
----------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
----------------------------------------
Dear Stockholder:
The Annual Meeting of Stockholders of Fairfield Communities, Inc. (the
"Company") will be held on September 20, 1994, at 10:00 a.m. Central Daylight
Savings Time at the Arkansas Excelsior Hotel, Markham and Louisiana Streets,
Little Rock, Arkansas, for the following purposes:
1. To elect seven members of the Board of Directors;
2. To approve the sale of First Federal Savings and Loan Association of
Charlotte ("First Federal") for approximately $40 million to Security
Capital Bancorp, a North Carolina corporation;
3. To approve an amendment to the Company's Share Purchase Rights
Agreement;
4. To approve an amendment to certain provisions of the Company's Second
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") relating to the election, terms of office and removal
of directors;
5. To approve an amendment to certain provisions of the Certificate of
Incorporation relating to special stockholders meetings and
stockholders consents;
6. To approve the deletion of certain provisions of the Certificate of
Incorporation which prohibit the issuance of nonvoting equity
securities; and
7. To transact such other business as may properly come before the Annual
Meeting or any adjournments or postponements thereof.
The Board of Directors has nominated certain individuals for election to
serve as directors and has unanimously approved the First Federal sale, the
amendment to the Share Purchase Rights Agreement and the amendments to the
Certificate of Incorporation. The Board of Directors recommends that you vote
for these proposals.
The close of business on July 25, 1994 has been fixed as the record date
for the meeting. All stockholders of record at that time are entitled to
notice of and to vote at the meeting and any adjournments or postponements
thereof.
All stockholders are cordially invited to attend the meeting. The Board of
Directors urges you to date, sign and return promptly the enclosed proxy to
give voting instructions with respect to your shares of Common Stock. The
proxies are solicited by the Company's Board of Directors. The return of the
proxy will not affect your right to vote in person if you attend the meeting.
By Order of the Board of Directors
Marcel J. Dumeny
August 4, 1994 Secretary
TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE COMPLETE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ACCOMPANYING ENVELOPE.
<PAGE>
Fairfield Communities, Inc.
2800 Cantrell Road
Little Rock, Arkansas 72202
(501) 664-6000
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD SEPTEMBER 20, 1994
INTRODUCTION
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the board of directors (the "Board") of Fairfield Communities, Inc.
(the "Company"), for use at the 1994 Annual Meeting of Stockholders (the
"Annual Meeting"), to be held on Thursday, September 20, 1994, at 10:00 a.m.
Central Daylight Savings Time at the Arkansas Excelsior Hotel, Markham and
Louisiana Streets, Little Rock, Arkansas, and any adjournments or
postponements thereof. At the Annual Meeting, the holders (sometimes referred
to herein as "stockholders") of common stock, $0.01 par value per share, of
the Company (the "Common Stock"), will be asked to elect as directors the
individuals nominated by the Board (collectively, the "Nominees" and each
individually a "Nominee") and to approve (a) the sale of First Federal Savings
and Loan Association of Charlotte ("First Federal" or the "Association") to
Security Capital Bancorp, a North Carolina corporation ("SCBC"), for
approximately $40 million (the "Sale"), (b) an amendment to the Company's Share
Purchase Rights Agreement, (c) an amendment to certain provisions of the
Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") relating to the election, terms of office and
removal of directors, (d) an amendment to certain provisions of the
Certificate of Incorporation relating to special stockholders meetings and
stockholders consents, and (e) the deletion of certain provisions of the
Certificate of Incorporation that prohibit the issuance of nonvoting equity
securities. Finally, the stockholders will be asked to vote for, approve,
consent to, ratify or otherwise transact such other business as may properly
come before the Annual Meeting or any adjournments or postponements thereof.
The Board knows of no other business that will be presented for stockholder
action at the Annual Meeting.
The mailing address of the principal executive offices of the Company is
P.O. Box 3375, Little Rock, Arkansas 72203. This Proxy Statement is first
being mailed to stockholders of the Company on or about August 12, 1994.
The Company will bear the expense of preparing and mailing the proxy
materials and may use regular employees and associates, without additional
compensation, to request, by telephone or otherwise, the return of proxies or
attendance at the Annual Meeting.
RECORD DATE, SOLICITATION AND REVOCABILITY OF PROXIES
The Board has selected July 25, 1994 as the record date (the "Record Date")
for the Annual Meeting. Only those stockholders of record as of the close of
business on the Record Date are entitled to notice of and to vote at the
Annual Meeting. At the close of business on the Record Date, there were
9,728,885 shares of Common Stock issued and outstanding (excluding the 160,001
shares held by wholly-owned subsidiaries). Stockholders will be entitled to
one vote for each share of Common Stock held by them of record at the close of
business on the Record Date on any matters properly brought before the Annual
Meeting for a vote.
Proxies in the form enclosed are solicited by the Board. Shares of Common
Stock represented by a properly executed proxy, if such proxy is received in
time and not revoked, will be voted at the Annual Meeting in accordance with
the instructions indicated in such proxy. IF NO INSTRUCTIONS ARE INDICATED,
SHARES OF COMPANY COMMON STOCK WILL BE VOTED FOR THE ELECTION OF THE NOMINEES,
FOR THE APPROVAL OF THE SALE, FOR THE APPROVAL OF THE AMENDMENT TO THE
COMPANY'S SHARE PURCHASE RIGHTS AGREEMENT, FOR THE APPROVAL OF THE AMENDMENT
TO CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION RELATING TO THE
ELECTION, TERMS OF OFFICE AND REMOVAL OF DIRECTORS, FOR
i
<PAGE>
THE AMENDMENT TO CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION
RELATING TO SPECIAL STOCKHOLDERS MEETINGS AND STOCKHOLDERS CONSENTS, FOR THE
APPROVAL OF THE DELETION OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION WHICH PROHIBIT THE ISSUANCE OF NONVOTING EQUITY SECURITIES AND
IN THE DISCRETION OF THE PROXY HOLDER AS TO ANY OTHER MATTER WHICH MAY
PROPERLY COME BEFORE THE ANNUAL MEETING FOR A VOTE. IF NECESSARY AND UNLESS
CONTRARY INSTRUCTIONS ARE GIVEN, THE PROXY HOLDER MAY ALSO VOTE IN FAVOR OF A
PROPOSAL TO ADJOURN THE MEETING IN ORDER TO PERMIT FURTHER SOLICITATION OF
PROXIES, TO OBTAIN A QUORUM OR TO OBTAIN SUFFICIENT VOTES TO APPROVE THE
PROPOSALS.
A stockholder who has given a proxy may revoke it at any time prior to its
exercise at the Annual Meeting by either (i) giving written notice of
revocation to the Secretary of the Company, (ii) properly submitting to the
Company a duly executed proxy bearing a later date than the proxy being
revoked, or (iii) appearing in person at the Annual Meeting and voting in
person. All written notices of revocation or other communications with
respect to revocation of proxies should be addressed as follows: Fairfield
Communities, Inc., P.O. Box 3375, Little Rock, Arkansas 77203, Attention:
Marcel J. Dumeny, Secretary.
Abstentions and broker non-votes will be included in determining the number
of shares present or represented at the Annual Meeting for purposes of
determining whether a quorum exists. Abstentions and broker non-votes with
regard to matters brought before the Annual Meeting will be treated in the
following manner for purposes of determining whether the requisite vote has
been obtained. With regard to the election of directors, votes may be cast in
favor of or withheld from each Nominee. Votes that are withheld will be
excluded entirely from the vote and will have no effect. Abstentions may be
specified on all matters, except the election of directors. Because the
proposed amendments to the Certificate of Incorporation and the Sale require
the approval of a majority of the outstanding shares entitled to vote,
abstentions will have the effect of a negative vote. Because the proposed
amendment to the Share Purchase Rights Agreement requires the approval of only
a majority of the shares represented and voting thereon at the Annual Meeting,
an abstention will have no effect. Under applicable Delaware law, a broker
non-vote will have no effect on the proposed amendments to the Certificate of
Incorporation, the Sale, the amendment to the Share Purchase Rights Agreement
or the outcome of the election of directors. Accordingly, abstentions will
have no effect on the outcome of the vote on any matter other than the Sale,
the amendment to certain provisions of the Certificate of Incorporation
relating to the election, terms of office and removal of directors, the
amendment to certain provisions of the Certificate of Incorporation relating
to special stockholders meetings and stockholders consents and the deletion of
certain provisions of the Certificate of Incorporation which prohibit issuance
of non-voting equity securities (as to each of which they will have the effect
of a vote against approval thereof). Broker non-votes will have no effect on
the outcome of the vote on any matter.
VOTES REQUIRED
Approval of both the Sale and the proposed amendments to the Certificate of
Incorporation require the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock entitled to vote. Approval of the
amendment to the Company's Share Purchase Rights Agreement requires the
affirmative vote of a majority of the shares represented and voting thereon at
the Annual Meeting. Provided a quorum is present, the affirmative vote of a
plurality of the shares of Common Stock represented at the Annual Meeting and
entitled to vote is required for election of each of the Nominees and the
transaction of any other business properly brought before the Annual Meeting.
The Company has obtained the consent of The First National Bank of Boston
("Lender") and all regulatory approvals required to consummate the Sale. See
"Proposal 2 -- Sale of First Federal -- Summary of the Agreement --
Termination, Amendment and Waiver" and " -- Regulatory Approvals."
ii
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Record Date, Solicitation and Revocability of Proxies . . . . . . . i
Votes Required. . . . . . . . . . . . . . . . . . . . . . . . . . . ii
PROPOSAL 1 -- ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Nominees for Election as Class I Directors. . . . . . . . . . . . . 1
Nominees for Election as Class II Directors . . . . . . . . . . . . 1
Nominees for Election as Class III Directors. . . . . . . . . . . . 2
PROPOSAL 2 -- SALE OF FIRST FEDERAL . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Summary of the Agreement. . . . . . . . . . . . . . . . . . . . . 3
General Terms . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . 3
Termination, Amendment and Waiver . . . . . . . . . . . . . . . . 4
Conditions Precedent to Closing . . . . . . . . . . . . . . . . . 4
Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Conduct of Business Pending the Sale. . . . . . . . . . . . . . . 5
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 5
Background of and Reasons for Sale of First Federal . . . . . . . . 5
Background of Proposed Sale . . . . . . . . . . . . . . . . . . . 5
Consideration of Alternatives to the Sale . . . . . . . . . . . . 9
Reasons for Proposed Sale . . . . . . . . . . . . . . . . . . . . 9
Opinion of Financial Advisor. . . . . . . . . . . . . . . . . . . . 10
Fairness Opinion. . . . . . . . . . . . . . . . . . . . . . . . . 10
Compensation of Capital Resources . . . . . . . . . . . . . . . . 11
Effect of Sale on Rights of Stockholders. . . . . . . . . . . . . . 12
Effects of Sale on the Company. . . . . . . . . . . . . . . . . . . 12
Excluded Association Assets . . . . . . . . . . . . . . . . . . . . 13
Security Capital Bancorp. . . . . . . . . . . . . . . . . . . . . . 13
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 14
Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . 14
Comparative Unaudited Per Share Data. . . . . . . . . . . . . . . . 14
Alternatives if Sale Disapproved. . . . . . . . . . . . . . . . . . 14
PROPOSAL 3 -- AMENDMENT TO THE COMPANY'S SHARE PURCHASE RIGHTS
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Purposes and Effects of the Proposed Rights Agreement Amendment . . 15
Summary of the Existing Provisions of the Rights Agreement. . . . . 16
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Antidilution Adjustments. . . . . . . . . . . . . . . . . . . . . 16
Series A Preferred Shares . . . . . . . . . . . . . . . . . . . . 17
Flip-in and Flip-over Events. . . . . . . . . . . . . . . . . . . 17
Qualifying Offer Provisions . . . . . . . . . . . . . . . . . . . 17
Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Rights Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Vote Required for Approval. . . . . . . . . . . . . . . . . . . . . 18
iii
<PAGE>
Page
----
PROPOSAL 4 -- AMENDMENT TO CERTAIN PROVISIONS OF
THE CERTIFICATE OF INCORPORATION RELATING TO THE
ELECTION, TERMS OF OFFICE AND REMOVAL OF DIRECTORS . . . . . . . . . 19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Purposes and Effects of the Proposed Classified Board Amendment . . 19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Part A -- Classification of the Board . . . . . . . . . . . . . . 20
Part B -- Removal of Directors Only for Cause . . . . . . . . . . 20
Part C -- Filling of Vacancies on the Board . . . . . . . . . . . 20
Part D -- Fixing the Size of the Board. . . . . . . . . . . . . . 21
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Certain Takeover-Related Considerations . . . . . . . . . . . . . 21
Vote Required for Approval. . . . . . . . . . . . . . . . . . . . . 22
PROPOSAL 5 -- AMENDMENT TO CERTAIN PROVISIONS OF
THE CERTIFICATE OF INCORPORATION RELATING TO
STOCKHOLDER ACTION AND SPECIAL MEETINGS OF STOCKHOLDERS. . . . . . . 23
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Purposes and Effects of Proposed Stockholder Action Amendment . . . 23
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Part A -- Prohibition of Action by Written Consent. . . . . . . . 23
Part B -- Call of Special Meeting . . . . . . . . . . . . . . . . 24
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Certain Takeover-Related Considerations . . . . . . . . . . . . . 24
Vote Required for Approval. . . . . . . . . . . . . . . . . . . . . 25
CERTAIN OTHER TAKEOVER-RELATED CONSIDERATIONS . . . . . . . . . . . . 26
CERTAIN EXISTING CIRCUMSTANCES POTENTIALLY
AFFECTING A CHANGE IN CONTROL OF THE COMPANY . . . . . . . . . . . . 27
Certain Regulatory Matters. . . . . . . . . . . . . . . . . . . . . 27
Delaware General Corporation Law. . . . . . . . . . . . . . . . . . 27
Certificate of Incorporation and Bylaws . . . . . . . . . . . . . . 27
PROPOSAL 6 -- DELETION OF CERTAIN PROVISIONS OF
THE CERTIFICATE OF INCORPORATION WHICH PROHIBIT
THE ISSUANCE OF NONVOTING EQUITY SECURITIES. . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Purposes and Effect of the Proposed Nonvoting Equity Amendment. . . 29
Vote Required for Approval. . . . . . . . . . . . . . . . . . . . . 29
INFORMATION ABOUT THE COMMITTEES AND COMPENSATION OF THE BOARD. . . . 30
Board Committees. . . . . . . . . . . . . . . . . . . . . . . . . . 30
Director's Compensation . . . . . . . . . . . . . . . . . . . . . . 30
COMPENSATION OF EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . . . 31
Summary Compensation Table. . . . . . . . . . . . . . . . . . . . . 31
Profit Sharing and Excess Benefit Plans . . . . . . . . . . . . . . 32
Key Employee Retirement Plan. . . . . . . . . . . . . . . . . . . . 32
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Option Exercises in Last Year and Year-End Option Values. . . . . . 33
Employment Agreements and Termination of Employment Arrangements. . 33
Report on Executive Compensation. . . . . . . . . . . . . . . . . . 34
iv
<PAGE>
Page
----
Compensation Committee Interlocks and Insider Participation . . . . 38
Performance Graphs. . . . . . . . . . . . . . . . . . . . . . . . . 39
BENEFICIAL OWNERSHIP OF SECURITIES. . . . . . . . . . . . . . . . . . 42
Certain Beneficial Owners . . . . . . . . . . . . . . . . . . . . . 42
Directors and Executive Officers. . . . . . . . . . . . . . . . . . 43
MARKET PRICES OF AND DIVIDENDS PAID ON COMPANY COMMON STOCK . . . . . 44
Market Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . 44
BUSINESS AND PROPERTIES OF THE COMPANY. . . . . . . . . . . . . . . . 45
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 45
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Certain Relationships and Related Transactions. . . . . . . . . . . 45
Compliance with Section 16(a) of the Exchange Act . . . . . . . . . 45
Independent Public Accountants. . . . . . . . . . . . . . . . . . . 45
No Dissenter's Rights . . . . . . . . . . . . . . . . . . . . . . . 46
Stockholder Proposals . . . . . . . . . . . . . . . . . . . . . . . 46
Other Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . F-1
Appendix I -- Stock Purchase Agreement, dated as of April 5, 1994,
between Fairfield Communities, Inc. and Security Capital
Bancorp.
Appendix II -- Opinion of Capital Resources Group, Inc.
Appendix III -- Annual Report on Form 10-K/A (No. 2) for the Year Ended
December 31, 1993 of Fairfield Communities, Inc.
Appendix IV -- Quarterly Report on Form 10-Q/A (No. 1) for the Quarter
Ended March 31, 1994 of Fairfield Communities, Inc.
v
<PAGE>
PROPOSAL 1 -- ELECTION OF DIRECTORS
GENERAL
Assuming the stockholders approve the proposed amendment to the Certificate
of Incorporation described under "Proposal 4 -- Amendment to Certain Provisions
of the Certificate of Incorporation Relating to the Election, Terms of Office
and Removal of Directors," the Board will be classified into three classes,
with the directors in each class serving three-year terms (and, in each case,
until their respective successors are duly elected and qualified); except that
the initial terms of the directors in Class I will expire at the 1995 annual
meeting of stockholders, the initial terms of the directors in Class II will
expire at the 1996 annual meeting of stockholders and the initial terms of the
directors in Class III will expire at the 1997 annual meeting of stockholders.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR ELECTION OF THE NOMINEES.
In the event that the stockholders fail to approve the proposed amendment
to the Certificate of Incorporation described under "Proposal 4 -- Amendment to
Certain Provisions of the Certificate of Incorporation Relating to the
Election, Terms of Office and Removal of Directors," the Board will continue
to have one class of directors, elected annually and each serving a one-year
term (and, in each case, until their respective successors are duly elected
and qualified), and the Nominees will be considered nominated for the seven
director positions, each with one-year terms, and without regard to the class
designations below. The number of directors, currently set at seven, would
continue to be as fixed from time to time by or in the manner provided in the
Company's Amended and Restated Bylaws (the "Bylaws").
Information regarding the Nominees is set forth below. Each of the
Nominees is currently serving as a director of the Company. Five of the
Nominees began serving in September 1992; Messrs. John W. McConnell and
J. Steven Wilson were also directors of the Company as it existed prior to the
Plan of Reorganization ("Predecessor Fairfield") and served in such capacities
since March 1990.
A plurality of the votes of the Common Stock cast at the Annual Meeting (or
any adjournments thereof) is required to elect directors. Each Nominee has
consented to being named in this Proxy Statement and to serve if elected. If
a Nominee should for any reason become unavailable for election, proxies may
be voted with discretionary authority by the proxy holder for a substitute
designated by the Board.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION OF THE
NOMINEES. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS
SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
NOMINEES FOR ELECTION AS CLASS I DIRECTORS
Daryl J. Butcher, age 54, Vice President, Real Estate of WLD Enterprises,
Inc., a trust management company, since June 1993. From 1981 to May 1993,
Mr. Butcher was President of Butcher Real Estate, Inc., a real estate company
developing commercial and industrial properties in the Baltimore-Washington
D.C. area.
William C. Scott, age 57, President and Director of Summitt Care
Corporation, Inc., a developer and operator of retirement and convalescent
centers, since 1985. Director of Pacific Southwest, Inc., a holding company.
J. Steven Wilson, age 50, Chairman and Chief Executive Officer of Wickes
Lumber Company since 1991; Chairman and President of Wilson Financial
Corporation, a holding company, since 1980; Chairman, President and Chief
Executive Officer of Riverside Group, Inc., an insurance company, since 1985;
Chairman, President and Chief Executive Officer of The Atlantic Group, Inc., a
health food distribution company, since 1986.
NOMINEES FOR ELECTION AS CLASS II DIRECTORS
Ernest D. Bennett, III, age 41, partner at the law firm of Taylor, Philbin,
Pigue, Marchetti and Bennett since June 1992. From 1989 to May 1992,
Mr. Bennett served as General Counsel at Robert Orr/Sysco Food Services
Company. From 1980 to 1989, Mr. Bennett was a partner at the law firm of Camp
and Bennett.
1
<PAGE>
John W. McConnell, age 52, President and Chief Executive Officer of
Fairfield since 1991; President and Chief Operating Officer from 1990 to 1991;
Senior Vice President and Chief Financial Officer from 1986 to 1990.
NOMINEES FOR ELECTION AS CLASS III DIRECTORS
Russell A. Belinsky, age 33, Senior Vice President and Principal of Chanin
and Company and Senior Vice President and Principal of GTC Capital Partners
since 1990. From 1986 to 1990, Mr. Belinsky was an associate at the law firm
of Skadden, Arps, Slate, Meagher & Flom.
Philip L. Herrington, age 41, Chairman and President of Herrington, Inc., a
private investment and business advisory firm with interests in insurance, real
estate, printing and health care services, since July 1986; and President and
Chief Operating Officer of Destin Guardian Corporation, a real estate
development and management company, since 1989.
2
<PAGE>
PROPOSAL 2 -- SALE OF FIRST FEDERAL
THE FOLLOWING DISCUSSION DESCRIBES THE MATERIAL TERMS OF THE SALE. THIS
DISCUSSION, INSOFAR AS IT RELATES TO MATTERS CONTAINED IN THE STOCK PURCHASE
AGREEMENT, DATED AS OF APRIL 5, 1994, BETWEEN THE COMPANY AND SCBC (THE
"AGREEMENT") IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
AGREEMENT INCLUDED AS APPENDIX I HERETO.
GENERAL
Holders of Company Common Stock are being asked to approve the Agreement
and the Sale of First Federal contemplated thereby. Only if such approval is
obtained, and all conditions to the consummation of the Sale are either
satisfied or waived, will the Sale proceed. There can be no assurance that
all of the conditions to consummation of the Sale will occur. If the
stockholders approve the Agreement and the Sale, the Company intends to
consummate the Sale of First Federal, in which event First Federal will no
longer be a subsidiary of the Company. THE BOARD RECOMMENDS THAT STOCKHOLDERS
VOTE FOR APPROVAL OF THE SALE OF FIRST FEDERAL.
SUMMARY OF THE AGREEMENT
GENERAL TERMS. A copy of the Agreement is included as Appendix I. The
following discussion of the Agreement is a summary only, is necessarily
selective and therefore incomplete and is qualified in its entirety by
reference to the Agreement. Any words in this summary the initial letters of
which are capitalized and that are not defined in this Proxy Statement shall
have the meanings given them in the Agreement.
The Agreement to be presented for approval at the Annual Meeting provides
for the sale of all of the outstanding stock of First Federal to SCBC (or a
subsidiary of SCBC, which SCBC has designated as Security Bank and Trust
Company) for a purchase price of $40.35 million, which will be increased
(subject to the limitation hereafter described) to reflect the consolidated
pretax net earnings of First Federal and its subsidiaries for the period from
October 1, 1993 through the closing of the sale, or decreased by the
consolidated pretax net losses of First Federal and its subsidiaries during
this period, whichever is the case (the "Purchase Price"). The increase to the
$40.35 million for pretax earnings of First Federal and its subsidiaries
cannot exceed $1.825 million plus, in general, the pretax earnings or
losses of First Federal and its subsidiaries from August 1, 1994 through the
closing, provided that the foregoing amounts may be reduced under certain
circumstances for reserves taken or losses (in excess of gains) on Excluded
Assets (as defined below) after September 30, 1993. Up to approximately $1.39
million of the Purchase Price is to be retained by SCBC to secure the
Company's obligation to indemnify SCBC against three existing lawsuits/claims
which have been asserted against First Federal (the "Litigation Indemnity").
As part of the proposed transaction, the Company is to purchase for cash
(a) at book value, net of reserves, up to approximately $18.4 million, as of
April 30, 1994, of certain real estate, classified loans, joint venture
interests and other assets owned by First Federal (the "Excluded Association
Assets"), subject to the right of SCBC to elect for First Federal to retain
all or part of such assets, and (b) lot and timeshare contract receivables and
related assets, which First Federal previously acquired from the Company (the
"Contracts Receivable"), having a book value less certain negotiated
reserves at April 30, 1994 of approximately $48.4 million and a weighted
average yield at April 30, 1994, on approximately $46.6 million of interest
earning Contracts Receivable, of 11.6%. The Excluded Association Assets and
the Contracts Receivable are collectively referred to as the "Excluded
Assets." As of April 30, 1994 the market value of the Excluded Association
Assets and the Contracts Receivable, based on the Company's expected manner of
disposal after acquiring such assets from First Federal, was approximately
$15.9 million and $47.0 million, respectively. See " -- Effects of the Sale
of First Federal."
Approximately $2.85 million in net book value of the Excluded Association
Assets are to be pledged to SCBC to provide additional security with respect
to both the Litigation Indemnity and the general indemnities under the
Agreement. The Company has certain rights to substitute collateral in
connection with such pledge, including the right to substitute $0.60 to $0.70
of cash for every $1.00 of net book value of Excluded Association Assets so
pledged. Reserves taken by the Company after the closing on Excluded
Association Assets securing the Litigation Indemnity may increase the total
Excluded Association Assets required as collateral.
REGULATORY APPROVALS. The Sale is subject to receipt of approvals from the
Office of Thrift Supervision ("OTS"), the Board of Governors of the Federal
Reserve System ("FRB"), the Federal Deposit Insurance Corporation ("FDIC") and
3
<PAGE>
the Banking Commission of the State of North Carolina (the "Banking
Commission"), all of which have been received and are subject to the
satisfaction of certain conditions. See " -- Regulatory Approvals."
TERMINATION, AMENDMENT AND WAIVER. The Agreement may be terminated
prior to the Effective Time, as defined in the Agreement, by mutual consent
of the parties, or by either party as a result of a material breach of a
covenant, material undertaking or representation or warranty in the Agreement
if such breach is not cured within 20 days of written notice of such breach.
The Agreement may also be terminated by either party if one of its conditions
precedent to closing is not met, if a party fails to use its best efforts to
furnish information and obtain necessary third party consents to the
Agreement, if applications for certain prior approvals are denied, and the
time periods for appeals and requests for reconsideration have run, if either
party determines in good faith that it is impossible for the other party
to meet a condition precedent, or if the Effective Time has not occurred by
5:00 p.m., Greensboro, North Carolina time, on September 30, 1994.
In order to proceed with the Sale and purchase of the Excluded Assets, the
Company needed to obtain the consent of certain of its lenders and financing
for a portion of the purchase price of the Excluded Assets. The Company has
obtained such consents and a commitment to finance a portion of the purchase
price for certain of the Excluded Assets. If the Company is not able to close
on the financing commitments and is not able to obtain alternative financing,
the Company may also terminate the Agreement, in which case the Company has
agreed to pay all of SCBC's out-of-pocket costs associated with the
transaction plus $20,000. Furthermore, if either party wrongfully terminates
the Agreement or if either party terminates the Agreement because of
deliberate or wilful action or inaction on the part of the other party, then
in either case the offending party has agreed to pay the other party
liquidated damages in the amount of $925,000.
Except with respect to any required regulatory approval, each of the
Company and SCBC, by written instrument signed by its chief executive officer,
may extend the time for performance of any of the obligations of the other
party, and may waive (a) inaccuracies of the other party in representations
and warranties, (b) compliance with any covenants, undertakings or agreements
of the other party, or satisfaction of any of the conditions precedent to its
obligations, or (c) the performance by the other party of any of its
obligations set out in the Agreement.
CONDITIONS PRECEDENT TO CLOSING. The obligations of the parties to
consummate the transactions contemplated in the Agreement are subject to the
following conditions: (i) all necessary corporate actions to consummate the
transactions are taken by all parties; (ii) no party is subject to any
prohibition that will adversely affect the consummation of the sale
transaction and a certificate to such effect is delivered by the parties to
one another prior to closing; (iii) the representations and warranties of the
parties are true at the time of closing; (iv) both parties shall have
performed all material obligations and complied with all covenants required of
them by the Agreement; (v) all necessary regulatory approvals to consummate
the transactions will have been received; (vi) each party shall have
demonstrated its ability to make certain deliveries as required by the
Agreement; (vii) SCBC will have received certain opinions from the Company's
and First Federal's counsel; (viii) First Federal and its subsidiaries will
have conducted its business as provided in the Agreement; (ix) no material
adverse effect shall have occurred or be deemed likely to occur to First
Federal in the foreseeable future; (x) SCBC shall have received the
Association Letter and an affirmation immediately prior to closing confirming
that such Letter remains accurate; (xi) SCBC shall receive the resignation of
the members of First Federal's board of directors prior to closing; (xii) any
required lenders' approvals shall have been received; and (xiii) the Company
shall have purchased the Excluded Assets and assumed certain excluded
liabilities.
COVENANTS. The parties make the following covenants in the Agreement:
(i) each party shall file all necessary applications for regulatory approval
to consummate the sale; (ii) each party shall use its best efforts to furnish
required information and take all actions necessary to consummate the sale;
(iii) each party shall cooperate in matters related to accounting and
financial matters, including tax filings; (iv) the Company shall keep SCBC
advised regarding material adverse events with respect to First Federal and
its subsidiaries; (v) SCBC shall keep certain disclosures and investigation
results confidential; (vi) the parties shall consult with respect to, and
agree to the form of, any press release related to the Agreement; (vii) the
Company's representatives on the First Federal board of directors agree to
vote, consistent with their fiduciary duties as directors, to carry on First
Federal's business in the ordinary course of business, among other matters;
(viii) the Company shall not sell or otherwise encumber its shares of First
Federal stock; (ix) the Company shall deliver certain certificates and other
documents as set forth in the Agreement at closing; (x) First Federal shall
make certain contributions to its employee benefit plans, and (xi) the Company
shall use its best efforts in good faith to obtain all necessary lender
approvals and financing commitments.
4
<PAGE>
CONDUCT OF BUSINESS PENDING THE SALE. The Agreement provides that, except
with the prior written consent of SCBC, between the date of the Agreement and
the Effective Time, Company will not (a) transfer, sell or convey any of the
Shares, or any Rights thereto, to any other Person, or enter into, or permit
the imposition of, a Restricted Transfer respecting the Shares; (b) grant any
Security Interest in any of the Shares to any other Person; (c) vote the
Shares to approve any merger, consolidation, sale, exchange, disposition or
liquidation of First Federal; (d) solicit or encourage inquiries or proposals
with respect to, furnish any information relating to, or participate in any
negotiations or discussions concerning, any acquisition or purchase of the
Shares or other shares of voting securities of First Federal, all or a
substantial portion of the assets of, or any equity interest in, First Federal
or any merger, consolidation or other business combination involving First
Federal other than as contemplated by the Agreement, or authorize or permit
any officer, director, agent or Affiliate to do any of the above; or fail to
notify SCBC immediately if any such inquiries or proposals are received by,
any such information is requested from, or any such negotiations or
discussions are sought to be initiated with Company or First Federal;
(e) enter, or permit an Affiliate to enter, into agreements, commitments or
understandings with First Federal providing for the extension of credit to
Company or any of its Affiliates; or (f) agree to do any of the foregoing.
The Agreement also provides that, except with the prior written consent of
SCBC, between the date of the Agreement and the Effective Date, the two
representatives of the Company serving on First Federal's Board of Directors
shall use their best influences, and shall cast their votes as directors,
consistent with their fiduciary duties as directors and in compliance with all
laws, to cause First Federal (and First Federal to cause its subsidiaries) to
carry on its business in accordance with all laws and in the Ordinary Course
of Business, subject to certain restrictions on its lending and investment
activities above certain dollar limits, and to cause First Federal (and First
Federal to cause its subsidiaries) not to: (a) retain, set aside, make or pay
any dividend or other distribution in respect of its capital stock; (b) issue
any shares of its capital stock to any Person, or recognize on its stock
transfer records any transfer, sale or conveyance of any of the Shares to any
other Person, or enter into or permit the imposition of, a Restriction on
Transfer respecting the Shares; (c) issue, grant or authorize any Rights with
respect to any of its capital stock or effect any recapitalization,
reclassification, stock dividend, stock split or like change in
capitalization; (d) amend its certificate of incorporation or bylaws, impose
or suffer the imposition, on any share of stock held by First Federal, of any
Security Interest or permit any such Security Interest to exist, or waive or
release any material right or cancel or compromise any material debt or claim
other than in the Ordinary Course of Business; (e) solicit or encourage
inquiries or proposals with respect to, furnish any information relating
to, or participate in any negotiations or discussions concerning, any
acquisition or purchase of the Shares, or other shares of voting securities of
First Federal, all or a substantial portion of the assets of, or a substantial
equity interest in, First Federal, or any merger, consolidation or other
business combination involving First Federal other than as contemplated by the
Agreement or authorize or permit any officer, director, agent or Affiliate to
do any of the above, or fail to notify SCBC immediately if any such inquiries
or proposals are received by, any such information is requested from, or any
such negotiations or discussions are sought to be initiated with First
Federal; or (f) agree to do any of the foregoing.
INDEMNIFICATION. Upon completion of the sale at closing, the Company and
SCBC will be responsible for and will indemnify each other for a period of 913
days following the closing date for certain breaches of their respective
representations, warranties, covenants or undertakings provided for in the
Agreement. In addition, the Company will indemnify SCBC and First Federal for
any losses suffered by reason of certain litigation matters until such matters
are finally resolved (see " -- Summary of the Agreement -- General Terms"), and
will indemnify SCBC and First Federal for excess severance benefit claims that
may be asserted by certain of First Federal's employees, in the event of
involuntary termination after the Sale. The Company's indemnification
obligation shall be secured by the pledge of certain security interests to
SCBC or a designated subsidiary (see " -- Summary of the Agreement -- General
Terms").
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE SALE OF
FIRST FEDERAL. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS
STOCKHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
BACKGROUND OF AND REASONS FOR SALE OF FIRST FEDERAL
BACKGROUND OF PROPOSED SALE. As part of its successful reorganization under
Chapter 11 of the United States Bankruptcy Code (the "Reorganization"), on
October 25, 1990 the Company retained the investment banking firm of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") to explore, among other
things, the possibility of selling First Federal. However, the passage of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 and
5
<PAGE>
the subsequent activities of the Resolution Trust Corporation established
thereunder in resolving failed thrift institutions had a significant adverse
effect on the operations of and market value of many thrift institutions,
including First Federal. Consequently, the Company determined that it would
not be in the Company's best efforts to attempt to sell First Federal at that
time.
In April 1991 First Federal retained BEI Golembe Financial, Inc., a
financial institutions consultant, to assist it in formulating a strategic
plan for increasing First Federal's profitability. First Federal's Board of
Directors adopted a strategic plan on July 19, 1991, which focused on those
lending and deposit activities that had historically made up the core of First
Federal's business, including single family owner occupied residential
mortgage, residential construction, home equity, second mortgage, lot and home
improvement loans, selective acquisition and development loans and a full
range of retail transaction and savings accounts. Products and services that
were not among First Federal's core thrift business were to be eliminated or
offered on a limited basis to existing customers only, including auto,
student, unsecured personal, installment and commercial loans, free checking
or other deposit "loss leaders", annuities and credit and accidental health
and property/casualty insurance. The narrowing of First Federal's product
offerings in accordance with the strategic plan was completed by the end of
1991 and two branch offices were consolidated with other First Federal
branches in early 1992.
As the Company intensified its efforts in early 1992 to secure approval of
its Reorganization, the Company asked DLJ to explore again the market for
First Federal. DLJ presented an information package it prepared on First
Federal to approximately 30 financial institutions, which resulted in one
verbal offer to acquire all of First Federal's branches for approximately
$17 million payable totally in unspecified First Federal assets. The Board
determined that the offer was not acceptable because it was deemed to be
inadequate and the proposed payment terms were unsatisfactory. The Company
determined in the fourth quarter of 1992 not to continue to pursue a sale of
First Federal at that time.
In connection with the continuing implementation of First Federal's
strategic plan and in response to a directive from the OTS to provide a
qualified successor to First Federal's President in the event of his
incapacitation or retirement, the Company commenced a search for and
identified and made an offer of employment to a new President of First
Federal to succeed Robert T. Waugh, First Federal's soon-to-retire President.
However, in August 1993, before the Company could complete its negotiations
with the prospective President, David B. Jordan, Vice-Chairman and Chief
Executive Officer of SCBC, approached Mr. Waugh about SCBC's possible interest
in acquiring First Federal. Mr. Waugh referred Mr. Jordan to Mr. McConnell
(who beneficially owns approximately 165,500 shares of Fairfield Communities,
Inc.'s Common Stock, including 112,500 shares of Fairfield Communities, Inc.'s
Common Stock Mr. McConnell has the right to acquire through the exercise of
warrants). Mr. McConnell indicated in an initial telephone conversation with
Mr. Jordan that the Company had taken First Federal off the market and that,
while the Company was always willing to discuss a sale, it was not prepared to
sell First Federal at a discount. Mr. Jordan and certain other representatives
of SCBC met with Mr. McConnell and representatives of the Company and First
Federal in Little Rock, Arkansas on August 11, 1993. No specific proposals
were presented at the meeting, which involved general discussions about the
Company's and First Federal's businesses, including the Contracts Receivable
owned by First Federal. On August 31, 1993 Fairfield and SCBC entered into a
confidentiality agreement and the Company provided certain requested
information to SCBC regarding First Federal and the Company.
Mr. McConnell informed the Board at its regular meeting on September 29,
1993 regarding the expression of interest by a financial institution in
exploring an acquisition of First Federal, including preliminary indications
of a price approximating book value payable in cash and certain excluded
assets. Mr. McConnell reported that while such preliminary terms were not
acceptable, he recommended that the potential buyer be permitted to finish its
due diligence and then the Company determine whether a transaction would be
possible at an acceptable price and on mutually agreeable payment terms.
Mr. McConnell reminded the directors regarding the pending offer to the
candidate for President of First Federal, who had determined to await the
decision whether the Company would sell First Federal. It was possible,
Mr. McConnell reported, that this candidate would not be available if
the Company decided to pursue a possible sale of First Federal. Nevertheless,
the Board authorized Mr. McConnell to proceed with sale discussions.
On October 13, 1993 SCBC confirmed in a letter to Mr. McConnell its interest
in pursuing negotiations to acquire 100% of First Federal's stock at a
range of 95% to 110% of First Federal's net book value (approximately
$25.8 million to $29.8 million). The purchase price was proposed to be
payable in cash and up to $16.4 million in net book value of certain
identified excluded assets. In addition, SCBC proposed that Fairfield
repurchase for cash all Contracts Receivable
6
<PAGE>
at their net book values. Mr. McConnell responded by telephone that such offer
was not acceptable. In further telephone conversations, SCBC increased its
offer to approximately $32 million and then to approximately $36 million, which
offers Mr. McConnell also declined to accept. However, when SCBC's offer
reached approximately $38 million, management decided to retain Capital
Resources Group, Inc., an investment banking firm specializing in financial
institutions that had previously advised the Company in connection with certain
aspects of the Company's purchase of First Federal in 1989 ("Capital
Resources"), to serve as financial advisor to the Board in connection with its
consideration of the possible sale of First Federal. After consulting with
Capital Resources, Mr. McConnell verbally made a counter proposal to sell First
Federal for approximately $42 million. During the ensuing weeks, periodic
telephone discussions continued regarding various aspects of the pricing of
First Federal, including who would be entitled to First Federal's earnings
during the period prior to closing, the possible addition of $20,000 per month
to First Federal's general loan loss reserves and the reallocation of certain
of First Federal's reserves.
On November 19, 1993 the Company presented a letter of intent to SCBC
involving a purchase price consisting of $40 million plus the retention by the
Company of interim earnings from September 30, 1993 to the date of closing plus
all tax sharing payments otherwise payable by First Federal to the Company
under an existing tax sharing agreement, with the purchase price to be paid in
the form of certain excluded assets and cash. In addition, the Company would
repurchase the Contracts Receivables at net book value. This proposal was made
in response to SCBC's then pending offer to purchase First Federal for $38.3
million with no provision for payment of interim earnings or tax sharing
payments.
Mr. McConnell and other members of management briefed the Board on the
status of the negotiations at its regular meeting on November 30, 1993. Mr.
McConnell discussed the proposed terms of the sale, including the Company's
proposed treatment of reserves, the tax sharing payments and First Federal's
interim earnings. Management reviewed each of the then-identified Excluded
Association Assets having an outstanding balance of more than $300,000 and
certain other Excluded Association Assets that were proposed to be transferred
as part of the purchase price, including amounts then reserved against those
assets, the estimated time frames that might be required to monetize them and
the possibility, if the Company decided to accelerate their liquidation, that
further reserves might be required. In addition, management described the
effects the transaction would have on the Company's available cash, taking into
account the additional amounts the Company would need to borrow to repurchase
the Excluded Assets. While overall borrowings under the Company's line of
credit would increase as a result of the repurchase of the Excluded Assets,
management believed such additional borrowing requirements to be acceptable
because (i) sufficient capacity would remain under the Company's credit lines;
and (ii) repurchased Contracts Receivable would qualify for purchase by the
Company's subsidiary, Fairfield Acceptance Corporation ("FAC"), or until March
31, 1995, by FAC's wholly owned subsidiary, Fairfield Funding Corporation.
See Note 6 of Notes to Consolidated Financial Statements of Fairfield
Communities, Inc. in the Annual Report on Form 10-K/A (No. 2) for the Year
Ended December 31, 1993 (the "Form 10-K"), which is included as Appendix III
hereto.
Management also reviewed with the Board the impact of a Sale on the
Company's projected earnings over a four-year period as compared with retaining
First Federal as a subsidiary. In particular, management concluded that a Sale
would have a negligible impact on the overall borrowing costs to finance the
Contracts Receivable, notwithstanding the Company's higher cost of funds
relative to First Federal's cost of funds, since the Company would only need to
borrow approximately 50% of the outstanding principal balance of the Contracts
Receivable after giving effect to the cash proceeds from the Sale (assuming a
$40 million purchase price net of the repurchase of the Excluded Assets), as
compared to First Federal's need to support the Contracts Receivable with
deposits and borrowings equal to 100% of the outstanding principal balance of
the Contracts Receivable. However, once borrowings used to support the
Contracts Receivable are repaid, excess funds realized from such Contracts
Receivable would produce significantly greater returns to the Company with a
Sale (assuming either that such funds are invested in new contracts receivable
which are currently originated at interest rates ranging from 11.4% to 14.4%,
or are used to repay debt of the Company restructured in the Reorganization,
some of which carries an annual interest cost of up to 10%) than without a
Sale (assuming First Federal were to reinvest such funds in mortgage-backed
securities and other assets at yields from 6% to 7%).
A representative of Capital Resources presented a preliminary draft of a
sale of control valuation analysis of First Federal (the "Preliminary Report").
Capital Resources' analysis set forth a minimum sale of control value range for
First Federal utilizing the market value approach, which derives a valuation
based on a review of key financial statistics and acquisition pricing
statistics of a comparative group of of acquired thrifts. For a description of
this comparative group of
7
<PAGE>
acquired thrifts, see " -- Opinion of Financial Advisor -- Fairness Opinion."
Due to the pricing structure proposed in connection with the sale of First
Federal, pursuant to which certain Excluded Assets are to be repurchased by the
Company, Capital Resources determined that it was appropriate to value First
Federal on both an "as is" basis, without the transfer of any Excluded Assets,
and on an "adjusted" basis, giving effect to the transfer of Excluded Assets to
the Company and the assumed reinvestment of the proceeds therefrom by First
Federal. Based on the assumptions and the results of its analysis of the
prices paid for the comparative group of thrifts reviewed in the Preliminary
Report, Capital Resources advised the Board that the range of prices under
discussion with SCBC fell above the minimum acquisition price range believed to
be appropriate by Capital Resources for a sale of control of First Federal.
After a lengthy discussion on the merits and desirability of the Sale,
including the somewhat limited prospects for growth in the thrift industry
generally and the Company's strategic decision to concentrate on its core
vacation products business, the Board authorized Mr. McConnell to continue
pursuing negotiations with SCBC within the $38.3 million to $40.0 million or
more price range then being discussed by the parties, to enter into a letter
of intent and to proceed to negotiate a definitive agreement subject to final
Board approval.
On December 2, 1993 SCBC's counsel provided a detailed written response to
the Company's proposed form of letter of intent, which included among other
things (i) a statement that the issue whether the transaction would be
structured as a stock or asset purchase had not been resolved; (ii) a request
that the Company escrow a portion of the purchase price to secure the Company's
indemnification obligations; and (iii) requests that SCBC continue to be
permitted to conduct due diligence for 45 days, during which the Company and
First Federal would refrain from entering into any negotiations with other
parties regarding the sale of First Federal ("no-shop provision"), the breach
of which would require the Company to pay SCBC a $1 million termination fee.
In discussions thereafter, which culminated in a letter of intent entered into
on December 15, 1993, the parties conditionally agreed, among other terms set
forth therein, to structure the transaction as a stock purchase, to include a
no-shop provision and a $450,000 termination fee and to collateralize the
indemnification obligation in favor of SCBC in an amount having a cash
equivalent value up to $1.5 million, to be secured by $2.5 million of Excluded
Association Assets.
On January 13, 1994 SCBC's counsel presented an initial draft of the
Agreement to the Company, at which time such counsel raised again the
possibility of structuring the sale as an asset purchase due to the existence
of a lawsuit against First Federal that had come to light after the execution
of the letter of intent. See Note 14 of Notes to Consolidated Financial
Statements in the Form 10-K for a description of such lawsuit. In response to
these concerns, the Company prepared a detailed analysis, which was reviewed
by the Company's auditors, of the potential damages claimed in such lawsuit.
After receiving a revised draft of the Agreement in response to detailed
comments from the Company and its counsel, the parties met on February 24, 1994
in Salisbury, North Carolina to negotiate various provisions of the Agreement,
including the termination provisions and related termination fee, the
representations, warranties, indemnification and collateralization provisions,
including the holdback of a portion of the purchase price to collateralize the
Litigation Indemnity, and the definitions of various elements of the purchase
price adjustments. Work on these and other provisions of the Agreement
continued, including at one additional meeting on March 9-10, 1994 between the
parties' counsel, until March 17, 1994, at which time management presented what
it believed to be a substantially complete form of a proposed purchase
agreement to the Company's Board for approval.
At its regular meeting held on March 22, 1994 the Board reviewed the terms
of the proposed Sale of First Federal, including the principal terms of the
proposed form of purchase agreement. In particular, the Board reviewed the
indemnification provisions of the Agreement and reviewed the analysis that the
Company's management had prepared with the assistance of the Company's outside
auditors with respect to one of the lawsuits covered by the Litigation
Indemnity. See " -- Summary of Agreement -- General Terms" and
" -- Indemnification." Following discussion of various other provisions and
matters related to the Agreement, the likelihood of approval by the Company's
lenders and federal and state regulatory authorities, First Federal's recent
financial performance and prospects and the status of the Excluded Association
Assets, the Board unanimously approved the Sale and agreed to recommend it to
the stockholders for approval.
On March 25, 1994 the proposed form of purchase agreement was presented to
SCBC's Board of Directors, which approved the agreement subject to certain
adjustments to the calculation of the purchase price, including a cap on
interim period earnings. See " -- Summary of Agreement -- General Terms." After
agreeing upon the specific details related to the foregoing proposed
adjustments, the Company and SCBC finalized the Agreement, which was signed
by the parties
8
<PAGE>
on April 6, 1994. On April 7, 1994 the Board reviewed the foregoing
modifications to the Agreement and, by consent, unanimously approved the Sale
and agreed to recommend it to the stockholders for approval.
CONSIDERATION OF ALTERNATIVES TO THE SALE. In connection with its
consideration in 1992 of a possible sale of First Federal, the Company
considered a number of alternatives with respect to the ownership of First
Federal, including (i) restructuring and significantly downsizing the
operations of First Federal or breaking up or liquidating First Federal by way
of separate sales of its branches and assets, each of which alternatives had
significant regulatory and economic disadvantages; (ii) selling the stock of
First Federal to a third party, which until 1993 did not appear to be
economically viable; and (iii) retaining ownership of the Association while
First Federal continued to implement or sought to improve upon its strategic
plan, which, after the immediately preceding alternatives proved unacceptable,
the Company decided to pursue until approached by SCBC in August 1993.
Upon receiving SCBC's expression of interest in 1993 and after extensive
preliminary negotiations, the Board consulted with its financial advisor,
Capital Resources. Thereafter, acting upon the valuation by and other advice
from Capital Resources, the Board determined that stockholder value was more
likely to be enhanced by selling First Federal at this time on the terms
contemplated by the Agreement than by retaining its investment in First Federal
while First Federal continued to implement or sought to improve upon its
strategic plan. The Company believes it can more effectively deploy its
investment in First Federal into the growth of its higher return vacation
ownership business. The Board also considered the possibility of seeking
additional offers for First Federal, including whether any such efforts would
result in a materially increased purchase price, and the possible adverse
consequences further delays necessitated by such remarketing efforts would
have on First Federal's franchise value. See "Background of and Reasons for
the Sale of First Federal -- Background of Proposed Sale."
REASONS FOR PROPOSED SALE. After consideration of relevant business,
financial, legal and market factors, the Board believes that the Sale is in
the best interests of the Company and the stockholders. In reaching this
conclusion and approving the Sale, the Board considered, among other factors
and in addition to the alternatives to the Sale described above, (i) the
effect the Sale would have on the Company's projected earnings and balance
sheet; (ii) Capital Resources' valuation of First Federal (see " -- Opinion of
Financial Advisor -- Fairness Opinion") as compared to the Purchase Price
(see " -- Summary of Agreement -- General Terms" and "Opinion of Financial
Advisor -- Fairness Opinion"); (iii) the likelihood that the Company would
receive a better overall offer for the sale of First Federal than that made
by SCBC; (iv) the likelihood that SCBC would withdraw its offer if a response
were to be delayed while the Company attempted to shop First Federal; (v) the
purchase prices being realized in comparable pending and completed
transactions involving thrifts in North Carolina and the rest of the United
States (see " -- Opinion of Financial Advisor -- Fairness Opinion") and the
likelihood that the market for thrifts in general, and North Carolina in
particular, would improve and result in materially higher offers for First
Federal; and (vi) the ability to structure the Sale as a stock, rather than
an asset, purchase. The Board also considered the opinion of Capital
Resources that the consideration to be received by the Company pursuant to
the Sale was fair from a financial point of view to the Company.
In addition, the Company considered (i) the fact that Security Capital would
not agree to purchase First Federal unless the Company agreed to purchase the
Excluded Assets; (ii) the fact that the Company would be required to take
further writedowns on the Excluded Assets after the Sale as a result of the
anticipated change in the Company's manner of disposing of such assets, due to
its desire to monetize the Excluded Association Assets as soon as possible and
to the fact that it would not have the benefit after the Sale of all of First
Federal's personnel who are presently involved in working out these assets;
(iii) the Company's desire to repurchase First Federal's Contracts Receivable
in order better to maintain relationships with the Company's customers who are
obligated under such Contracts Receivable and to maintain such Contracts
Receivable as part of the Company's core business; (iv) the eligibility of the
Contracts Receivable as collateral under the Company's credit lines and under
the financing arranged through the Company's indirect wholly owned subsidiary,
Fairfield Funding Corporation; and (v) the fact that the Purchase Price for
the stock of First Federal, net of anticipated writedowns on the Excluded
Assets, exceeds the minimum acquisition price range believed to be appropriate
by Capital Resources for a sale of control of First Federal. See " -- Effects
of the Sale of First Federal" and " -- Accounting Treatment of Sale." In view
of these considerations, the Company believes the purchase price to be paid for
the Excluded Assets to be fair to the Company. See " -- Background of and
Reasons for the Sale of First Federal -- Background of Proposed Sale."
9
<PAGE>
OPINION OF FINANCIAL ADVISOR
FAIRNESS OPINION. Capital Resources, acting as financial advisor in
connection with the Sale, has delivered its opinion, dated July 22, 1994, to
the Board to the effect that, from a financial point of view, the cash purchase
price to be paid by SCBC is fair to the Company. Capital Resources did not
recommend to the Company the amount of consideration to be paid by SCBC. Such
amount was determined by mutual agreement of the Company and SCBC after
extensive negotiations. The Board, considering the results of the negotiations
and Capital Resources' opinion, found the amount to be reasonable. The Company
did not provide Capital Resources with instructions or limitations for the
purpose of preparing its opinion. The Company's purchase of the Excluded
Assets does not fall within the scope of Capital Resources' opinion. A copy of
the opinion is included as Appendix II and should be read in its entirety by
stockholders.
In connection with rendering its opinion to the Board, Capital Resources
prepared an Evaluation and Analysis Report dated as of April 8, 1994, and a
supplement thereto dated as of July 22, 1994 (as supplemented, the "Report"),
which includes substantially all of the information contained in the
Preliminary Report previously provided to the Board in November 1993, as well
as additional financial and other information about First Federal and certain
additional comparable thrifts. See " -- Background of and Reasons for the Sale
of First Federal -- Background of Proposed Sale." The Preliminary Report and
the Report utilized the same market value approach, which derives a valuation
(or provides a basis for a valuation opinion) based on a review of key
financial statistics and acquisition pricing statistics of a comparative group
of acquired (or target) thrifts. The comparative group of thrifts consisted of
29 thrifts (23 in the Preliminary Report), consisting of 11 North Carolina
thrifts and 18 non-North Carolina thrifts for which mergers and acquisitions
had either been completed (over the prior two years) or were pending, which had
similar assets, equity (and tangible equity)/assets, non-performing assets
("NPA")/total assets, return on average assets ("ROA") and return on average
equity ("ROAE") levels as First Federal, out of a group of approximately 150
thrift transactions on which Capital Resources had data. The average amounts
of assets and equity and the average ratios of equity/assets, tangible
equity/assets, NPA/assets, ROA and ROAE for all thrifts in the comparative
group were $395.3 million, $30.0 million, 7.72%, 7.53%, 2.69%, 0.68% and
10.81%, respectively. The median amounts and ratios in such categories for
all thrifts in the comparative group were $337.0 million, $32.0 million, 7.74%,
6.96%, 2.05%, 0.71% and 10.81%, respectively, compared to amounts and ratios
in such categories for First Federal at March 31, 1994 of $319.1 million,
$28.8 million, 9.01%, 9.01%, 7.91%, 0.70% and 8.56%, respectively.
After identifying the baseline group of 29 thrift merger and acquisition
transactions for comparative purposes, Capital Resources analyzed information
with respect to the price paid (or to be paid) in each such transaction as a
(a) ratio to book value (and tangible book value), (b) ratio to earnings,
(c) percentage of assets and (d) percentage of deposits. The Preliminary
Report and the Report also discussed the relative merits of these different
acquisition pricing ratios and percentages. The following table summarizes the
purchase prices and pricing ratios for First Federal "as is" and "as adjusted"
and for the comparable non-North Carolina thrifts, North Carolina thrifts and
all comparable thrifts as a group (dollars in millions):
10
<PAGE>
<TABLE>
<CAPTION>
Price/ Price/
Book Tangible Price/ Price/ Price/
Price Value Book Value Earnings Deposits Assets
----- ----- ---------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
First Federal "as
is" (1) $40.35 140.3% 140.3% 17.04x 14.8% 12.6%
First Federal "as
adjusted" (2) 40.35 140.3 140.3 22.80 14.8 12.6
Non-North Carolina
thrifts (3)
Average 44.53 126.8 130.0 13.81 12.8 10.2
Median 43.35 125.7 125.7 14.29 12.4 10.2
North Carolina
thrifts (4)
Average 31.90 150.2 154.9 13.41 13.2 11.5
Median 21.00 150.8 150.8 13.97 11.5 10.6
All thrifts
Average 39.80 135.7 139.5 14.24 13.0 10.7
Median 38.20 135.3 135.3 14.23 11.9 10.3
<FN>
- - - - - ---------------
(1) Reflects a purchase price per share of $201.75 based on 200,000 shares
outstanding and First Federal's reported financial results at and for the
12 months ended March 31, 1994.
(2) The "as adjusted" price/earnings ratio of 22.80x is based on pro forma net
income of $1.77 million for First Federal for the 12 months ended March 31,
1994 assuming that $69.0 million of Excluded Assets, including $49.7
million of Contracts Receivable at an average weighted yield of 11.1%, are
replaced with $69.0 million of loans, mortgage-backed securities and
investment securities at a weighted average yield of 7%.
(3) Atlanfed Bancorp, Inc.; Fairfax Financial Corp.; Pioneer Financial
Corporation; Annapolis Bancorp, Inc.; Washington Bancorp, Inc.; Providence
Savings & Loan Association; Greenwich Financial Corporation; First AmFed
Corporation; First Federal Savings Bank of Proviso Township; FloridaBank, A
Federal Savings Bank; First Federal Bancshares of De Funiak Springs, Inc.;
Mid-State Federal Savings Bank; First Federal Savings Bank of Northwest
Florida; Village Financial Services, Ltd.; CFS Financial Corporation;
Montclair Bancorp, Inc.; Prime Bancshares, Inc.; and South Carolina Federal
Corporation.
(4) American Bancshares, Inc.; Robeson Savings Bank, Inc., SSB; Home Federal
Savings Bank of Eastern North Carolina; Citizens Savings Bank, SSB; Old
Stone Bank of North Carolina, A Federal Savings Bank; Citizens Savings
Bank, Inc.; Orange Federal Savings & Loan Association; FedFirst
Bancshares, Inc.; C K Federal Savings Bank; Security Financial Holding
Company; and First Fincorp, Inc.
</TABLE>
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. In its Report,
Capital Resources noted that the market value approach described above was the
most appropriate in assessing whether the acquisition proposal for First
Federal was fair to the Company from a financial point of view. Capital
Resources did not conduct a physical inspection of any of the properties or
assets of First Federal and did not make or obtain any independent evaluation
or appraisals of any properties, assets or liabilities of First Federal,
including the Excluded Assets. Moreover, Capital Resources assumed and relied
upon the accuracy and completeness of the financial and other information that
was provided to it by the Company and First Federal or was publicly available.
Capital Resources' fairness opinion is necessarily based on economic, market
and other conditions as in effect on, and the information (certain of which is
summarized in the Report) made available to it as of, July 22, 1994 and will
not be updated.
COMPENSATION OF CAPITAL RESOURCES. The Company has paid Capital Resources
$50,000 for its financial advisory services in connection with the Sale, and
pursuant to the terms of an engagement letter between the Company and Capital
Resources, the Company has agreed to pay Capital Resources $70,000 for its
fairness opinion related to the Sale,
11
<PAGE>
including the preparation of the Report. In addition, the Company has agreed
to reimburse Capital Resources for its expenses incurred for travel,
communication, reproduction, data and computer time to the extent such expenses
are necessary and incident to the completion of the services rendered. The
Company has agreed to indemnify Capital Resources against any claims or
liabilities arising in connection with the services under the engagement
letter, except for liabilities resulting from the gross negligence or other
fault of Capital Resources.
As part of its business, Capital Resources is regularly engaged in
valuations of financial institutions in connection with mergers and
acquisitions, negotiated underwritings, strategic and financial planning,
branch sale or purchase transactions, private placements and other purposes.
The Board decided to retain Capital Resources based upon Capital Resources'
experience as a financial advisor in mergers and acquisitions of financial
institutions and its knowledge of financial institutions generally and services
previously rendered in connection with the Company's acquisition of First
Federal in 1989 and in connection with the Reorganization, which commenced in
1990. Capital Resources has not provided services to the Company within two
years prior to the date of this Proxy Statement.
Capital Resources' opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the Sale.
EFFECT OF SALE ON RIGHTS OF STOCKHOLDERS
Consummation of the Sale is not anticipated to have any material impact on
the rights of stockholders. The Company will remain a corporation organized
under the laws of the State of Delaware and will remain subject to the
reporting and other requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the Securities
and Exchange Commission (the "SEC") promulgated thereunder. By letter dated
June 29, 1994 the OTS advised the Company that upon consummation of the Sale
and receipt of a letter from the Company's counsel that such Sale was
consummated in accordance with the OTS' approval thereof and further certifying
that the Company no longer controls a savings association, the Company will be
released from its registration as a savings and loan holding company. See
"Certain Existing Circumstances Potentially Affecting a Change in Control of
the Company -- Certain Regulatory Matters."
EFFECTS OF SALE ON THE COMPANY
The purchase price for First Federal, which is to be paid in cash, is $40.35
million, which will be increased (subject to the limitations hereafter
described) to reflect the consolidated pretax net earnings of First Federal and
its subsidiaries for the period from October 1, 1993 through the date of
closing, or decreased by the consolidated pretax net losses of First Federal
and its subsidiaries during this period, whichever is the case. The increase
to the $40.35 million for pretax earnings of First Federal and its subsidiaries
cannot exceed $1.825 million plus, in general, the pretax earnings or losses of
First Federal and its subsidiaries from August 1, 1994 through the closing,
provided that the foregoing amounts may be reduced under certain circumstances
for reserves taken or losses (in excess of gains) on Excluded Assets after
September 30, 1993. At September 30, 1993, First Federal's consolidated book
value was $27.4 million. The amount of First Federal's pretax earnings (before
giving effect to adjustments required under the Agreement) for the period from
October 1, 1993 through April 30, 1994 was approximately $1.9 million. Up to
approximately $1.39 million of the Purchase Price is to be retained by SCBC to
securitize the Litigation Indemnity. As part of the proposed transaction, the
Company is to purchase for cash (a) at book value, net of reserves, up to
approximately $18.4 million, as of April 30, 1994, of Excluded Association
Assets, subject to the right of SCBC to elect for First Federal to retain all
or part of such assets, and (b) Contracts Receivable having a book value less
certain reserves at April 30, 1994 of approximately $48.4 million and a
weighted average yield at April 30, 1994, on approximately $46.6 million of
interest earning Contracts Receivable, of 11.6%. See Note 16 of Notes to
Consolidated Financial Statements of Fairfield Communities, Inc. in the
Form 10-K. Approximately $2.85 million in net book value of the Excluded
Association Assets are to be pledged to SCBC to provide additional security
with respect to both the Litigation Indemnity and the general indemnities
under the Agreement. The Company has certain rights to substitute collateral
in connection with such pledge, including the right to substitute $0.60 to
$0.70 of cash for every $1.00 of net book value of Excluded Association
Assets so pledged.
As of April 30, 1994 the Excluded Association Assets, which had a book
value net of reserves of $18.4 million, had a market value, based on the
Company's expected manner of disposal after acquiring these assets from First
Federal, totaling approximately $15.9 million. The April 30, 1994 market value
of the Excluded Association Assets, assuming First
12
<PAGE>
Federal is retained by the Company and continues with its present method of
disposing of such assets, is approximately equal to the book value net of
existing reserves. These assets are part of the Company's net liabilities
held for sale. As of April 30, 1994 the Contracts Receivable, which had a
book value less certain negotiated reserves of approximately $48.4 million,
had a market value, based on the Company's expected manner of disposal of
certain of these assets after acquiring these assets from First Federal, of
approximately $47 million. The April 30, 1994 market value of the Contracts
Receivable, assuming First Federal is retained by the Company and continues
with its present method of disposing of such assets, is approximately equal to
the book value net of reserves. Of the $48.4 million of Contracts Receivable,
$45.8 million is included in assets of continuing operations and $2.6 million
is included in net liabilities held for sale.
Management estimates that the Sale will result in a net gain of
approximately $5.5 million after taking into account (i) writedowns related to
the Excluded Assets estimated at approximately $4.0 million, based upon the
Company's accelerated method of disposal of these assets subsequent to the
consummation of the Sale, and (ii) anticipated selling expenses, including
professional fees and other direct expenses, of approximately $3.3 million.
See the Pro Forma Condensed Consolidated Financial Statements of the Company
and related notes thereto included herewith.
EXCLUDED ASSOCIATION ASSETS
The Excluded Association Assets, which had a book value of $18.4 million as
of April 30, 1994, are carried at the lower of cost or estimated fair value
based on First Federal's current manner of disposal, and consist of (i) $8.5
million of loans receivable, of which 43 loans totaling $6.7 million were
originated by First Federal, and $1.8 million of loan participations, (ii) $9.8
million of real estate owned, and (iii) $.1 million of other assets. Of the
loans receivable originated by First Federal, 10 loans totaling $2.2 million
are nonperforming loans and 31 loans totaling $2.3 million were performing as
of April 30, 1994 but have a history of delinquencies. One loan totaling $1.6
million is a current loan (current since the third quarter of 1992) of which
the underlying collateral is a hotel, and another loan totaling $.6 million is
a current loan but the underlying collateral was previously held by First
Federal as real estate owned. The $1.8 million of loan participations includes
37 loans, 36 or $.8 million of which are performing and one or $1.0 million of
which is nonperforming.
The real estate owned consists of a retail shopping complex in Cornelius,
North Carolina with a book value of $2.5 million. First Federal acquired this
property in July 1992 and has hired a property management firm to continue
leasing the complex while the property is offered for sale. Net income for the
four months ended April 30, 1994 totaled approximately $75,000. Cash flows at
current occupancy rates (approximately 98%) would be adequate to recover First
Federal's book value. Another of such assets consists of an 11% participation
interest with a book value of $2.1 million in a hotel in West Hollywood,
California. This property is to be auctioned in the third quarter of 1994.
Also included in the Excluded Association Assets are two office buildings in
Columbia, South Carolina with a book value of $1 million. First Federal
acquired this property in June 1993. A property management company is in place
and the property is listed with a real estate broker. One office building is
under contract for sale to the tenant for $450,000 (approximate book value)
with a projected closing date of August 1, 1994. First Federal's strategy is
to continue to improve occupancy (from approximately 81% through April 1994)
to enhance the marketability of the other office building.
SECURITY CAPITAL BANCORP
SCBC is a North Carolina corporation organized as a multi-bank holding
company. On June 30, 1992, Omni Capital Group, Inc., a multi-thrift holding
company incorporated under the laws of the State of North Carolina, merged with
and into First Security Financial Corporation ("FSFC"), a bank holding company
incorporated under the laws of the State of North Carolina (the "Merger").
Upon the completion of the Merger, FSFC's name was changed to Security Capital
Bancorp. Thus, at March 31, 1994, SCBC was a $928.4 million multi-bank holding
company with leverage capital of $125.8 million, or 13.48% of total assets. Its
market capitalization as of April 29, 1994 was approximately $152.4 million.
SCBC operates primarily through its four banking subsidiaries, which have 45
offices in 11 counties in the south central and western Piedmont regions of
North Carolina. SCBC's general and administrative offices are located in
Salisbury, North Carolina.
13
<PAGE>
REGULATORY APPROVALS
The Sale requires approvals from the OTS, the FDIC, the FRB and the Banking
Commission (collectively, the "Regulatory Approvals"). All of such approvals
have been received. Pursuant to the Regulatory Approvals, the Sale is subject,
among other conditions, to the condition that the Sale be consummated no
earlier than July 30, 1994 and no later than September 30, 1994 (pursuant to
the FRB's approval), October 27, 1994 (pursuant to the OTS' approval), December
31, 1994 (pursuant to the FDIC's approval) and May 18, 1995 (pursuant to the
Banking Commission's approval), subject in each case to extension in certain
circumstances by the applicable regulatory agency. Approval by the OTS, the
FDIC, the FRB and the Banking Commission does not represent a determination as
to the fairness of the Sale to the stockholders or a recommendation or
endorsement of the Sale by the OTS, the FDIC, the FRB or the Banking
Commission.
The Company and the OTS entered into a Voting and Disposition
Rights/Dividend Agreement, dated May 30, 1989, as amended (the "Prenuptial
Agreement"), pursuant to which the OTS may take over and/or dispose of First
Federal without compensation to the Company, but subject to certain rights of
the Company to notice and opportunity to cure. OTS' ability to take over
and/or dispose of First Federal arises if either (a) the Company fails to
honor its obligation to remarket certain delinquent contracts receivable or
(b) First Federal's regulatory capital under GAAP at any time falls below two
percent of First Federal's assets. The Prenuptial Agreement also provides
substantial restrictions on First Federal's ability to pay dividends. First
Federal entered into a Supervisory Agreement with the OTS, dated August 26,
1992, pursuant to which First Federal agreed, except for certain enumerated
transactions, that neither First Federal nor any of its subsidiaries would
enter into any transaction with Fairfield or any of its subsidiaries without
the prior written approval of the Regional Director of the OTS. By letter
dated June 29, 1994 the OTS advised the Company that it will terminate the
Prenuptial Agreement and the Supervisory Agreement upon consummation of the
Sale. The Company and First Federal are in full compliance with the
requirements of the Prenuptial Agreement and the Supervisory Agreement as of
the date hereof.
INCOME TAX CONSEQUENCES
Although the Sale will be a taxable transaction for federal and state income
and franchise tax purposes, the Sale is not anticipated to have any material
federal or state income or franchise tax consequences to the Company. The
Company believes that upon consummation of all of the transactions contemplated
in the Agreement, including without limitation the Sale, a loss will be
recognized for federal income tax purposes. Any tax gains or losses upon
consummation will generally be included in determining the Company's
consolidated federal income tax results for its tax year in which the Sale is
consummated but are not expected materially to alter such results. The Sale
should not have any federal or state income tax effect to any stockholders.
COMPARATIVE UNAUDITED PER SHARE DATA
For information on certain comparative per share data for the Company, see
the Pro Forma Condensed Consolidated Financial Statements of the Company
included herewith.
ALTERNATIVES IF SALE DISAPPROVED
In the event an affirmative vote of the holders of a majority of the
outstanding shares of Common Stock is not received approving the Sale or any
other condition to the Sale is not fulfilled or waived, the Sale will not be
consummated. In such case, the Company may consider alternatives to the
proposed Sale. The Company's management has not identified any specific
alternative or alternatives it would pursue in the event of a disapproval or
termination of the Agreement or determined which, if any, courses of action
would in fact then be available to the Company. A number of alternatives,
nevertheless, may be available to the Company, including one or more of the
following: (i) adjourning or continuing the Annual Meeting and resoliciting
or continuing to solicit stockholders to approve the Sale; (ii) seeking to
restructure the terms of the Sale or to enter into an alternative sale
transaction and resoliciting stockholders' approval of such transaction;
(iii) adopting a plan of liquidation or dissolution and/or winding up the
affairs of First Federal in a manner which would not require stockholder
approval; or (iv) changing its plan to sell First Federal and determining
instead to retain First Federal as a subsidiary.
14
<PAGE>
PROPOSAL 3 -- AMENDMENT TO
THE COMPANY'S SHARE PURCHASE RIGHTS AGREEMENT
GENERAL
The Company entered into its existing Share Purchase Rights Agreement (the
"Rights Agreement") pursuant to the Seventh Amended and Restated Joint Plan of
Reorganization of the Company and certain of its subsidiaries (the "Plan of
Reorganization"). The existing provisions of the Rights Agreement are
summarized below under the caption " -- Summary of the Existing Provisions
of the Rights Agreement."
In general, the Rights Agreement is intended to (i) reduce the Company's
vulnerability to potentially coercive or unfair takeover practices and takeover
proposals which are inadequate or otherwise inconsistent with the best
interests of the Company and its stockholders, (ii) encourage potential
acquirors to negotiate with the Board, acting on behalf of the Company and its
stockholders, (iii) enhance the bargaining position of the Board in such
negotiations, (iv) provide additional time to the Board in which appropriately
to evaluate and respond to an unsolicited takeover proposal, and (v) under
appropriate circumstances, provide additional time to the Board in which to
develop or implement alternatives designed to provide superior value to the
Company's stockholders. The Rights Agreement is not intended to, and the Board
believes that it will not, deter fully priced and financed cash offers for all
outstanding shares of Common Stock because the Board's fiduciary duties would
require it to act in the best interests of the Company and its stockholders in
responding to an unsolicited takeover proposal. These fiduciary duties may,
under certain circumstances, include a duty to cause the Rights (as defined
below) to be redeemed. Because the Board may cause the Rights to be redeemed
in the manner described below, the Rights Agreement should not interfere with
any transaction approved by the Board.
The Board has authorized, subject to the approval of the Company's
stockholders, an amendment (the "Rights Agreement Amendment") to the Rights
Agreement, which would delete from the Rights Agreement provisions that
presently exempt so-called "Qualifying Offers" and certain related transactions
from certain key provisions of the Rights Agreement. These provisions were
originally included in the Rights Agreement in connection with the formulation
of the Plan of Reorganization at the request of the representatives of certain
prepetition creditors of the Company, including the representatives of certain
such creditors that either received no shares of Common Stock pursuant to the
Plan of Reorganization or subsequently liquidated or reduced substantially
their holdings of shares of Common Stock received pursuant to the Plan of
Reorganization. The Rights Agreement Amendment is intended to assure that the
potential benefits of the Rights Agreement will be available in connection with
any unsolicited takeover proposal, irrespective of whether such proposal would
satisfy the criteria for a so-called "Qualifying Offer." THE BOARD RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE RIGHTS AGREEMENT AMENDMENT.
PURPOSES AND EFFECTS OF THE PROPOSED RIGHTS AGREEMENT AMENDMENT
As a result of the so-called "Qualifying Offer" provisions, the Rights
Agreement, as presently in effect, would be ineffective with respect to an
unsolicited takeover proposal satisfying the definition of "Qualifying Offer,"
irrespective of whether the proposal is in the best interests of the Company
and its stockholders in light of, among other factors, the timing and likely
effects of the proposal, potential alternatives to the proposal, and the
Company's strategic plans and long-term prospects. In the context of such a
proposal, the potential benefits otherwise provided by the Rights Agreement
would not be realized, and the Board may not have sufficient leverage to
negotiate to improve the terms of such proposal or otherwise to respond to such
proposal, including, under appropriate circumstances, by developing or
implementing alternatives designed to provide superior value to the Company's
stockholders. Accordingly, the Board has authorized, subject to approval by
the Company's stockholders, the Rights Agreement Amendment, which would
eliminate the "Qualifying Offer" provisions from the Rights Agreement.
The Board believes that the Rights Agreement has the potential to enhance
substantially the Board's ability, consistent with its fiduciary duties,
appropriately to evaluate and respond to an unsolicited takeover proposal and,
under appropriate circumstances, to develop or implement alternatives designed
to provide superior value to the Company's stockholders. The Board further
believes that any such proposal and the potential responses or alternatives
thereto can be fully considered and evaluated only when such a proposal is
actually presented, taking into account the relevant circumstances existing at
that time. Accordingly, the Board believes that the potential benefits of the
Right Agreements should be available in connection with any unsolicited
takeover proposal, irrespective of whether such proposal would
15
<PAGE>
satisfy the criteria for a so-called "Qualifying Offer" or any other criteria
prescribed prior to the time the proposal is actually presented. The Rights
Agreement Amendment is intended to have this effect.
Regardless of whether the Rights Agreement Amendment is implemented, the
Rights Agreement could have the effect of discouraging an unsolicited takeover
proposal, even though such a proposal might be beneficial to the Company and
its stockholders or even though some stockholders might otherwise desire such
a proposal. The implementation of the Rights Agreement Amendment could extend
this potential deterrent effect to unsolicited takeover proposals satisfying
the criteria for a so-called "Qualifying Offer." Acquisitions or other changes
in control which are proposed and effected without prior consultation and
negotiation with the existing Board and management are not necessarily
detrimental to the Company and its stockholders. In addition, the requirement
that a potential acquiror negotiate with the Board may afford the Company's
management the opportunity to avoid removal. The Board, however, believes that
the benefits of enhancing its ability to negotiate with the proponents of
unsolicited takeover proposals and otherwise respond to such proposals
outweighs the disadvantages of potentially discouraging such proposals and the
possibility of self-interest by management.
SUMMARY OF THE EXISTING PROVISIONS OF THE RIGHTS AGREEMENT
GENERAL. Pursuant to the Rights Agreement, each share of Common Stock
issued pursuant to the Plan of Reorganization was accompanied by one share
purchase right (a "Right"), and each share of Common Stock issued thereafter
and prior to the Rights Distribution Date (as defined below), or the earlier
redemption or expiration of the Rights, will similarly be accompanied by one
Right (subject to adjustment in certain circumstances). Each Right entitles
the registered holder thereof to purchase from the Company one one-hundredth
of a share of Series A Junior Participating Preferred Stock, par value $.01
per share (the "Series A Preferred Shares"), of the Company at a price (the
"Series A Purchase Price") of $25.00 per one one-hundredth of a Series A
Preferred Share (subject to adjustment in certain circumstances).
The Rights Agreement provides that the Rights will be evidenced by the
certificates evidencing shares of Common Stock until the earlier to occur of
the following dates (the earlier of such dates being the "Rights Distribution
Date"): (i) the close of business on the tenth business day (or such later date
as the Board may determine) following the first date of public announcement by
the Company or such person that a person (other than the Company or a
subsidiary or employee benefit plan of the Company), together with its
affiliates and associates, has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding Common Stock (any such
person being an "Acquiring Person") and (ii) the close of business on the tenth
business day (or such later date as the Board may determine) following the
commencement of a tender offer or exchange offer by a person (other than the
Company or a subsidiary or employee benefit plan of the Company), the
consummation of which would result in beneficial ownership by such person of
20% or more of the outstanding Common Stock. The Rights Agreement further
provides that, until the Rights Distribution Date, the Rights may be
transferred with and only with the Common Stock, and that, until the Rights
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates evidencing Common Stock will also
constitute the transfer of the Rights associated with such certificates. As
soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of Common Stock as of the close of business on the Rights
Distribution Date and such separate Rights Certificates alone will evidence the
Rights. No Right is exercisable at any time prior to the Rights Distribution
Date. The Rights will expire on September 1, 2002 (the "Final Expiration
Date") unless earlier redeemed by the Company as described below. Until a
Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Company, including without limitation the right to vote or
to receive dividends.
ANTIDILUTION ADJUSTMENTS. The Series A Purchase Price payable, and the
number of Series A Preferred Shares or other securities issuable, upon exercise
of a Right are subject to adjustment from time to time to prevent dilution (i)
in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Shares, (ii) upon the grant to
holders of the Series A Preferred Shares of certain rights or warrants to
subscribe for or purchase Series A Preferred Shares at a price, or securities
convertible into Series A Preferred Shares with a conversion price, less than
the then-current market price of the Series A Preferred Shares, or (iii) upon
the distribution to holders of the Series A Preferred Shares of evidences of
indebtedness or cash (excluding regular periodic cash dividends), assets
(excluding dividends payable in Series A Preferred Shares) or subscription
rights or warrants (other than those referred to above). The number of Rights
associated with each share of Common Stock is also subject to adjustment from
time to time to prevent dilution in the event of a stock dividend on the Common
Stock payable in shares of Common Stock or a subdivision or combination of the
Common Stock occurring, in any such case, prior to the Rights Distribution
Date.
16
<PAGE>
Subject to certain exceptions, no adjustments in the Series A Purchase
Price will be required until cumulative adjustments require an adjustment in
the Series A Purchase Price of at least 1%. The Company is not required to
issue fractional Series A Preferred Shares (other than fractions that are
integral multiples of one one-hundredth of a Series A Preferred Share, which
may, at the option of the Company, be evidenced by depositary receipts) or
fractional shares of Common Stock or other securities issuable upon the
exercise of Rights. In lieu of issuing such securities, the Company may make
a cash payment, as provided in the Rights Agreement.
SERIES A PREFERRED SHARES. The Series A Preferred Shares issuable upon
exercise of the Rights will be redeemable at the option of the Board, in whole
or in part, at any time and from time to time, at a cash price per share equal
to the product of 100 times the average market value (computed as provided in
the Certificate of Designations relating to the Series A Preferred Shares) of
the Common Stock on the date of mailing of the notice of redemption. Each
Series A Preferred Share will be entitled to a minimum preferential quarterly
dividend payment equal to the greater of (i) $0.75 per share and (ii) an
amount equal to 100 times the aggregate dividends declared per share of Common
Stock during the applicable quarter. In the event of liquidation, the holders
of the Series A Preferred Shares will be entitled (i) to a preferential
liquidation payment of $16.50 per share plus accrued and unpaid dividends to
the date of such payment and (ii) after the holders of shares of Common Stock
shall have received an amount per share equal to the quotient obtained by
dividing the per share liquidation preference paid to holders of Series A
Preferred Shares by 100, to receive, together with the holders of Common Stock,
their ratable and proportionate share of the remaining assets to be distributed
in the ratio of 100 to one with respect to the Series A Preferred Shares and
shares of Common Stock, on a per share basis, respectively. Each Series A
Preferred Share will have 100 votes, voting together with the Common Stock.
Finally, in the event of any merger, consolidation or other transaction in
which shares of Common Stock are exchanged, each Series A Preferred Share will
be entitled to receive 100 times the amount received per share of Common Stock.
These rights will be protected by customary antidilution provisions.
Rights may be exercised to purchase Series A Preferred Shares only after the
occurrence of the Rights Distribution Date and prior to the occurrence of a
Flip-in Event or Flip-over Event (as such terms are defined below). A Rights
Distribution Date resulting from the commencement of a tender offer or exchange
offer described in clause (ii) of the definition of "Rights Distribution Date"
set forth above could precede the occurrence of a Flip-in Event or Flip-over
Event and thus (subject to the earlier redemption or expiration of the Rights)
result in the Rights being exercisable to purchase Series A Preferred Shares.
A Rights Distribution Date resulting from any occurrence described in clause
(i) of the definition of "Rights Distribution Date" set forth above would
necessarily follow the occurrence of a Flip-in Event or Flip-over Event and
thus (subject to the earlier redemption or expiration of the Rights) result in
the Rights being exercisable to purchase shares of Common Stock or other
securities as described below.
FLIP-IN AND FLIP-OVER EVENTS. The Rights Agreement generally provides that,
in the event (a "Flip-in Event") that any person becomes an Acquiring Person,
proper provision will be made so that each holder of a Right, other than Rights
that are or were owned beneficially by the Acquiring Person (which, from and
after the date of the first occurrence of a Flip-in Event, will be void), will
thereafter have the right to receive, upon the exercise thereof at the
then-current Series A Purchase Price, a number of shares of Common Stock (or,
under certain circumstances, an economically equivalent security or securities
of the Company) having a market value of two times the Series A Purchase Price.
The Rights Agreement generally provides that, in the event (a "Flip-over
Event") that, following the first date of public announcement by the Company or
such person that a person has become an Acquiring Person, (i) the Company
merges with or into any person and the Company is not the surviving
corporation, (ii) any person merges with or into the Company and the Company is
the surviving corporation, but all or part of the Common Stock is changed or
exchanged, or (iii) 50% or more of the Company's assets or earning power are
sold, proper provision will be made so that each holder of a Right (other than
Rights that previously have become void upon the occurrence of a Flip-in Event)
will thereafter have the right to receive, upon the exercise thereof at the
then-current Series A Purchase Price, a number of shares of common stock (or,
under certain circumstances, an economically equivalent security or securities)
of such other person having a market value of two times the Series A Purchase
Price.
QUALIFYING OFFER PROVISIONS. As presently in effect, the Rights Agreement
provides that the acquisition of beneficial ownership of 20% or more of the
outstanding Common Stock pursuant to a Qualifying Offer (as defined below) will
not result in a Flip-in Event, and an all-cash merger or consolidation with a
person that acquired shares of Common Stock pursuant to a Qualifying Offer will
not constitute a Flip-over Event if the price per share offered in such
transaction is not less than the price per share offered in the Qualifying
Offer. In general, a "Qualifying Offer" is defined as an all-cash tender offer
for all of the outstanding Common Stock that meets all of the following
requirements: (i) the person making
17
<PAGE>
the tender offer has firm written commitments from responsible financial
institutions to provide funds for such offer which, when added to the amount
of cash which such person has available and has committed to utilize for
purposes of the offer, will be sufficient to consummate the offer and pay all
related expenses; (ii) such person will own, after consummating such offer,
shares representing a majority of the voting power of the outstanding shares of
the Company's voting stock; (iii) such offer will in all events remain open for
at least 45 business days and will be extended for at least 20 business days
after any change in the price offered or an alternative offer is made which
provides for consideration per share in excess of that provided for in such
offer; and (iv) prior to or upon commencing such offer, such person has
committed in writing (a) to consummate promptly upon completion of the offer
an all-cash transaction or transactions whereby all remaining shares of the
Common Stock will be acquired at the same price per share paid pursuant to the
offer, (b) that such person will not amend such offer to reduce the per share
price offered, change the form of consideration offered or reduce the number of
shares being sought or in any other respect which is materially adverse to the
Company's stockholders, and (c) that such person will not make any offer for
any equity securities of the Company for six months after commencement of the
original offer if the original offer does not result in the tender of the
number of shares required to be purchased as described in (ii) above, unless
another all-cash tender offer for all outstanding shares of the Common Stock
meeting certain specified requirements is commenced.
REDEMPTION. The Board may cause the Company to redeem the Rights in whole,
but not in part, at a price of $0.01 per Right, subject to adjustment in
certain circumstances (the "Redemption Price"), at any time prior to the
earlier of (i) the close of business on the tenth day following the first date
of public announcement by the Company or such person that a person has become
an Acquiring Person and (ii) the Final Expiration Date. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption
Price.
AMENDMENTS. Prior to the Rights Distribution Date, the Rights Agreement may
be amended by the Company, without the approval of any holders of Rights
Certificates, to cure any ambiguity or defect, shorten or lengthen time periods
or change the provisions thereunder in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the interests of
the holders of Rights Certificates (other than an Acquiring Person or its
affiliates or associates), provided that no amendment may be so made which
changes the requirements that must be met for a cash tender offer to constitute
a Qualifying Offer or which changes the Redemption Price, the Final Expiration
Date, the Series A Purchase Price or the number of Series A Preferred Shares
for which a Right is exercisable. In addition, prior to the Rights Distribution
Date, the Rights Agreement may be supplemented or amended in any respect which
the Board shall determine if such supplement or amendment is approved at a
meeting of stockholders by the affirmative vote of holders of a majority of the
voting power of the shares entitled to vote and voting (in person or by proxy)
for or against such supplement or amendment at such meeting.
RIGHTS AGENT. The First National Bank of Boston currently acts as Rights
Agent under the Rights Agreement.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of shares of Common Stock
represented at the Annual Meeting and voting on this proposal is required to
approve the Rights Agreement Amendment.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE RIGHTS
AGREEMENT AMENDMENT. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS
STOCKHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
18
<PAGE>
PROPOSAL 4 -- AMENDMENT TO CERTAIN PROVISIONS OF
THE CERTIFICATE OF INCORPORATION RELATING TO THE
ELECTION, TERMS OF OFFICE AND REMOVAL OF DIRECTORS
PROPOSAL 4 HAS FOUR PARTS, WHICH ARE ENUMERATED ON THE ENCLOSED PROXY AS
FOLLOWS: PART A -- CLASSIFICATION OF THE BOARD; PART B -- REMOVAL OF DIRECTORS
ONLY FOR CAUSE; PART C -- FILLING OF VACANCIES ON THE BOARD; AND PART D --
FIXING THE SIZE OF THE BOARD. STOCKHOLDERS MAY VOTE FOR OR AGAINST, OR
ABSTAIN FROM VOTING WITH RESPECT TO, EACH OF THE FOUR PARTS OF PROPOSAL 4
INDIVIDUALLY, AND NEED NOT VOTE OR ABSTAIN CONSISTENTLY WITH RESPECT TO SUCH
PARTS. THE BOARD BELIEVES THAT THE FOUR INDIVIDUAL PARTS OF PROPOSAL 4 ARE
CLOSELY INTERRELATED AND THAT THE IMPLEMENTATION OF EACH SUCH PART IS
NECESSARY IN ORDER FOR THE OBJECTIVES SOUGHT TO BE ACHIEVED BY PROPOSAL 4 TO
BE FULLY ACHIEVED. ACCORDINGLY, NO PART OF PROPOSAL 4 WILL BE IMPLEMENTED
UNLESS EACH OF THE INDIVIDUAL PARTS OF PROPOSAL 4 IS APPROVED BY THE
REQUISITE VOTE OF STOCKHOLDERS. THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE
FOR APPROVAL OF EACH PART OF PROPOSAL 4.
GENERAL
Article Seventh of the Certificate of Incorporation, as presently in effect,
provides that the number of directors of the Company will be fixed from time to
time by or in the manner provided in the Bylaws. The Bylaws presently provide
that the number of directors shall be not more than seven and that the exact
number of directors shall be determined by resolution of the Board or by a vote
of holders of at least a majority of the issued and outstanding shares of
Common Stock entitled to vote generally in the election of directors. The
number of directors is currently set at seven, and each director is elected
annually for a one-year term.
Article Seventh of the Certificate of Incorporation, as presently in effect,
further provides that (i) any director may be removed from office with or
without cause by the holders of a majority of the voting power of all shares of
the Company entitled to vote generally in an election of directors, (ii) if one
or more directors is removed by a vote of the stockholders, the vacancy or
vacancies created thereby shall be filled by vote of the stockholders, (iii)
newly created directorships resulting from an increase in the number of
directors and any vacancies resulting from death, resignation, disqualification
or other cause (other than vacancies resulting from removal of a director with
or without cause by a vote of the stockholders) will be filled by the
affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum, or by a sole remaining director or by the
stockholders, and (iv) any director elected in accordance with the procedures
described in clause (iii) will hold office until the next annual meeting.
The Board has adopted, and recommends that the Company's stockholders
approve (by approving each of the four parts of Proposal 4), an amendment (the
"Classified Board Amendment") to Article Seventh of the Certificate of
Incorporation which would, in general: (i) classify the Board into three
separate classes, as nearly equal in number as possible, with one class being
elected each year and require the vote of 80% of the voting power of the
Company's voting stock to amend or repeal, or to adopt any provision
inconsistent with, such classification; (ii) provide that directors may be
removed only for cause and only with the approval of holders of 80% or more of
the voting power of the Company's voting stock and require the vote of 80%
of the voting power of the Company's voting stock to amend or repeal, or to
adopt any provision inconsistent with, such provision; (iii) provide that any
vacancy on the Board may be filled only by the remaining directors then in
office, even though less than a quorum, and require the vote of 80% of the
voting power of the Company's voting stock to amend or repeal, or to adopt any
provision inconsistent with, such provision; and (iv) provide that the number
of directors may be determined only by the affirmative vote of the majority of
the entire Board and require the vote of 80% of the voting power of the
Company's voting stock to amend or repeal, or to adopt any provision
inconsistent with, such provision. The foregoing components of the Classified
Board Amendment, which are enumerated on the enclosed proxy as Parts A through
D of Proposal 4, are discussed in greater detail below.
PURPOSES AND EFFECTS OF THE PROPOSED CLASSIFIED BOARD AMENDMENT
GENERAL. The Classified Board Amendment, as a whole, is intended to
(i) promote continuity and stability in the management and policies of the
Company, (ii) encourage potential acquirors to negotiate with the Board, acting
on behalf of the Company and its stockholders, (iii) enhance the bargaining
position of the Board in such negotiations, and (iv) discourage certain
takeover-related tactics that may be inconsistent with the best interests of
the Company and its stockholders.
19
<PAGE>
PART A -- CLASSIFICATION OF THE BOARD. The Delaware General Corporation Law
permits the Board to be divided into classes serving staggered terms. Under
the portion of the Classified Board Amendment constituting Part A of
Proposal 4, the Company's directors would be divided into three classes, with
three directors elected for a term expiring at the 1995 Annual Meeting, two
directors elected for a term expiring at the 1996 Annual Meeting, and the
remaining two directors elected for a term expiring at the 1997 Annual Meeting
(and, in each case, until their respective successors are duly elected and
qualified). At each Annual Meeting of Stockholders commencing with the 1995
Annual Meeting, one class of directors would be elected for a three-year term.
If at any time the size of the Board is changed, the increase or decrease in
the number of directors would be apportioned among the three classes to make
all classes as nearly equal as possible. Under the portion of the Classified
Board Amendment constituting Part A of Proposal 4, the vote of 80% of the
voting power of the Company's voting stock would be required for the amendment
or repeal of, or the adoption of any provision inconsistent with, the
provisions described in this paragraph. The Board has no present plans,
arrangements, commitments or understandings with respect to increasing or
decreasing the size of the Board or of any class of directors.
Information concerning the current nominees for election as directors at the
Annual Meeting and the terms for which they will serve if each part of Proposal
4 is approved is set forth under the caption "Election of Directors." If each
part of Proposal 4 is not approved, all directors would be elected to serve
until the 1995 Annual Meeting and until their successors are elected and
qualified.
The Board believes that a classified board will promote continuity and
stability in the management and policies of the Company because, absent
extraordinary circumstances, a majority of the Company's directors at any
given time will have had prior experience as directors of the Company. The
Board further believes that such continuity and stability will facilitate
long-term planning for the Company's business. The classification of directors
would have the effect of making it more difficult to change the composition of
the Board. Absent extraordinary circumstances, at least two stockholders
meetings, instead of one, would be required to effect a change in the majority
control of the Board, except in the event of vacancies resulting from removal
for cause or other reason (in which case, the remaining directors would fill
the vacancies so created as described below). If each part of Proposal 4 is
approved, the classification provisions would apply whether or not a change
in the Board would be beneficial to the Company and its stockholders and
whether or not some stockholders believe that such a change would be desirable.
PART B -- REMOVAL OF DIRECTORS ONLY FOR CAUSE. Under the Delaware General
Corporation Law, unless the corporation's certificate of incorporation
otherwise provides, the holders of a majority of the shares then entitled to
vote at an election of directors may effect the removal of directors of a
corporation the board of directors of which is classified, but only for cause.
Under the portion of the Classified Board Amendment constituting Part B of
Proposal 4, directors of the Company could be removed by stockholders only for
cause, and then only by the vote of the holders of 80% of the voting power of
the Company's voting stock, voting together as a single class, and the vote of
80% of the voting power of the Company's voting stock would be required for the
amendment or repeal of, or the adoption of any provision inconsistent with,
such provisions. This portion of the Classified Board Amendment is intended to
preclude a potential acquiror or other stockholder from removing incumbent
directors without cause, but would permit the holders of 80% of the voting
power of the Company's voting stock, voting together as a single class, to
remove directors for cause. The primary purpose of this portion of the
Classified Board Amendment is to preclude the removal of any director or
directors by the proponent of an unsolicited takeover proposal or another
stockholder, unless removal is warranted for reasons other than control of the
Board. The precise meaning of "cause" in the context of director removal has
not been conclusively established. The Delaware courts have held that actions
such as embezzlement, disclosure of trade secrets and other violations of
fiduciary duty constitute "cause" in this context. Conversely, the Delaware
courts have indicated that a desire to take over the management of a
corporation or the failure to cooperate with management do not constitute
"cause" in this context.
PART C -- FILLING OF VACANCIES ON THE BOARD. Under the portion of the
Classified Board Amendment constituting Part C of Proposal 4, a vacancy on the
Board, including a vacancy created by an increase in the number of directors,
occurring prior to the expiration of the term in office of the class in which
such vacancy occurs, could be filled by the remaining directors, but not by the
stockholders. The portion of the Classified Board Amendment constituting
Part C of Proposal 4 also provides that any director elected to the Board to
replace another director will hold office for the unexpired term of the
director he or she replaced and a director elected by the Board to fill a
vacancy created by an increase in the number of directors will hold office
until the next election for the class to which he or she was elected. Under
the portion of the Classified Board Amendment constituting Part C of
Proposal 4, the vote of 80% of the voting
20
<PAGE>
power of the Company's voting stock would be required for the amendment or
repeal of, or the adoption of any provision inconsistent with, the provision
described in this paragraph.
Although the portion of the Classified Board Amendment constituting Part B
of Proposal 4 would permit the holders of 80% of the voting power of the
Company's voting stock, voting together as a single class, to remove directors
for cause, under the portion of the Classified Board Amendment constituting
Part C of Proposal 4 only the directors would have the power to fill the
vacancies created by such removal. The primary purpose of this portion of the
Classified Board Amendment, in conjunction with the portion of the Classified
Board Amendment constituting Part B of Proposal 4, is to preclude a potential
acquiror or other stockholder from removing incumbent directors and
simultaneously gaining control of the Board by filling the vacancies created
by such removal with its own nominees.
PART D -- FIXING THE SIZE OF THE BOARD. The portion of the Classified Board
Amendment constituting Part D of Proposal 4 provides that the number of
directors comprising the entire Board shall be a number not less than three nor
greater than eleven and would alter the arrangement set forth in the current
Bylaws by providing that the number, within such range, will be as authorized
exclusively by a majority of the entire Board. The portion of the Classified
Board Amendment constituting Part A of Proposal 4 would also require the vote
of 80% of the voting power of the Company's voting stock for the amendment or
repeal of, or the adoption of any provision inconsistent with, the provisions
described in the immediately preceding sentence. The primary purpose of this
portion of the Classified Board Amendment, in conjunction with the portion of
the Classified Board Amendment constituting Part C of Proposal 4, is to prevent
a potential acquiror or other stockholder from increasing the number of
directors and attempting to fill those vacancies. The Board has no present
plans, arrangements, commitments or understandings with respect to increasing
or decreasing the size of the Board or of any class of directors.
AMENDMENT. Under the Delaware General Corporation Law, amendments to a
corporation's certificate of incorporation require the approval of the holders
of a majority of the outstanding shares entitled to vote thereon and, in
certain cases, of a majority of the outstanding shares of each class entitled
to vote thereon as a class. The Delaware General Corporation Law also permits
provisions in a corporation's certificate of incorporation that require a
greater vote than the vote otherwise required by law for any corporate action.
The requirement of an increased stockholder vote for amendment of the
provisions contained in each part of Proposal 4 is designed to prevent a
potential acquiror or other stockholder controlling a majority of the voting
power of the Company's stock from avoiding the requirements thereof by simply
amending such provisions.
CERTAIN TAKEOVER-RELATED CONSIDERATIONS. The Board believes that the
existing provisions of Article Seventh of the Certificate of Incorporation may
increase the Company's vulnerability to potentially coercive or unfair takeover
practices and takeover proposals or takeover-related tactics which are
inadequate or otherwise not in the best interests of the Company and its
stockholders. In particular, the Board believes that the imminent threat of
the removal and replacement of a majority or all of the Company's directors by
means of a proxy contest in connection with an unsolicited takeover proposal
could severely curtail the Board's ability effectively to (i) negotiate with
the potential acquiror to improve the terms of such proposal or (ii) otherwise
respond to such proposal, including, under appropriate circumstances, by
developing or implementing alternatives designed to provide superior value to
the Company's stockholders. Moreover, because of the serious disruption to the
Company's management, policies and business operations that would likely result
from a replacement of a majority or all of the Company's directors, it is
possible that even a person who was not seriously interested in acquiring
control of the Company could seek to use the threat of a proxy contest or
takeover proposal as a means to pressure the Company to repurchase such
person's voting securities at a substantial premium over market price in order
to avoid such disruption.
The Classified Board Amendment is not intended to, and the Board believes
that it would not, deter fully priced and financed cash offers for all
outstanding shares of Common Stock because the Board's fiduciary duties would
require it to act in the best interests of the Company and its stockholders
in responding to an unsolicited takeover proposal. Rather, the Board believes
that the Classified Board Amendment would (i) promote continuity and stability
in the management and policies of the Company, (ii) encourage potential
acquirors to negotiate with the Board, acting on behalf of the Company and its
stockholders, (iii) enhance the bargaining position of the Board in such
negotiations, and (iv) discourage certain takeover-related tactics that may be
inconsistent with the best interests of the Company and its stockholders. It
is possible, however, that the Classified Board Amendment could have the
effects of discouraging an unsolicited takeover proposal and making it more
difficult to replace the existing Board and management even though such a
proposal or replacement might be beneficial to the Company and its stockholders
and even though some stockholders might otherwise desire such a proposal or
replacement. Acquisitions or other changes in control which are
21
<PAGE>
proposed and effected without prior consultation and negotiation with the
existing Board and management are not necessarily detrimental to the Company
and its stockholders. The Board, however, believes that the benefits of
continuity and stability in the management and policies of the Company and the
enhancement of the Board's ability to negotiate with the proponents of
unsolicited takeover proposals and otherwise respond to such proposals outweigh
the disadvantages of potentially discouraging such proposals and the
possibility of self-interest by management.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Common
Stock entitled to vote at the Annual Meeting is required to approve each part
of Proposal 4. Unless each of the four parts of Proposal 4 is approved by such
vote, the Classified Board Amendment will not be implemented.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF EACH PART OF
PROPOSAL 4. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS
SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
22
<PAGE>
PROPOSAL 5 -- AMENDMENT TO CERTAIN PROVISIONS OF
THE CERTIFICATE OF INCORPORATION RELATING TO
STOCKHOLDER ACTION AND SPECIAL MEETINGS OF STOCKHOLDERS
PROPOSAL 5 HAS TWO PARTS, WHICH ARE ENUMERATED ON THE ENCLOSED PROXY AS
FOLLOWS: PART A -- PROHIBITION OF ACTION BY WRITTEN CONSENT AND PART B --
CALL OF SPECIAL MEETINGS. STOCKHOLDERS MAY VOTE FOR OR AGAINST, OR ABSTAIN
FROM VOTING WITH RESPECT TO, EACH OF THE TWO PARTS OF PROPOSAL 5 INDIVIDUALLY,
AND NEED NOT VOTE OR ABSTAIN CONSISTENTLY WITH RESPECT TO SUCH PARTS. NEITHER
PART OF PROPOSAL 5 WILL BE IMPLEMENTED UNLESS EACH OF THE INDIVIDUAL PARTS OF
PROPOSAL 5 IS APPROVED BY THE REQUISITE VOTE OF STOCKHOLDERS. ACCORDINGLY,
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF EACH PART OF
PROPOSAL 5.
GENERAL
Article Sixth of the Certificate of Incorporation, as presently in effect,
provides that special meetings of stockholders of the Company may be called by
the Chief Executive Officer of the Company (the "CEO"), the Chairman of the
Board, if different from the CEO (the "Chairman"), or the Secretary of the
Company, and shall be called by the CEO, the Chairman or the Secretary of the
Company within 10 calendar days after receipt of the written request of holders
of at least 10% of the Company's issued and outstanding Common Stock entitled
to vote generally in an election of directors.
Under Delaware General Corporation Law, unless the certificate of
incorporation provides otherwise, any action required or permitted to be taken
by stockholders of a corporation may be taken without a meeting and without a
stockholder vote if a written consent setting forth the action taken is signed
by the holders of shares of outstanding stock having the requisite number of
votes that would be necessary to authorize such action at a meeting of
stockholders. The Certificate of Incorporation, as presently in effect, does
not eliminate or restrict the ability of stockholders to so act without a
meeting.
The Board has adopted, and recommends that the Company's stockholders
approve (by approving each of the two parts of Proposal 5), an amendment (the
"Stockholder Action Amendment") to Article Sixth of the Certificate of
Incorporation which would, in general: (i) provide that all stockholder
action must be taken at an annual or special meeting of stockholders and not by
written consent and require the vote of 80% of the voting power of the
Company's voting stock to amend or repeal, or to adopt any provision
inconsistent with, such provision and (ii) provide that special meetings of
the Company's stockholders may be called only by the CEO, the Chairman or the
Secretary of the Company and not by stockholders and require the vote of 80%
of the voting power of the Company's voting stock to amend or repeal, or to
adopt any provision inconsistent with, such provision. The foregoing
components of the Stockholder Action Amendment, which are enumerated on the
enclosed proxy as Parts A and B of Proposal 5, are discussed in greater detail
below.
PURPOSES AND EFFECTS OF PROPOSED STOCKHOLDER ACTION AMENDMENT
GENERAL. The Stockholder Action Amendment, as a whole, is intended to
(i) give all stockholders an opportunity to participate at a meeting in the
determination of any proposed stockholder action, (ii) minimize the potential
expense and distractions associated with stockholder proposals by preventing
the proponents thereof from forcing the consideration of a proposal prior to
the next annual meeting of stockholders or such earlier time as an officer of
the Company having the authority to call a special meeting of stockholders
deems appropriate, and (iii) discourage certain takeover-related tactics that
may be inconsistent with the best interests of the Company and its
stockholders.
PART A -- PROHIBITION OF ACTION BY WRITTEN CONSENT. The portion of the
Stockholder Action Amendment constituting Part A of Proposal 5 would require
that all stockholder action be taken at an annual or special meeting of
stockholders and prohibit stockholder action by written consent. The portion
of the Classified Board Amendment constituting Part A of Proposal 4 would also
require the vote of 80% of the voting power of the Company's voting stock for
the amendment or repeal of, or the adoption of any provision inconsistent with,
the provisions described in the immediately preceding sentence.
The portion of the Stockholder Action Amendment constituting Part A of
Proposal 5 is intended to prevent a potential acquiror or other stockholder
from seeking to exercise the rights vested in the Company's stockholders as a
group without giving all of the Company's stockholders entitled to vote on a
proposed action adequate opportunity to
23
<PAGE>
participate at a meeting to consider such proposed action. Accordingly, the
portion of the Stockholder Action Amendment constituting Part A of Proposal 5
would give all stockholders an opportunity to participate at a meeting in the
determination of any proposed stockholder action and would prevent holders of a
majority of the voting power of the Company's voting stock from taking action
unilaterally without a meeting.
PART B -- CALL OF SPECIAL MEETING. The portion of the Stockholder Action
Amendment constituting Part B of Proposal 5 would provide that special meetings
of the Company's stockholders may be called only by the CEO, the Chairman or
the Secretary of the Company and not by stockholders and require the vote of
80% of the voting power of the Company's voting stock for the amendment or
repeal of, or the adoption of any provision inconsistent with, such provision.
This portion of the Stockholder Action Amendment is intended to minimize the
potential expense and distractions associated with stockholder proposals by
preventing the proponents thereof from forcing the consideration of a proposal
prior to the next annual meeting of stockholders or such earlier time as an
officer of the Company having the authority to call a special meeting of
stockholders deems appropriate. The existing ability of the CEO, Chairman or
Secretary of the Company to call a special meeting of stockholders to act on
matters prior to the next annual meeting of stockholders would not be affected
by the Stockholder Action Amendment. If each part of Proposal 5 is approved,
the Stockholder Action Amendment would apply to all special meetings of
stockholders, irrespective of the purpose thereof, and would prevent
stockholders from calling a special meeting, even though some stockholders
might otherwise desire to do so.
AMENDMENT. Under the Delaware General Corporation Law, amendments to a
corporation's certificate of incorporation require the approval of the holders
of a majority of the outstanding shares entitled to vote thereon and, in
certain cases, of a majority of the outstanding shares of each class entitled
to vote thereon as a class. The Delaware General Corporation Law also permits
provisions in a corporation's certificate of incorporation that require a
greater vote than the vote otherwise required by law for any corporate action.
The requirement of an increased stockholder vote for amendment of the
provisions contained in each part of Proposal 5 is designed to prevent a
potential acquiror or other stockholder controlling a majority of the voting
power of the Company's stock from avoiding the requirements thereof by simply
amending such provisions.
CERTAIN TAKEOVER-RELATED CONSIDERATIONS. The Board believes that the lack
of any restriction in the Certificate of Incorporation on the ability of
stockholders to act by written consent and the existing provisions of Article
Sixth of the Certificate of Incorporation permitting stockholders to force the
call of a special meeting may increase the Company's vulnerability to
potentially coercive or unfair takeover practices and takeover proposals or
takeover-related tactics which are inadequate or otherwise not in the best
interests of the Company and its stockholders. In particular, the Board
believes that the ability of stockholders to act by written consent or call a
special meeting of stockholders in connection with an unsolicited takeover
proposal could severely curtail the Board's ability effectively to (i)
negotiate with the potential acquiror to improve the terms of such proposal or
(ii) otherwise respond to such proposal, including, under appropriate
circumstances, by developing or implementing alternatives designed to provide
superior value to the Company's stockholders. Although these potentially
detrimental effects are particularly acute in light of the existing provisions
of the Certificate of Incorporation relating to the election, terms of office
and removal of directors, they would not necessarily be eliminated solely by
the implementation of the proposed Classified Board Amendment. Even if the
proposed Classified Board Amendment were implemented, a potential acquiror
could seek to effect amendments to the Bylaws or to take other actions by means
of a written consent or at a special meeting of stockholders with the intention
of limiting the authority or flexibility of the Board and management or
otherwise pressuring the Board to capitulate to an unsolicited takeover
proposal.
The Stockholder Action Amendment is not intended to, and the Board believes
that it would not, deter unsolicited takeover proposals. Rather, the Board
believes that the Stockholder Action Amendment would (i) give all stockholders
an opportunity to participate at a meeting in the determination of any
stockholder action, (ii) minimize the potential expense and distractions
associated with stockholder proposals by preventing the proponents thereof
from forcing the consideration of a proposal prior to the next annual meeting
of stockholders or such earlier time as an officer of the Company having
authority to call a special meeting of stockholders deems appropriate, and
(iii) discourage certain takeover-related tactics that may be inconsistent
with the best interests of the Company and its stockholders. It is possible,
however, that under certain circumstances the Stockholder Action Amendment
could have the effects of making it more difficult to effect certain elements
of an unsolicited takeover proposal or, depending upon whether the Classified
Board Amendment is implemented, to replace the existing Board and management,
even though such a proposal or replacement might be beneficial to the Company
and its stockholders and even though some stockholders might otherwise desire
such a proposal or replacement. Acquisitions or other changes in control which
are proposed and effected without
24
<PAGE>
prior consultation and negotiation with the existing Board and management are
not necessarily detrimental to the Company and its stockholders. The Board,
however, believes that the benefits of giving all stockholders an opportunity
to participate at a meeting in the determination of any stockholder action,
minimizing potential expenses and distractions associated with stockholder
proposals and discouraging certain takeover-related tactics that may be
inconsistent with the best interests of the Company and its stockholders
outweigh the disadvantages of potentially discouraging such proposals and the
possibility of self-interest by management.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Common
Stock entitled to vote at the Annual Meeting is required to approve each part
of Proposal 5. Unless each of the two parts of Proposal 5 is approved by such
vote, the Stockholder Action Amendment will not be implemented.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF EACH PART OF
PROPOSAL 5. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS
SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
25
<PAGE>
CERTAIN OTHER TAKEOVER-RELATED CONSIDERATIONS
Except for the proposed amendment to Rights Agreement described under the
caption "Proposal 3 -- Amendment to the Company's Share Purchase Rights
Agreement" and the proposed amendments to the Certificate of Incorporation
described under the captions "Proposal 4 -- Amendment to Certain Provisions of
the Certificate of Incorporation Relating to the Election, Terms of Office and
Removal of Directors" and "Proposal 5 -- Amendment to Certain Provisions of the
Certificate of Incorporation Relating to Stockholder Action and Special
Meetings of Stockholders," and for certain conforming changes that would be
made to the Company's Bylaws in the event that one or both of such amendments
to the Certificate of Incorporation are implemented, the Board does not
currently contemplate adopting or recommending the approval of any other
action which might have the effect of delaying, deterring or preventing a
change in control of the Company, except that the Board may consider certain
amendments to the Bylaws providing for advance notice procedures in connection
with director nominations and stockholder proposals (which amendments may be
effected by the Board without stockholder approval).
The proposed amendment to Rights Agreement described under the caption
"Proposal 3 -- Amendment to the Company's Share Purchase Rights Agreement" and
the proposed amendments to the Certificate of Incorporation described under
the captions "Proposal 4 -- Amendment to Certain Provisions of the Certificate
of Incorporation Relating to the Election, Terms of Office and Removal of
Directors" and "Proposal 5 -- Amendment to Certain Provisions of the
Certificate of Incorporation Relating to Stockholder Action and Special
Meetings of Stockholders," while not directly related to each other, are
intended to complement each other and operate together with the existing
provisions of the Rights Agreement and the provisions of Section 203 of the
Delaware General Corporation Law described under the caption "Certain
Existing Circumstances Potentially Affecting a Change in Control of the
Company" to, among other objectives, (i) reduce the Company's vulnerability
to potentially coercive or unfair takeover practices and takeover proposals
that are inadequate or otherwise inconsistent with the best interests of the
Company and its stockholders, (ii) encourage potential acquirors to negotiate
with the Board, acting on behalf of the Company and its stockholders,
(iii) enhance the bargaining position of the Board in such negotiations,
(iv) provide additional time to the Board in which appropriately to evaluate
and respond to an unsolicited takeover proposal, and (v) under appropriate
circumstances, provide additional time to the Board in which to develop or
implement alternatives designed to provide superior value to the Company's
stockholders.
26
<PAGE>
CERTAIN EXISTING CIRCUMSTANCES POTENTIALLY
AFFECTING A CHANGE IN CONTROL OF THE COMPANY
In addition to the Rights Agreement described above under the caption
"Proposal 3 -- Amendment to the Company's Share Purchase Rights Agreement,"
certain existing circumstances relating to the Company may have the effect of
delaying, deterring or preventing a change in control of the Company. These
circumstances are described briefly below. The Board considered all such
circumstances in determining to adopt and recommend that the Company's
stockholders approve the proposed amendment to the Rights Agreement described
under the caption "Proposal 3 -- Amendment to the Company's Share Purchase
Rights Agreement" and the proposed amendments to the Certificate of
Incorporation described under the captions "Proposal 4 -- Amendment to Certain
Provisions of the Certificate of Incorporation Relating to the Election,
Terms of Office and Removal of Directors" and "Proposal 5 -- Amendment of
Certain Provisions of the Certificate of Incorporation Relating to Stockholder
Action and Special Meetings of Stockholders." Neither the proposed amendment
to the Rights Agreement described under the caption "Proposal 3 -- Amendment to
the Company's Share Purchase Rights Agreement" nor the proposed amendments to
the Certificate of Incorporation described under the captions "Proposal 4 --
Amendment to Certain Provisions of the Certificate of Incorporation Relating
to the Election, Terms of Office and Removal of Directors" and "Proposal 5 --
Amendment of Certain Provisions of the Certificate of Incorporation Relating
to Stockholder Action and Special Meetings of Stockholders" was adopted in
response to any specific efforts to which the Company is aware to accumulate
shares of Common Stock or obtain control of the Company.
CERTAIN REGULATORY MATTERS
The Change in Bank Control Act (the "Control Act") and the Savings and Loan
Holding Company Act (the "Holding Company Act") govern the acquisition of
control of a savings association or holding company thereof, such as the
Company. The Control Act and its implementing regulations provide that no
individual, or group of individuals acting in concert, may acquire control
of a savings and loan holding company without giving 60 days prior written
notice to the OTS. The OTS may extend the 60-day period. The OTS is
specifically empowered to disapprove a proposed acquisition of control and to
assess civil penalties of up to $1.0 million per day for willful violations of
the Control Act. The Holding Company Act and its implementing regulations
likewise provide that no company may acquire control of a savings and loan
holding company without the prior approval of the OTS and that any company
that acquires such control will itself become a saving and loan holding company
subject to registration, examination and regulation under the Holding Company
Act and its implementing regulations.
"Control" for purposes of both the Control Act and Holding Company Act is
defined to include the power, either directly or indirectly, or acting in
concert with others, to direct the management or policies of a savings and
loan holding company, to vote more than 25% of a class of voting stock of the
savings and loan holding company or to control in any manner the election of a
majority of the directors of the company. In addition, a rebuttable
presumption that "control" has been acquired shall arise if the acquiror,
either directly or indirectly, or acting in concert with others, acquires more
than 25% of any class of stock of the savings and loan holding company or
obtains more than 10% of a class of voting stock of the holding company and
is subject to any control factor, as specified in the applicable regulations.
The following are some of these control factors: (i) the acquiror would be one
of the two largest holders of a class of voting stock; (ii) the acquiror would
hold more than 25% of total stockholders' equity; (iii) the acquiror would hold
more than 35% of the combined debt securities and stockholders' equity;
(iv) the acquiror and/or his nominees would constitute more than one member of
the board of directors; and (v) the acquiror or a nominee or management
official of the acquiror would serve as chairman of the board of directors,
chairman of the executive committee, chief executive officer, chief operating
officer, chief financial officer or in any position with similar policymaking
authority.
Upon the consummation of the Sale, the Company would cease to be subject to
the Control Act and the Holding Company Act and potential acquirors would cease
to be subject to the restrictions on acquisitions of control of the Company
described above. See "Proposal 2 -- Sale of First Federal -- Effect of Sale on
Rights of Stockholders."
DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits the Company
from engaging in certain business combinations with any interested stockholder
(which, subject to certain exceptions, includes any person who, together with
such person's affiliates and associates, owns 15% or more of the outstanding
voting stock of the Company) for a period of three years following the date
that such stockholder became an interested stockholder, unless (i) prior to
such date, the Board approved the business combination or the transaction
which resulted in the stockholder becoming an interested
27
<PAGE>
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder,
together with such stockholder's affiliates and associates, owned at least 85%
of the voting stock of the Company (excluding certain management and employee
plan shares), or (iii) after such date, the business combination is approved by
the Board and authorized by the affirmative vote of at least 66-2/3% of the
outstanding voting stock which is not owned by the interested stockholder or
such stockholder's affiliates or associates.
CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate of Incorporation and the Bylaws currently do not contain any
provisions intended by the Company to have, or to the knowledge of the Board
having, the effect of delaying, deterring or preventing a change in control of
the Company. However, the Certificate of Incorporation presently provides the
Company authority to issue 25,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock").
As of July 25, 1994, (i) 9,888,886 shares of Common Stock were issued and
outstanding, of which 160,001 were held by wholly owned subsidiaries,
(ii) 1,000,000 shares of Common Stock were reserved for possible issuance upon
exercise of the warrants under the Company's First Amended and Restated
Warrant Plan (the "1992 Warrant Plan") (see "Information About the Committees
and Compensation of the Board -- Director's Compensation," "Compensation of
Executive Officers -- Summary Compensation Table" and " -- Stock Options"),
(iii) no shares of Preferred Stock were issued and outstanding, and (iv)
1,000,000 Series A Preferred Shares were reserved for possible issuance upon
the exercise of Rights. The Board will have the power to determine the price
and terms under which additional shares of capital stock may be issued and to
fix the terms of any additional series of Preferred Stock, and existing
stockholders will not have any preemptive rights with respect thereto.
Without limiting the generality of the foregoing, the Company may issue
fractional shares of Preferred Stock or deposit a number of shares of Preferred
Stock with a depositary agent and direct the depositary agent to issue
depositary receipts representing fractional shares of Preferred Stock. As a
result of the Board's ability to fix the terms of the Preferred Stock and the
Company's ability to issue fractional shares of Preferred Stock or cause the
issuance of depositary receipts representing fractional shares of Preferred
Stock, the limitation on the number of shares of Preferred Stock authorized
for issuance under the Certificate of Incorporation may not be particularly
meaningful.
28
<PAGE>
PROPOSAL 6 -- DELETION OF CERTAIN PROVISIONS OF
THE CERTIFICATE OF INCORPORATION WHICH
PROHIBIT THE ISSUANCE OF NONVOTING EQUITY SECURITIES
GENERAL
Article Tenth of the Certificate of Incorporation, as presently in effect,
provides that, except as otherwise specifically provided in the Certificate of
Incorporation, the Company will not issue nonvoting equity securities. Article
Tenth further provides that such provision (i) was included in the Certificate
of Incorporation in compliance with Section 1123 of the United States
Bankruptcy Code (the "Bankruptcy Code"), (ii) will have no further force and
effect beyond that required by such Section, (iii) will have such force and
effect, if any, only for as long as such Section is in effect and applicable
to the Company, and (iv) in all events may be amended and eliminated in
accordance with such requirements of the Bankruptcy Code and Delaware General
Corporation Law.
The Board has adopted, and recommends that the Company's stockholders
approve, an amendment (the "Section 1123 Deletion Amendment") to the
Certificate of Incorporation which would delete Article Tenth thereof in its
entirety. The Section 1123 Deletion Amendment is intended to enable the
Company to issue nonvoting equity securities of the Company, to the extent
otherwise authorized under the Certificate of Incorporation and applicable
law, at such time, and from time to time, as the Board may determine that the
issuance of such securities would be in the best interests of the Company and
its stockholders. THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE SECTION 1123 DELETION AMENDMENT.
PURPOSES AND EFFECT OF THE PROPOSED NONVOTING EQUITY AMENDMENT
Article Tenth of the Certificate of Incorporation, as presently in effect,
was included in the Certificate of Incorporation solely to comply with the
provisions of Section 1123 of the Bankruptcy Code in connection with the Plan
of Reorganization. The Company's reorganization under the Bankruptcy Code
became effective on September 1, 1992, and all equity securities that have
been or will be distributed pursuant to the Plan of Reorganization are voting
securities. Accordingly, the Board believes that Article Tenth of the
Certificate of Incorporation has fully served the purpose for which it was
intended, and is concerned that the provisions thereof could unnecessarily
restrict the Company's financial flexibility in the future.
As noted above, under Article Tenth of the Certificate of Incorporation as
presently in effect, the Company is prohibited from issuing any nonvoting
equity securities. The Section 1123 Deletion Amendment would enable the
Company to issue nonvoting equity securities of the Company, to the extent
otherwise authorized under the Certificate of Incorporation and applicable
law, at such time, and from time to time, as the Board may determine that the
issuance of such securities would be in the best interests of the Company and
its stockholders. The Board has no present plans, arrangements, commitments
or understandings with respect to the issuance of nonvoting equity securities.
See "Certain Existing Circumstances Potentially Affecting a Change in Control
of the Company -- Certificate of Incorporation and Bylaws" for additional
information regarding the Common Stock and Preferred Stock authorized under
the Certificate of Incorporation.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Common
Stock entitled to vote at the Annual Meeting is required to approve the
Section 1123 Deletion Amendment.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF THE SECTION 1123
DELETION AMENDMENT. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS
STOCKHOLDERS SPECIFY IN THEIR PROXIES A CONTRARY CHOICE.
29
<PAGE>
INFORMATION ABOUT THE COMMITTEES AND COMPENSATION OF THE BOARD
BOARD COMMITTEES
During the year ended December 31, 1993 there were eight meetings of the
Board. Each director attended at least 75% of the meetings of the Board and
committees appointed by the Board (the "Board Committees") on which he served
ended December 31, 1993.
The Board currently has two standing committees. Certain information
regarding the function of the standing committees, their membership and the
number of meetings held during the year ended December 31, 1993 follows.
The Audit Committee, which met three times during the year ended
December 31, 1993, recommends to the Board a firm to serve as the independent
public accountants for the Company and monitors the performance of such firm;
reviews and approves the scope of the annual audit and quarterly reviews and
evaluates with the independent public accountants the Company's annual audit
and annual consolidated financial statements; reviews with management the
status of internal accounting controls; and evaluates all public financial
reporting documents of the Company. Messrs. Philip L. Herrington (Chairman),
Russell A. Belinsky and Ernest D. Bennett, III currently are members of the
Audit Committee.
The Compensation Committee, which met one time during the year ended
December 31, 1993, reviews the administration of the Company's employee
benefit plans and makes recommendations to the Board with respect to the
Company's compensation policies. Messrs. William C. Scott (Chairman),
Daryl J. Butcher and J. Steven Wilson currently are members of the
Compensation Committee.
The Company has no standing nominating or similar committee. The Board will
consider stockholder recommendations which are submitted in writing and
addressed to the attention of the Secretary of the Company. Any recommendation
should include the name and address of the stockholder making the
recommendation and the number of shares owned by said stockholder, the
candidate's name and address, a summary of the candidate's educational
background and business or professional experience during the past five years,
the names of any corporations of which the candidate is or has been a director,
and any other information the proposing stockholder considers relevant in
evaluating the candidate's qualifications. The recommendation also should
indicate the candidate's willingness to serve if nominated and selected.
DIRECTOR'S COMPENSATION
The Company has a policy of compensating only outside directors for the
attendance at meetings of the Board and meetings of Board Committees. During
the fiscal year ended December 31, 1993, directors received $1,500 for each
in-person Board meeting, $1,000 for each in-person committee meeting and 50% of
those respective amounts for each telephonic Board or Board Committee meeting
in which they participated, plus an annual retainer fee of $30,000 payable in
equal monthly installments. For the fiscal year ended December 31, 1993
compensation payments to directors totaled $242,500. The Company also
reimburses directors for travel and out-of-pocket expenses incurred in
connection with attendance at these meetings.
The 1992 Warrant Plan provides for the grant of nonqualified stock warrants
to certain key employees and directors to purchase up to 1,000,000 shares of
Common Stock. Warrants under the 1992 Warrant Plan are to be granted at prices
not less than the fair market value of such shares on the date of grant and may
be exercisable for periods of up to 10 years from the date of grant. During the
fiscal year ended December 31, 1993 warrants were granted to outside directors
to purchase a total of 5,000 shares each of Common Stock. These warrants were
granted effective October 1, 1993 at an exercise price of $3.00 per share, and
become exercisable as to 20% of the shares subject thereto on each of the first
through fifth anniversaries from the date of grant.
30
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The table below summarizes the compensation of the CEO and each of the other
four most highly compensated executive officers of the Company (collectively,
the "named executive officers") for each of the last three fiscal years.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Name and Underlying All Other
Principal Options/ Compen-
Position Year Salary Bonus SARS(#) sation (4)
- - - - - --------- ---- ------ ----- ----------- ----------
<S> <C> <C> <C> <C> <C>
John W. McConnell 1993 $275,000 $185,625 -- $68,054
President and 1992 250,005 -- 150,000 3,239
Chief Executive 1991 219,800 16,485 -- --
Officer
Morris E. Meacham 1993 200,000 72,051 -- 43,589
Executive Vice 1992 207,217 -- 100,000 2,174
President (1) 1991 194,800 14,610 -- --
Marcel J. Dumeny 1993 175,000 67,411 -- 41,071
Senior Vice 1992 164,842 -- 100,000 594
President, 1991 149,800 11,235 -- --
General Counsel
and Secretary
Robert W. Howeth 1993 164,800 49,440 100,000 33,795
Senior Vice 1992 172,768 -- -- --
President and 1991 164,800 12,360 -- --
Treasurer (2)
Clayton G. Gring, Sr. 1993 150,000 30,000 100,000 35,877
Senior Vice 1992 155,769 10,000 -- --
President (3) 1991 34,615 -- -- --
<FN>
- - - - - ---------------
(1) Effective January 1, 1994 Mr. Meacham entered into a new Employment
Agreement as Vice President of Special Projects.
(2) During 1994 Mr. Howeth was elected Chief Financial Officer.
(3) Mr. Gring was employed by the Company on September 23, 1991.
(4) Compensation in 1993 includes (a) contributions to the Company's Profit
Sharing Plan (Mr. McConnell -- $10,513; Mr. Meacham -- $10,513;
Mr. Dumeny -- $10,513; Mr. Howeth -- $8,579 and Mr. Gring -- $6,307),
(b) allocated benefits under the Company's Excess Benefit Plan (Mr.
McConnell -- $7,225; Mr. Meacham -- $719 and Mr. Dumeny -- $334), (c)
dollar amounts of premiums paid on life insurance policies for the
benefit of the named executive officers' respective designated
beneficiaries (Mr. McConnell -- $4,941; Mr. Meacham -- $2,357; Mr.
Dumeny -- $1,135; Mr. Howeth -- $1,485 and Mr. Gring -- $11,209) and (d)
allocated benefits under the Company's Key Employee Retirement Plan (Mr.
McConnell -- $45,375; Mr. Meacham -- $30,000; Mr. Dumeny -- $29,089; Mr.
Howeth -- $23,731 and Mr. Gring -- $18,361). Compensation in 1992 includes
premiums paid on life insurance policies for the benefit of the named
executive officers' respective designated beneficiaries.
</TABLE>
31
<PAGE>
PROFIT SHARING AND EXCESS BENEFIT PLANS
The Company's Profit Sharing Plan (the "Profit Sharing Plan") was adopted in
1977 and is a tax qualified plan. All employees with one full year of service
with the Company or a participating subsidiary were eligible in 1993 to
participate in the Profit Sharing Plan, and all participants are fully vested
after seven years of service. Annual contributions by the Company, if any, are
at the discretion of the Board. The Company on March 17, 1994 made a
contribution to the Profit Sharing Plan for 1993 of $527,488. Effective
July 1, 1994 the Profit Sharing Plan was renamed the "Fairfield Communities,
Inc. Savings/Profit Sharing Plan" and amended and restated, among other things,
to add a 401(k) feature.
In 1994 the Company adopted an Excess Benefit Plan (the "Excess Benefit
Plan"), which is a non-qualified, unfunded plan established to provide
designated employees of the Company with benefits that will compensate them
for certain limitations imposed by federal law on the amount of compensation
which may be considered in determining amounts contributed by the Company to
participants' accounts under the Profit Sharing Plan. Participant accounts
are maintained under the Excess Benefit Plan, which are credited with amounts
that would, except for the limits of the Internal Revenue Code, have been
contributed to such participants' accounts under the Profit Sharing Plan.
Participant accounts under the Excess Benefit Plan vest in accordance with the
vesting schedule set forth in the Profit Sharing Plan. Interest is credited to
the participants' accounts annually at the base (prime) rate of interest
charged by The First National Bank of Boston as at March 17, 1994 and the first
banking day of each subsequent year. Participants' accounts under the Excess
Benefit Plan were credited as of March 17, 1994 by a total of $16,361 for 1993,
of which $8,277 was for the account of three named executive officers.
KEY EMPLOYEE RETIREMENT PLAN
In 1994 the Company adopted a Key Employee Retirement Plan (the "Key
Employee Retirement Plan"), which is a non-qualified, unfunded plan established
to provide designated senior executives of the Company with retirement
benefits. Participant accounts are credited on each January 1 by a percentage
(the "Benefit Percentage") of each participant's prior year's total cash
compensation. In general, the Benefit Percentage can range from 0% to 20%,
depending on the Company's moving average rate of return on stockholders'
equity. Participant accounts are fully vested after seven years of service
or upon the occurrence of a "change in control", death, termination of
employment due to total disability or retirement on or after age 55, in each
case while employed by the Company. Benefits are payable annually over a
ten-year period or, at the discretion of the Board, or in the event of the
occurrence of a "change in control", in a lump sum. Interest is credited to
participants' accounts monthly at the base (prime) rate of interest charged by
The First National Bank of Boston on the first banking day of 1994 and of each
subsequent year. Participants' accounts under the Excess Benefit Plan were
credited as of January 1, 1994 by a total of $146,557 for 1993. All of the
named executive officers are participants in the Key Employee Retirement Plan.
STOCK OPTIONS
The following table sets forth certain information concerning stock options
granted during the year ended December 31, 1993 to the named executive
officers. No grants of SARs were made to named executive officers during the
year ended December 31, 1993.
32
<PAGE>
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term (3)
Options Employees Price Expiration -----------------------
Name Granted (1) in 1993 ($/SH)(2) Date 5% 10%
---- ------------ --------- ---------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Robert W. Howeth 100,000 23.8 3.00 9/28/2003 $188,000 $477,000
Clayton G. Gring, Sr. 100,000 23.8 3.00 9/28/2003 188,000 477,000
<FN>
- - - - - ---------------
(1) Represents stock purchase warrants granted on September 29, 1993. The
warrants become exercisable in five equal annual installments beginning
one year after the date of grant.
(2) The exercise price was not less than the fair market value of the Company's
Common Stock on the date of grant.
(3) As required by rules of the SEC, potential values stated are based on the
prescribed assumption that the Common Stock will appreciate in value from
the date of grant to the end of the option term (10 years from the date of
grant) at annualized rates of 5% and 10% (total appreciation of 63% and
159%), respectively, and therefore are not intended to forecast possible
future appreciation, if any, in the price of the Common Stock.
</TABLE>
OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning the number of
unexercised options at December 31, 1993. There were no options exercised by
any named executive officer during the year ended December 31, 1993.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-The-Money
Underlying Unexercised Options Options
at Year End at Year End (1)
----------------------------- ---------------------------
Name Unexercisable Exercisable Exercisable Unexercisable
---- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
John W. McConnell 75,000 75,000 $112,500 $112,500
Morris E. Meacham 50,000 50,000 75,000 75,000
Marcel J. Dumeny 50,000 50,000 75,000 75,000
Robert W. Howeth -- 100,000 -- 150,000
Clayton G. Gring, Sr. -- 100,000 -- 150,000
<FN>
- - - - - ---------------
(1) The dollar amounts shown represent the amount by which the product of the
number of shares purchasable upon the exercise of the related options and
the December 31, 1993 closing market price of $4.50 per share exceeds the
aggregate purchase price payable upon such exercise.
</TABLE>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Pursuant to the Plan of Reorganization, the Company entered into employment
agreements (the "Employment Agreements"), effective September 1, 1992, with
John W. McConnell, Morris E. Meacham and Marcel J. Dumeny (the "Executives"),
which were developed with the input of an external consultant and were
negotiated by Predecessor Fairfield with the creditors groups involved in the
Reorganization. The Employment Agreements are for initial terms of three
years, with automatic one-year extensions, unless at least nine months'
termination notice is given by either the Company or the Executives prior to
the expiration of the initial or any renewal term, and provide for (a) initial
annual base salaries
33
<PAGE>
to Messrs. McConnell, Meacham and Dumeny of $275,000, $200,000 and $175,000,
respectively, (b) Company paid term life insurance coverage equal to two times
their respective base salaries and (c) the grant to Messrs. McConnell, Meacham
and Dumeny of warrants, exercisable through August 31, 2002, to purchase
150,000, 100,000 and 100,000, shares, respectively, of the Company's common
stock, at an exercise price equal to $3.00 per share, with 25% of such warrants
vesting (and becoming non-cancelable, regardless of whether or not the
Executive thereafter remains employed by the Company) on each of September 1,
1992, August 31, 1993, August 31, 1994 and August 31, 1995. The Employment
Agreements also provide for the payment of incentive bonuses on August 31,
1993, subject to certain conditions, which were fulfilled, equal to 37.5% of
Mr. McConnell's and 25% of Messrs. Meacham's and Dumeny's respective base
salaries. If, during the term of the Employment Agreements, an Executive is
terminated (i) for any reason, other than "for cause" (as defined in the
Employment Agreements), death or disability, or (ii) at the Executive's option,
due to "Constructive Discharge" (as defined in the Employment Agreements),
then such Executive is entitled to termination pay, subject to the limitations
of Section 280G of the Internal Revenue Code, equal to 150% of his highest
annualized base salary prior to termination. No termination pay is due to any
Executive who voluntarily resigns, is terminated "for cause" or ceases to be
employed as a result of death or disability.
Effective January 1, 1994 Mr. Meacham entered into a new employment
agreement ("New Agreement") as Vice President of Special Projects. The New
Agreement, which replaces Mr. Meacham's prior Employment Agreement described
above, is for a three-year term, with automatic one-year extensions, unless at
least nine months' termination notice is given by either the Company or
Mr. Meacham prior to the expiration of the initial or any renewal term, and
provides for an annual base salary of $120,000. If, during the term of the
New Agreement, Mr. Meacham is terminated (a) for any reason, other than "for
cause" (as defined in the New Agreement), death or disability, or (b) at his
option, due to "Constructive Discharge" (as defined in the New Agreement),
then, Mr. Meacham is entitled to termination pay, subject to the limitations
of Section 280G of the Internal Revenue Code, equal to (i) $300,000, if his
termination date occurs at any time during the period from January 1, 1994
through December 30, 1994, (ii) $240,000, if his termination date occurs at
any time during the period from December 31, 1994 through December 30, 1995,
(iii) $180,000, if his termination date occurs at any time during the period
from December 31, 1995 through December 30, 1996, and (iv) $120,000, if his
termination date occurs at any time from and after December 31, 1996. No
termination pay is due to Mr. Meacham if he voluntarily resigns, is terminated
"for cause" or ceases to be employed as a result of death or disability, except
that Mr. Meacham may elect to terminate his employment effective December 31,
1996 and receive $120,000, to partially compensate him for his agreement to
terminate his prior Employment Agreement and enter into the New Agreement.
The terms of Mr. Meacham's grant of warrants remained unchanged from his prior
Employment Agreement and Mr. Meacham continued to be entitled to Company paid
term life insurance coverage in the amount of $400,000.
Effective as of May 1993 the Company entered into Severance Pay Agreements
(the "Severance Pay Agreements") with Messrs. Gring and Howeth. The Severance
Pay Agreements extend through August 31, 1995, with automatic one-year
extensions, unless at least nine months' termination notice is given by either
the Company or Messrs. Gring or Howeth prior to the expiration of the initial
or any renewal term. If, during the term of the Severance Pay Agreements,
Messrs. Gring or Howeth is terminated (i) for any reason, other than "for
cause" (as defined in the Severance Pay Agreements), death or disability, or
(ii) at Messrs. Gring's or Howeth's option, due to "Constructive Discharge"
(as defined in the Severance Pay Agreements), then Messrs. Gring or Howeth
shall receive termination pay, subject to the limitations of Section 280G of
the Internal Revenue Code, equal to 150% of their highest annualized base
salary prior to termination. No termination pay is due to Messrs. Gring or
Howeth if they voluntarily resign, are terminated "for cause" or cease to be
employed as a result of death or disability. Messrs. Gring and Howeth have
also been separately granted Company paid term life insurance coverage in
amounts equal to two times their respective base salaries.
REPORT ON EXECUTIVE COMPENSATION
The following Report on Executive Compensation (the "Report") and the
performance graphs in the next section shall not be deemed to be "soliciting
material" or to be "filed" with the SEC or subject to Regulations 14A or 14C
of the SEC or to the liabilities of Section 18 of the Exchange Act and shall
not be deemed incorporated by reference into any filing under the Securities
Act of 1933, as amended, or the Exchange Act, notwithstanding any general
incorporation by reference of this Proxy Statement into any other document.
34
<PAGE>
INTRODUCTION
The Compensation Committee (the "Committee") reviews, considers for
approval and administers the granting of benefits under all compensation
programs for officers of the Company holding the position of Vice President
or above (the "Officers"). More specifically, on an annual or more frequent
basis, the Committee reviews and considers for approval recommendations of the
CEO for salary, incentive compensation and stock warrant grants to the other
Officers of the Company and recommends to the Board salary, incentive
compensation and stock warrant grants to the CEO. The actions taken by the
Committee are reported to the Board, which exercises final approval authority
over compensation decisions. During 1993, the Board materially modified,
prior to adoption, certain recommendations of the Committee, and took certain
other actions relating to compensation matters which were not considered by
the Committee. The items so modified, and the reasons for the modifications,
are discussed below.
The President of First Federal is considered to be an Executive Officer (as
defined below) of the Company, pursuant to applicable SEC regulations, even
though he is not an officer or employee of the Company. Under the terms of the
Company's acquisition of First Federal, the predecessor agency of the OTS
limited the Company to appointing two of its employees to serve on First
Federal's board of directors, with the result that First Federal's board of
directors consists of a majority of outside directors, who served as directors
of First Federal prior to the Company's acquisition of First Federal. The 1993
compensation paid to the President of First Federal did not make him one of the
named executive officers of the Company for 1993. Because neither the
Committee nor the Board reviewed or approved any of the compensation programs
for employees of First Federal during 1993 (all of which were administered
independently by First Federal's board of directors), the Report excludes any
discussion of First Federal's compensation policies and practices. The
Company has entered into the Agreement for the sale of First Federal, which is
submitted to the stockholders for approval in Proposal 2.
During 1993, the members of the Committee were William C. Scott, Chairman of
the Committee, Daryl J. Butcher and J. Steven Wilson. No member of the
Committee is a current or former employee or Officer of the Company or any of
its subsidiaries. Except as otherwise stated, the Report discusses the
Committee's compensation policies applicable to the officers of the Company
serving at the executive level (the "Executive Officers"), including the
relationship between the Company's performance and executive compensation,
and describes the specific bases on which the Committee made compensation
decisions in 1993 with regard to the CEO.
During 1993, the Internal Revenue Code was amended adding Section 162(m),
which, in general, limits the deductibility of annual compensation paid after
January 1, 1994 to any covered employee to $1,000,000, subject to certain
exceptions. The limitation is not currently expected to result in the loss of
any tax deductions for the Company's cash compensation programs, but may, in
the future, result in a loss of a tax deduction in connection with the 1992
Plan, since the ultimate value of the stock warrants are open-ended, depending
upon the market price for the Company's Common Stock at the time the warrants
are exercised, as compared to the exercise price. The Company is currently
studying the effects of this change in the tax law and has not yet determined
whether or not to amend the 1992 Plan, or to take other actions to comply with
the new limitation.
POLICY AND OVERALL COMPENSATION OBJECTIVES
The Committee's general policy is to provide Officers of the Company with
competitive compensation opportunities, which are internally equitable,
including short and long term incentive awards based upon meeting or exceeding
business and/or individual performance goals. These performance goals are
annually reflected as specific targets designed to correspond to, in decreasing
order of importance, (i) measures of profitability and shareholder return
(e.g., stock price), (ii) cash flow objectives and (iii) management priorities,
which change over time. The actual target levels and relative weights of each
measure are subjectively determined by the Committee on an annual basis.
The Company completed the Reorganization and emerged from bankruptcy on
September 1, 1992. As part of the Plan of Reorganization, a newly constituted
seven person Board was established for the Company, consisting of one
management nominee, Mr. McConnell, the Company's President and CEO, one nominee
of the stockholders of Predecessor Fairfield, J. Steven Wilson, who serves on
the Committee, and five nominees of various creditor groups in the
Reorganization who had not previously served as officers, directors or
employees of the Company or its subsidiaries,
35
<PAGE>
including Daryl J. Butcher and William C. Scott, members of the Committee.
Although nominated by certain groups with interests that are likely to be
inconsistent on particular matters that may come before the Board from time to
time, once a nominee is elected to serve as a director he or she has a
fiduciary duty to all stockholders. Thus, no director has a discrete
constituency amongst or before the stockholders, irrespective of the manner in
which the director may have been nominated.
COMPARABLE COMPENSATION INFORMATION
Because of the Company's September 1, 1992 emergence from Reorganization,
1993 was viewed by the Committee as a transitional year. 1993 represented the
first full year implementation of the Company's new business strategy,
developed in part during the course of the Reorganization. With base salaries,
minimum cash incentive compensation, severance pay entitlement and stock
warrants already having been established under the Plan of Reorganization for
Messrs. McConnell, Meacham and Dumeny, the Committee determined not to grant
salary increases during 1993 for Executive Officers, except in one instance,
approved by the Board with the concurrence of the Committee members, and
focused its actions on establishing appropriate cash incentive and stock-based
programs generally applicable to the Executive Officers. The Committee did not
consider comparable compensation information from any peer group or other
companies during 1993, but emphasized internal consistency in the
implementation of these programs and tailored cash and stock-based incentive
awards to reflect the compensation philosophy described above. The Committee
in 1994 retained a consulting firm, with substantial expertise in compensation
matters, to provide advice concerning the Company's compensation programs for
the named executive officers. The only matter reviewed by such consulting firm
affecting 1993 compensation was the Key Employee Retirement Plan, described
above. The consulting firm's evaluation determined that the Company's existing
Profit Sharing Plan did not provide competitive retirement benefits, and that
the benefit levels sought to be achieved by the proposed Key Employee
Retirement Plan would be appropriate, based upon compensation information which
the consulting firm had independently compiled in the normal course of its
business.
EXECUTIVE COMPENSATION PROGRAM COMPONENTS
The four components of the Company's compensation programs for Executive
Officers are (1) base salary, (2) cash incentive compensation (bonus), (3) long
term incentive awards (stock warrants) and (4) benefits, each of which is
discussed in etail below.
BASE SALARY. As noted above, the Committee did not recommend salary
increases for Executive Officers, although one salary increase, in the amount
of $10,000 per annum, was approved by the Board, with the concurrence of the
Committee members, for a Vice President of the Company, primarily based upon
the Board's and the Committee's subjective perception of such officer's
performance, the length of time since his last salary increase and external
competitive factors.
CASH INCENTIVE COMPENSATION. As noted above, Messrs. McConnell, Meacham and
Dumeny received minimum bonuses in 1993, which were contractually required
under the terms of their Employment Contracts. The Committee, following
consultation with the Board (which resulted in material modifications to
certain individual bonus targets and increases in certain individual incentive
amounts), established additional cash incentive plans applicable to the
Executive Officers for 1993 (including Messrs. McConnell, Meacham and Dumeny),
with possible awards ranging from a total of approximately 10% of base salary
to 100% of base salary, depending on job function and scope of responsibility.
A substantial portion of most Executive Officers' incentive compensation awards
were tied to meeting or exceeding budgeted profitability and cash flow, with
other significant performance goals including the achievement of certain levels
of asset sales, refinancing the Company's primary line of business, resolving
bankruptcy claims within overall estimates, opening a new vacation ownership
project on a profitable basis, obtaining sufficient inventory to support 1994
sales operations, development of a strategic plan, recruitment of personnel and
resolving professional fee claims in the bankruptcy proceedings. During 1993,
the Company's performance generally met or exceeded these goals, particularly
with regard to profitability and cash flow, asset sales, refinancings,
inventory, strategic planning, recruitment of personnel and resolving
professional fee claims. The performance goal relating to opening a new
vacation ownership project on a profitable basis was partially met, resulting
in a partial incentive award. In addition, specific goals relating to
resolving bankruptcy claims were met in the case of one officer and deferred
in the case of another pending the final resolution of such claims.
36
<PAGE>
LONG TERM INCENTIVE AWARDS. Under the Company's Plan of Reorganization,
the 1992 Plan was implemented, with authority to grant warrants to executives
of the Company to purchase up to a total of 1,000,000 shares of Common Stock.
Under the Plan of Reorganization, Messrs. McConnell, Meacham and Dumeny
received 10-year warrants to purchase a total of 350,000 shares of Common
Stock, at $3.00 per share.
The Committee during 1993 recommended the establishment of a stock option
plan, with annual grants to all Executive Officers of the Company, to have been
based upon meeting performance criteria during the year prior to grant. The
Board elected not to adopt the proposed stock option plan, but, with the
concurrence of the members of the Committee decided instead to grant awards
under the 1992 Plan to all Executive Officers, except for Messrs. McConnell,
Meacham and Dumeny. The warrants granted to the other Executive Officers
entitle them to purchase Common Stock, ranging in amounts from 20,000 to
100,000 shares for each individual (with individual award amounts being based
on the scope of each person's respective job responsibilities and potential
impact on overall corporate profitability), over a 10-year period, at $3 per
share (which was not less than the market price of the Company's Common Stock
on the date of grant), with 20% of such awards vesting on each of the first
five anniversary dates following the date of grant. The principal reasons for
the Board modifying the Committee's recommendation were (i) to avoid the need
for establishing a second stock award program and (ii) to achieve subjective
consistency by enabling the other Executive Officers to be motivated by similar
long term incentives to those reflected in the stock warrant grants issued
under the Plan of Reorganization to Messrs. McConnell, Meacham and Dumeny.
The Committee believes that stock warrant grants are desirable to align the
interests of the Executive Officers and the stockholders.
BENEFITS. The Company's benefit programs include optional life, health,
dental and disability coverages and participation in a tax qualified Profit
Sharing Plan, which was adopted in 1977. During 1994, the Company adopted a
non-qualified, unfunded Excess Benefit Plan, due to limitations on the amount
of compensation which can be considered, under the Internal Revenue Code, for
highly compensated participants in determining contribution allocations to
individual profit sharing plan accounts. Accounts were established under the
Excess Benefit Plan for all employees of the Company who were affected by such
limitations for the Profit Sharing Plan contribution for 1993. A total of
$16,361 was allocated to the participants' accounts under the Excess Benefit
Plan, which reflected the amount of additional contributions which would have
been allocated to such participants' accounts in the absence of the Internal
Revenue Code limitation, of which $8,277 was allocated to the accounts of three
named executive officers and the remaining $8,084 was allocated to the accounts
of employees in sales management positions who are not officers of the Company,
but whose compensation subjected them to the Internal Revenue Code compensation
limitations.
As disclosed under "Compensation of Executive Officers -- Employment
Contracts and Termination of Employment Arrangements," certain additional
Company paid term life insurance and severance benefits were extended to two
named executive officers in 1993, primarily to achieve subjective consistency
with the terms of the Employment Agreements granted to Messrs. McConnell,
Meacham and Dumeny in 1992 under the Plan of Reorganization.
During 1993 the Committee decided to review the Company's Profit Sharing
Plan, which then represented the Company's primary program for generating
retirement income for its employees. It was determined that the Profit Sharing
Plan had not accumulated any significant retirement benefit for participants
since the mid-1980s, leading to the decisions to (a) make a $527,488
contribution to the Profit Sharing Plan for 1993, which amount was calculated
as being approximately 5% of the pre-tax profit of the Company for 1993,
and (b) develop a non-qualified, unfunded key employee retirement plan, in
order to offer a more competitive retirement program for a limited group of key
employees. Under the Key Employee Retirement Plan (a number of the provisions
of which were suggested by the Board, with the concurrence of the Committee),
an account is established for each of the named executive officers, with a book
entry credited on January 1 of each year, based upon the Benefit Percentage of
each participant's prior year's total cash compensation. The Benefit
Percentage ranges from 0% to 20%, depending generally upon the moving average
rate of return on the Company's stockholders' equity, with tiers ranging, on
the low side, from "less than 5%" return on stockholders' equity, generating a
Benefit Percentage of "0%", to, on the high side, an "18% or more" return on
stockholders' equity, generating a Benefit Percentage of 20%. The tier levels
of return on stockholders equity were established subjectively, using as
reference points the average rates of return on stockholders' equity achieved
by companies comprising the S&P 500 and the Dow Jones Industrials. For 1993,
the Benefit Percentage was subjectively established at 12%, which resulted in
an aggregate accrual for all participants of $146,557.
37
<PAGE>
COMPENSATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER
During 1993 Mr. McConnell's salary remained unchanged, for the reasons noted
above. Mr. McConnell on August 31, 1993 was paid the minimum cash incentive
compensation award provided for under his Employment Contract implemented under
the Company's Plan of Reorganization, equal to 37.5% of his salary. Additional
cash incentive compensation awards were paid to Mr. McConnell in 1994,
attributable to his and the Company's 1993 performance, based upon (i) meeting
profit and cash flow budgets (incentive award equal to 10% of salary),
(ii) recruitment of personnel, (iii) successfully opening a new vacation
ownership site in 1993, (iv) completing a refinancing of the Company's
business, (v) the projected result of resolving bankruptcy claims within
estimated amounts and (vi) developing a strategic plan for the Company,
approved by the Board (items (ii) through (vi) in the aggregate being
equally weighted in accounting for an incentive award equal to 20% of salary).
In the aggregate, Mr. McConnell's cash incentive compensation (including the
minimum cash compensation award required under his Employment Contract
implemented under the Company's Plan of Reorganization) totaled 67.5% of his
1993 base salary. If all of Mr. McConnell's performance goals had been met,
his maximum cash incentive compensation payment for 1993 would have totaled
87.5% of salary.
As noted above, Mr. McConnell was not awarded any stock warrants or other
long term incentives during 1993, but received benefit allocations (a)
determined on a basis consistent with all of the employees of the Company, of
$10,513 under the Profit Sharing Plan, (b) determined on a basis consistent
with all affected employees, of $7,225 under the Excess Benefit Plan and
(c) determined on a basis consistent with all named executive officers,
$45,375 under the Key Employee Retirement Plan.
<TABLE>
<CAPTION>
COMPENSATION COMMITTEE BOARD OF DIRECTORS
OF THE BOARD OF DIRECTORS
<S> <C>
(ONLY WITH RESPECT TO ACTIONS TAKEN
BY THE BOARD OF DIRECTORS DESCRIBED
UNDER THE HEADING "LONG TERM
INCENTIVE AWARDS" UNDER THE CAPTION
"EXECUTIVE COMPENSATION
PROGRAM COMPONENTS")
William C. Scott, Chairman Russell A. Belinsky
Daryl J. Butcher Ernest D. Bennett, III
J. Steven Wilson Daryl J. Butcher
Philip L. Herrington
John W. McConnell
William C. Scott
J. Steven Wilson
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1987 the Company sold to First Pioneer Partners, Ltd., a Florida limited
partnership ("First Pioneer"), certain parcels of real property located at its
development in Melbourne, Florida and, in connection with this sale, First
Pioneer issued a 10-3/4% Promissory Note to a wholly owned subsidiary of the
Company in the amount of $1.2 million (this note was subsequently sold to the
Company's wholly owned insurance subsidiary). A wholly owned subsidiary of
Wilson Financial Corporation is a general partner of First Pioneer. Mr. J.
Steven Wilson, a director and a member of the Compensation Committee, is
Chairman and President of Wilson Financial Corporation. During 1993 First
Pioneer conveyed the collateral to the Company's insurance subsidiary in lieu
of foreclosure. The outstanding principal balance at time of conveyance was
approximately $350,000.
During 1993 the Company paid fees and expenses totaling $107,000 to GTC
Capital Partners, as financial advisors to Predecessor Fairfield's Official
Unsecured Bondholders' Committee during the Company's Reorganization.
Mr. Russell A. Belinsky, a director, is a Senior Vice President and Principal
of GTC Capital Partners.
38
<PAGE>
PERFORMANCE GRAPHS
The following graphs show (i) the annual cumulative stockholder return for
the periods from December 31, 1988 through July 2, 1992 and September 1, 1992
through December 31, 1993, following assumed investments of $100 each in shares
of Company Common Stock on each of December 31, 1988 and September 1, 1992,
respectively and (ii) the quarterly cumulative total stockholder return since
September 1, 1992, following an assumed investment of $100 on that date. All
shares of Company common stock, $.10 par value (the "Old Common Stock"), that
were outstanding and traded during the period of December 31, 1988 through July
2, 1992 were cancelled prior to the Reorganization and no distributions were
made on account of interests in such securities. All shares of Company Common
Stock that are currently outstanding (the "New Common Stock") are shares that
were issued to former creditors and claim holders of the Company after
September 1, 1992 (and after cancellation of the Old Common Stock) pursuant
to the Reorganization.
39
<PAGE>
COMPARISON OF CUMULATIVE TOTAL RETURN OF
COMPANY COMMON STOCK BEFORE AND AFTER REORGANIZATION
WITH THE NASDAQ U.S. INDEX AND A MARKET CAPITALIZATION PEER GROUP (1)(2)
<TABLE>
<CAPTION>
Old Common Stock New Common Stock
-------------------------------- ---------------------------
1988 1989 1990 1991 7/92 9/1/92 12/31/92 12/31/93
---- ---- ---- ---- ---- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fairfield $100 $ 63 $ 5 $ 7 $ 0 $100 $100 $300
Communties
Peer Group 100 103 81 95 90 100 112 121
NASDAQ
Stock Market 100 121 103 165 159 100 121 138
</TABLE>
COMPARISON OF CUMULATIVE TOTAL RETURN BY
QUARTER SINCE SEPTEMBER 1, 1992 WITH THE NASDAQ U.S. INDEX
AND A MARKET CAPITALIZATION PEER GROUP (2)
<TABLE>
<CAPTION>
New Common Stock
--------------------------------------------------------------
9/1/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93
------ ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Fairfield
Communities $100 $100 $100 $100 $117 $183 $300
Peer Group 100 104 112 118 108 119 121
NASDAQ
Stock Market 100 104 121 123 125 136 138
</TABLE>
(SEE FOOTNOTES ON NEXT PAGE)
40
<PAGE>
<TABLE>
<C> <S>
<FN>
- - - - - ---------------
(1) The amounts plotted in the left-hand box entitled "Old Common Stock" in the
first graph above represent the cumulative total return of the Old Common
Stock outstanding prior to the Company's Reorganization (i.e. during the
period December 31, 1988 through July 2, 1992 when trading in the Old
Common Stock was suspended permanently by the New York Stock Exchange),
which amounts are compared with the amounts plotted in the right-hand box
entitled "New Common Stock" in the same graph, which amounts represent (i)
the National Association of Securities Dealers, Inc.'s Automated
Quotations System ("NASDAQ") Stock Market U.S. Index and (ii) a peer
group constructed of NASDAQ listed companies with similar market
capitalization (the "Market Capitalization Peer Group").
(2) The data which appears in the right-hand box in the first graph above
compares the cumulative total return of the Company Common Stock
outstanding subsequent to the Company's Reorganization (i.e., during the
period September 1, 1992 through December 31, 1993) with the (i) NASDAQ
Stock Market U.S. Index and (ii) Market Capitalization Peer Group.
Additionally, the data which appear in the second graph above compares the
quarterly cumulative total return, since September 1, 1992, of the Company
Common Stock with the (i) NASDAQ Stock Market U.S. Index and (ii) Market
Capitalization Peer Group.
(3) The Company's primary operation is the Leisure Products business, with the
major sources of revenue and profitability being the sale of vacation
ownership intervals and interest income from installment contracts
receivable originated in connection with such sales. Very few other
publicly held companies engage in this line of business, and those that
do, such as The Walt Disney Company, Hilton Hotels Corporation and Host
Marriott Corporation, are (i) diversified, with such companies' similar
product segments providing substantially less than 50% of such companies'
revenues, and (ii) substantially larger, in terms of revenue, assets and
market capitalization, than the Company. Because of these factors, the
Company elected to compare the performance of its stock against (a) the
NASDAQ Stock Market U.S., which represents a broad-market index of
companies traded on the NASDAQ market, on which the Company's stock is
listed, and (b) the Market Capitalization Peer Group. The Market
Capitalization Peer Group is comprised of the 10 NASDAQ companies
immediately above and below the Company's December 31, 1993 market
capitalization ($50.83 million) as follows: Phoenix Technologies, Ltd.
(PTEC); Sands Regent (SNDS); Pancho's Mexican Buffet (PAMX); Reading Co.;
C.I.A. (RDGCA); Hawkins Chemical, Inc. (HWKN); Olympic Financial Ltd.
(OLYM); Dick Clark Productions, Inc. (DCPI); Serv-Tech Inc. (STEC);
National Insurance Group (NAIG); Longhorn Steaks, Inc. (LOHO); Amer First
Ptc/Pfd Equity Mtg. (AFPFZ); Weyco Group, Inc. (WEYS); Mid-South Insur.
Co. (MIDS); MOSCOM Corp. (MSCM); FONAR Corp. (FONR); CNS, Inc. (CNXS);
Allegheny & Western Energy (ALGH); DS Bancor Inc. (DSBC); IDEC
Pharmaceuticals (IDPH); and Defiance, Inc. (DEFI).
</TABLE>
41
<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of July 25, 1994 with
respect to any person known by the Company to be the beneficial owner of more
than five percent of the Common Stock.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (3)
------------------- -------------------- ----------
<S> <C> <C>
Physicians Insurance
Company of Ohio
13515 Yarmouth Drive, N.W. 1,678,726 (1) 17.3%
Pickerington, Ohio 43147
Magten Asset Management Corp.
33 East 21st Street 1,597,462 (2) 16.0
New York, New York 10010
<FN>
- - - - - ---------------
(1) A report on Schedule 13D has been filed with the SEC by Physicians
Insurance Company of Ohio ("PICO") indicating that PICO has sole voting
and dispositive power over 1,184,000 shares of Company Common Stock and
further has the right to acquire another 494,726 shares within 60 days of
July 25, 1994. The foregoing information has been included in this Proxy
Statement in reliance upon, and without independent verification of, the
disclosures contained in the above-referenced report on Schedule 13D.
(2) A report on Schedule 13G has been filed with the SEC by Magten Asset
Management Corp. indicating sole voting and dispositive power over
1,250,955 shares and shared voting and sole dispositive power over 346,507
shares. The foregoing information has been included in this Proxy
Statement in reliance upon, and without independent verification of, the
disclosures contained in the above-referenced report on Schedule 13G.
(3) Based on 9,991,385 shares outstanding as of July 25, 1994, which excludes
160,001 shares held by wholly owned subsidiaries of the Company, and
includes 262,500 shares, which represent shares that the named executive
officers have the right to acquire (through the exercise of warrants)
within 60 days of July 25, 1994. The total amount of Common Stock to be
issued after resolution of all claims under the Plan of Reorganization
will differ from the amount of Common Stock outstanding at July 25, 1994.
Consequently, the ownership interests of existing stockholders will be
diluted (see Note 9 of Notes to Consolidated Financial Statements in the
Form 10-K included as Appendix III hereto).
</TABLE>
42
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of July 25, 1994 with
respect to the beneficial ownership of the Common Stock by the Company's
directors, named executive officers and by all directors and officers as a
group. Each individual named has sole investment and voting power with respect
to his shares of Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership Class (1)
- - - - - ------------------------ -------------------- -----------
<S> <C> <C>
Russell A. Belinsky 4,000 *
J. Steven Wilson 361 *
John W. McConnell 165,500(2) 1.7
Morris E. Meacham 75,000(2) *
Marcel J. Dumeny 111,000(2) 1.1
Robert W. Howeth 20,000 *
Clayton G. Gring, Sr. 24 *
All directors and executive
officers as a group 379,385 3.8
<FN>
- - - - - ---------------
(1) Based on 9,991,385 shares outstanding as of July 25, 1994, which excludes
160,001 shares held by wholly owned subsidiaries of the Company, and
includes 262,500 shares, which represent shares that the named executive
officers have the right to acquire (through the exercise of warrants)
within 60 days after July 25, 1994 (see note (2) below). The total amount
of Common Stock to be issued after resolution of all claims under the Plan
of Reorganization will differ from the amount of Common Stock outstanding
at July 25, 1994. Consequently, the ownership interests of existing
stockholders will be diluted (see Note 9 of Notes to Consolidated Financial
Statements in the Form 10-K included as Appendix III hereto).
(2) Includes 112,500, 75,000, and 75,000, shares, respectively, for Messrs.
McConnell, Meacham and Dumeny, which represent shares the named executives
have the right to acquire (through the exercise of warrants) within 60 days
after July 25, 1994. Under the rules of the SEC, such shares are deemed
to be beneficially owned. For the purpose of calculating percentage
ownership, such shares were also considered to be outstanding.
* Beneficial ownership represents less than 1% of the outstanding shares.
</TABLE>
43
<PAGE>
MARKET PRICES OF AND DIVIDENDS PAID ON COMPANY COMMON STOCK
MARKET PRICES
The Company and certain of its subsidiaries successfully reorganized
pursuant to the Plan of Reorganization. Pursuant to the Plan of Reorganization,
all of the outstanding Common Stock of the Company issued prior to the
Reorganization was cancelled effective September 1, 1992. As of July 25, 1994
the number of shares of the Company's Common Stock outstanding totaled
9,888,886, of which 160,001 shares were held by wholly owned subsidiaries. In
accordance with the Plan of Reorganization, the Company will issue additional
shares as the remaining unsecured claims are resolved. The ultimate amount of
allowed unsecured claims and the timing of the resolution of claims is largely
within the control of the Bankruptcy Court. However, based upon available
information, the Company presently estimates that approximately 10,834,000
shares of Common Stock will be issued and outstanding, including 160,001 shares
held by wholly owned subsidiaries. Additionally, 588,235 shares have been
reserved, but not issued, for the possible benefit of the holders of the 10%
Senior Subordinated Secured Notes. See Notes 6 and 9 of Notes to Consolidated
Financial Statements in the Form 10-K included as Appendix III hereto. As of
July 25, 1994 there were approximately 5,100 stockholders of the Common Stock.
On November 4, 1993 the Common Stock commenced "regular way" trading on the
NASDAQ's National Market List under the trading symbol FFCI. For the period
November 4, 1993 through December 31, 1993 the high and low closing bid prices
were $4-5/8 and $2-3/4, respectively. For the period January 1, 1994 through
August 3, 1994 the high and low closing bid prices were $7 and $4-1/4,
respectively. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily reflect or represent
actual transactions.
The high and low bid and asked prices on the Common Stock on NASDAQ on
December 3, 1993, the last day on which shares of Common Stock were actually
traded prior to the public announcement of the proposed Sale, were $4 and $4,
respectively. The high and low bid and asked prices on August 3, 1994, the
most recent pricing information as quoted on NASDAQ available prior to the
date of this Proxy Statement, were $6-7/8 and $6-1/2, respectively.
DIVIDENDS
During the last two fiscal years the Company did not pay any dividends and
is prohibited from paying any dividends under the terms of its financing
arrangements, except for dividends payable in shares of its Common Stock. See
Note 9 of Notes to Consolidated Financial Statements in the Form 10-K included
as Appendix III hereto.
SELECTED FINANCIAL DATA
For selected financial data for the Company for applicable periods in the
five-year period ended December 31, 1993, see "Selected Financial Data" in the
Form 10-K, which is included as Appendix III hereto, which should be read in
conjunction with the "Selected Financial Data," consolidated financial
statements, related notes and financial information contained therein.
See also "Item 1. Financial Statements" in the Company's Quarterly Report on
Form 10-Q/A (No. 1) for the Quarter Ended March 31, 1994 (the "Form 10-Q"),
which is included as Appendix IV hereto.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Form 10-K included as
Appendix III hereto. See also "Item 2. Management's Discussion and Analysis
and Results of Operations" in the Form 10-Q included as Appendix IV hereto.
44
<PAGE>
BUSINESS AND PROPERTIES OF THE COMPANY
For information regarding the business and properties of the Company, see
"Items 1 and 2. Business and Properties" of the Form 10-K included as
Appendix III hereto.
LEGAL PROCEEDINGS
For information regarding material pending legal proceedings to which the
Company is a party or to which its property is subject, see Notes 9 and 14 of
Notes to Consolidated Financial Statements in the Form 10-K included as
Appendix III hereto.
OTHER INFORMATION
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1987 the Company sold to First Pioneer certain parcels of real property
located at its development in Melbourne, Florida and, in connection with this
sale, First Pioneer issued a 10-3/4% Promissory Note to a wholly owned
subsidiary of the Company in the amount of $1.2 million (this note was
subsequently sold to the Company's wholly owned insurance subsidiary). A
wholly owned subsidiary of Wilson Financial Corporation is a general partner
of First Pioneer. Mr. J. Steven Wilson, a director and a member of the
Compensation Committee, is Chairman and President of Wilson Financial
Corporation. During 1993 First Pioneer conveyed the collateral to the
Company's insurance subsidiary in lieu of foreclosure. The outstanding
principal balance at time of conveyance was approximately $350,000.
During 1993 the Company paid fees and expenses totaling $107,000 to GTC
Capital Partners, as financial advisors to Predecessor Fairfield's Official
Unsecured Bondholders' Committee during the Company's Reorganization.
Mr. Russell A. Belinsky, a director, is a Senior Vice President and
Principal of GTC Capital Partners.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of its Common Stock, to
file initial reports of ownership and reports of changes in ownership with the
SEC. Such persons are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to the year ended December 31, 1993, and written representations from
certain reporting persons, the Company believes that all filing requirements
have been complied with as they apply to its directors, executive officers and
persons who own more than 10% of the Common Stock, except that (i) a Form 3
initial statement and one Form 4 were filed late with respect to the ownership
and sale of Predecessor Fairfield's Common Stock by Mr. Robert T. Waugh,
President of First Federal, and (ii) a Form 3 initial statement of beneficial
ownership was filed late by Mr. William C. Scott with regard to his appointment
as a director of the Company.
INDEPENDENT PUBLIC ACCOUNTANTS
The Board has selected Ernst & Young to serve as independent public
accountants for the Company. The independent public accountants have audited
the financial statements of the Company for the fiscal year ended December 31,
1993 and performed such other nonaudit services as the Board requested.
A representative of Ernst & Young is expected to be present at the Annual
Meeting. This representative will have the opportunity to make a statement,
if he or she so desires, and is also expected to be available to respond to
appropriate questions from stockholders.
45
<PAGE>
NO DISSENTER'S RIGHTS
Neither the election of directors, the consummation of the Sale, the
amendments to the Certificate of Incorporation nor the amendment to the Rights
Agreement Amendment will create any dissenter's, appraisal or similar rights
for the stockholders, whether or not any such stockholder votes against the
approval of any or all of the proposals relating to those matters.
STOCKHOLDER PROPOSALS
If stockholder proposals are to be considered by the Company for inclusion
in a proxy statement for a future meeting of the stockholders, such proposals
must be submitted on a timely basis and must meet the requirements established
by the SEC. Stockholder proposals for the Company's 1995 annual meeting of
stockholders will not be deemed to be timely submitted unless they are received
by the Company at its principal executive offices by January 1, 1995. Such
stockholder proposals, together with any supporting statements, should be
directed to the Secretary of the Company. Stockholders submitting proposals
are urged to submit their proposals by certified mail, return receipt
requested.
OTHER BUSINESS
Management does not know of or intend to bring before the Annual Meeting any
other business. If, however, any other business should be presented to the
meeting, the proxies named in the enclosed form of proxy will vote the proxy
in accordance with their best judgment.
Whether or not you expect to be present at the meeting, please sign the
accompanying form of proxy and return it promptly in the enclosed, stamped,
return envelope.
By Order of the Board of Directors,
Marcel J. Dumeny,
Secretary
Little Rock, Arkansas
August 4, 1994
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Financial Statements (Unaudited) . . . . F-2
Pro Forma Condensed Consolidated Balance Sheet--
March 31, 1994 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . F-3
Pro Forma Condensed Consolidated Statement of Earnings--
Three Months Ended March 31, 1994 (Unaudited). . . . . . . . . . . . . . F-4
Pro Forma Condensed Consolidated Statement of Earnings--
Year Ended December 31, 1993 (Unaudited) . . . . . . . . . . . . . . . . F-5
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated Balance Sheets -- December 31, 1993 and
December 31, 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Consolidated Statements of Operations for the Year Ended
December 31, 1993, the Six Month Periods Ended December 31, 1992
and June 30, 1992 and the Year Ended December 31, 1991 . . . . . . . . F-11
Consolidated Statements of Stockholder's Equity for the Year Ended
December 31, 1993, the Six Month Periods Ended December 31, 1992
and June 30, 1992 and the Year Ended December 31, 1991 . . . . . . . . F-12
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1993, the Six Month Periods Ended December 31, 1992
and June 30, 1992 and the Year Ended December 31, 1991 . . . . . . . . F-13
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . F-15
Consolidated Balance Sheets -- March 31, 1994 (Unaudited) and
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-31
Consolidated Statements of Earnings for the Three Month Periods
Ended March 31, 1994 and March 31, 1993 (Unaudited). . . . . . . . . . F-32
Consolidated Statements of Cash Flows for the Three Month Periods
Ended March 31, 1994 and March 31, 1993 (Unaudited). . . . . . . . . . F-33
Notes to Consolidated Financial Statements (Unaudited) . . . . . . . . . . F-34
Pro Forma Consolidated Balance Sheet -- March 31, 1994 (Unaudited). . . . . F-36
F-1
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed consolidated balance sheet of
Fairfield Communities, Inc. and Subsidiaries ("Fairfield") as of March 31, 1994
and the unaudited pro forma condensed consolidated statements of earnings for
the year ended December 31, 1993 and three months ended March 31, 1994 give
effect to the use of funds from the sale of all of the outstanding stock of
First Federal and proceeds from Fairfield's revolving credit agreement to fund
the purchase of the Excluded Association Assets and Contracts Receivable
(collectively, the "Excluded Assets"). The unaudited pro forma information is
based on the historical financial statements of Fairfield giving effect to the
transactions under the assumptions and adjustments in the accompanying notes to
the unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated financial statements have
been prepared by Fairfield's management based upon available documentation
and may not be indicative of the results that actually would have occurred
if the transactions had been effected on the dates indicated. The
unaudited pro forma condensed consolidated financial statements should be
read in conjunction with Fairfield's financial statements and notes thereto
contained in the Annual Report on Form 10-K for the year ended December 31,
1993, as amended, and the Quarterly Report on Form 10-Q for the three months
ended March 31, 1994 as amended.
F-2
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1994
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 2,737 $ 40,785 (a) $ 2,737
28,715 (b)
(69,500)(a)
Loans receivable, net 150,739 46,800 (a) 150,739
(46,800)(c)
Real estate inventories 34,382 1,050 (c) 35,432
Restricted cash accounts 12,536 12,536
Property and equipment, net 6,273 6,273
Other assets 21,499 1,390 (a) 22,889
400 (a)
400 (c)
Net assets held for sale -- 17,300 (a) 17,300
Net assets of discontinued
operations 10,315 10,315
-------- -------- --------
$238,481 $ 19,740 $258,221
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Financing arrangements $123,757 $ 28,715 (b) $152,472
Deferred revenue 19,684 19,684
Other liabilities 28,626 3,312 (a) 32,294
356 (b)
Net liabilities held for sale 17,776 29,424 (a) --
(69,500)(c)
22,300 (c)
-------- -------- --------
Stockholders' equity 48,638 5,489 (a)(d) 53,771
(356)(b)
-------- -------- --------
$238,481 $ 19,740 $258,221
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-3
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES
Vacation ownership, net $ 6,398 $ 6,398
Homes and lots, net 1,795 1,795
Property management 2,740 2,740
Interest 5,324 5,324
Other 3,203 3,203
---------- ------- ---------
19,460 -- 19,460
---------- ------- ---------
EXPENSES
Vacation ownership 2,033 2,033
Homes and lots 973 973
Provision for loan losses 580 580
Selling 4,306 4,306
Property management 2,385 2,385
General and administrative 2,535 2,535
Interest, net 2,719 577 (b) 3,296
Other 2,389 2,389
---------- ------ ---------
17,920 577 18,497
---------- ------- ---------
Earnings from continuing
operations before gain on sale
of First Federal and provision
for income taxes 1,540 (577) 963
Provision for income taxes 462 (221) (b) 241
---------- ------ --------
Earnings from continuing
operations before gain on the
sale of First Federal $ 1,078 $(356) $ 722
---------- ------- ---------
---------- ------- ---------
EARNINGS PER SHARE FROM
CONTINUING OPERATIONS BEFORE
GAIN ON THE SALE OF FIRST
FEDERAL:
Primary $.10 $.07
---------- ------- ----------
---------- ------- ----------
Fully diluted $.09 $.06
---------- ------- ---------
---------- ------- ---------
CASH DIVIDENDS DECLARED -- --
---------- ------- ----------
---------- ------- ----------
BOOK VALUE PER SHARE $4.53 $5.00
---------- ------- ----------
---------- ------- ----------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary 11,095,519 11,095,519
---------- ------- ----------
---------- ------- ----------
Fully diluted 11,710,273 11,710,273
---------- ------- ----------
---------- ------- ----------
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-4
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES
Vacation ownership, net $ 34,332 $34,332
Homes and lots, net 12,073 12,073
Property management 10,876 10,876
Interest 39,894 $(15,805)(e) 24,089
Other 12,553 (2,957)(e) 9,596
-------- -------- -------
109,728 (18,762) 90,966
-------- -------- -------
EXPENSES
Vacation ownership 9,942 9,942
Homes and lots 5,212 5,212
Provision for loan losses 3,586 (334)(e) 3,252
Selling 21,850 21,850
Property management 11,057 11,057
General and administrative 18,267 (8,431)(e) 9,836
Interest, net 24,927 (10,478)(e) 16,782
2,333 (b)
Other 4,560 (102)(e) 4,458
-------- -------- -------
99,401 (17,012) 82,389
-------- -------- -------
Earnings from continuing
operations before gain on the
sale of First Federal and
provision for income taxes 10,327 (1,750) 8,577
Provision for income taxes 3,157 (665)(e) 2,492
-------- -------- -------
Earnings from continuing
operations before gain on the
sale of First Federal $ 7,170 $ (1,085) $ 6,085
-------- -------- -------
-------- -------- -------
EARNINGS PER SHARE FROM
CONTINUING OPERATIONS BEFORE
GAIN ON THE SALE OF FIRST
FEDERAL:
Primary $.65 $.55
-------- -------
-------- -------
Fully diluted $.61 $.52
-------- -------
-------- -------
CASH DIVIDENDS DECLARED -- --
-------- -------
-------- -------
BOOK VALUE PER SHARE $4.39 $4.95
-------- -------
-------- -------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary 11,037,765 11,037,765
---------- ----------
---------- ----------
Fully diluted 11,692,667 11,692,667
---------- ----------
---------- ----------
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
F-5
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma condensed consolidated financial statements reflect
the sale of all of the outstanding stock of First Federal for approximately
$40.4 million, plus approximately $1.8 million for the pretax interim earnings
of First Federal from October 1, 1993 through the date of closing. The amount
of available cash proceeds due Fairfield at closing has been reduced by
approximately $1.4 million due to the Litigation Indemnity. The amount of
these escrowed funds has been included in "Other assets" in the unaudited pro
forma condensed consolidated balance sheet.
As part of the proposed transactions, Fairfield will purchase (i)
approximately $19.8 million (net book value) of certain real estate,
classified loans, joint venture interests and other assets owned by First
Federal (the "Excluded Association Assets"), subject to the right of the
purchaser to retain all or part of such assets, and (ii) lot and vacation
ownership contracts receivable and related assets which First Federal
previously acquired from Fairfield (the "Contracts Receivable"),
having a net book value, at March 31, 1994, of approximately $49.7 million.
The Excluded Association Assets and the Contracts Receivable are collectively
referred to as the "Excluded Assets," which totaled approximately $69.5
million at March 31, 1994.
The unaudited pro forma condensed consolidated financial statements reflect
First Federal's sale and Fairfield's purchase of the Excluded Assets, with
Fairfield's purchase funded by the net cash proceeds totaling approximately
$40.8 million from the sale of First Federal's stock and borrowings of
approximately $28.7 million under available financing arrangements. The interest
expense associated with the additional borrowings of approximately $28.7
million incurred by Fairfield to purchase the Excluded Assets, using an
interest rate of 8.125% (i.e., the Company's incremental borrowing rate), would
result in calculated interest expense of approximately $2.3 million for the year
ended December 31, 1993 and approximately $.6 million for the three months ended
March 31, 1994. Interest expense included in the preceding pro forma financial
statements may not be indicative of the future cost to the Company considering
that the disposition of the deposit base of First Federal will result in
probable future increased cost of funds.
The purchase of the Excluded Assets by Fairfield is a condition to the
consummation of the sale of the stock of First Federal. As most of the
Excluded Association Assets are dissimilar to the assets of continuing
operations, the Company anticipates disposing of these assets in a manner
different than First Federal. Therefore, the Company has recorded valuation
allowances related to the Excluded Assets of approximately $4 million, based
upon the expected change in Fairfield's method of disposal of such assets
subsequent to the consummation of the transactions. Selling expenses,
including professional fees and other direct expenses, were estimated at
approximately $3.3 million. The net gain of approximately $5.5 million on the
sale of the stock of First Federal is composed of an expected sales price of
$42.2 million, net of (i) a basis of the investment in the stock of First
Federal of approximately $29.4 million, (ii) valuation allowances of the
Excluded Assets of approximately $4 million and (iii) selling expenses of
approximately $3.3 million. The gain on the sale of First Federal's stock is
not expected to result in an increase in income taxes due to the additional
tax basis in First Federal's stock and underlying assets (tax goodwill), for
which no deferred tax asset was previously recorded under the provisions of
SFAS 109.
F-6
<PAGE>
For purposes of determining the pro forma effect of the above mentioned
transactions, the following pro forma adjustments have been made (in
thousands):
(a) Reflects (1) the sale of the stock of First Federal and (2) the purchase
of Excluded Assets by the Company:
<TABLE>
<CAPTION>
DEBIT CREDIT
------- -------
<S> <C> <C>
(1)Cash $40,785
(1)Other assets (cash in escrow) 1,390
(2)Loan receivable (contracts) 46,800
(2)Other assets (accrued interest
-- contracts) 400
(2)Real estate inventories, net of
$1.45 million valuation
allowance 1,050
(2)Net assets held for sale, net
of $2.5 million valuation
allowance 17,300
(2)Cash $69,500
(1)Net liabilities held for sale 29,424[see(d)]
(1)Accrued expenses 3,312[see(d)]
Gain on the sale of stock 5,489 5,489[see(d)]
</TABLE>
The gain on the sale of the stock of First Federal is not included in the
Pro Forma Condensed Consolidated Statements of Earnings as Rule 11-02(b)(5) of
Regulation S-X states that pro forma financial statements are to be presented
based on earnings from continuing operations before nonrecurring charges or
credits directly attributable to the transaction.
(b) Reflects the additional borrowings under available financing arrangements
and additional interest expense:
<TABLE>
<CAPTION>
DEBIT CREDIT
------- -------
<S> <C> <C>
(1) Cash $28,715
Financing arrangements $28,715
December 31, 1993:
Interest expense 2,333
Accrued interest 2,333
March 31, 1994:
Interest expense 577
Other liabilities -- accrued income taxes 221
Other liabilities -- accrued interest 577
Provision for income taxes 221
</TABLE>
F-7
<PAGE>
(c) Reflects First Federal's sale of Excluded Assets:
<TABLE>
<S> <C> <C>
Cash (included in net liabilities held for
sale $69,500
Loans receivable (continuing operations) $46,800
Net liabilities held for sale,
($19,800 -- Excluded Association Assets and
$2,500 -- Contracts Receivable/REO) 22,300
Other assets 400
</TABLE>
(d) Represents the extimated net gain on the sale of First Federal's stock
calculated as follows:
<TABLE>
<S> <C>
Stated sales price $40,350
Earnings adjustment (related to the
interim period from October 1, 1993
to date of disposal) 1,825
-------
Adjusted sales price 42,175
Basis of the investment in the stock
of First Federal (29,424)
Other adjustments:
Valuation allowances related to Excluded
Assets (to reflect the Company's expected
plan of disposal of these assets) (3,950)
Accrual for direct selling costs,
including professional fees (3,312)
--------
Net gain on the sale of the stock of
First Federal $ 5,489
--------
--------
</TABLE>
(e) Reflects the historical earnings related to the net liabilities held for
sale for year ended December 31, 1993:
<TABLE>
<CAPTION>
DEBIT CREDIT
------- -------
<S> <C> <C>
Interest income $15,805
Other income 2,957
Retained earnings 1,248
Provision for income taxes $ 665
Provision for loan losses 334
General and administrative 8,431
Interest expense, net 10,478
Other expense 102
</TABLE>
F-8
<PAGE>
Report of Independent Auditors
The Board of Directors
First Federal Savings and Loan Association
of Charlotte and Subsidiaries
We have audited the accompanying consolidated balance sheets of First
Federal Savings and Loan Association of Charlotte and subsidiaries, a
wholly owned subsidiary of Fairfield Communities, Inc., as of
December 31, 1993 and 1992 (reorganized company), and the related
consolidated statements of operations, stockholder's equity, and cash
flows for the year ended December 31, 1993 (reorganized company) and
the six month periods ended December 31, 1992 (reorganized company)
and June 30, 1992 (prior to parent company reorganization) and for
the year ended December 31, 1991 (prior to parent company
reorganization). These financial statements are the responsibility
of the Association's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of First Federal Savings and Loan Association of
Charlotte and subsidiaries at December 31, 1993 and 1992 (reorganized
company), and the consolidated results of their operations and their
cash flows for the year ended December 31, 1993 (reorganized company)
and the six month periods ended December 31, 1992 (reorganized
company) and June 30, 1992 (prior to parent company reorganization)
and for the year ended December 31, 1991 (prior to parent company
reorganization) in conformity with generally accepted accounting
principles.
Ernst & Young
February 3, 1994
F-9
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY
--------------------------------
DECEMBER 31, DECEMBER 31,
1993 1992
----------- -----------
<S> <C> <C>
ASSETS
Cash and amounts due from depository
institutions $ 3,673 $ 3,882
Interest bearing deposits 10,332 32,004
Federal funds sold 200 200
-------- --------
Cash and cash equivalents 14,205 36,086
Investment securities (market value:
1993--$51,246; 1992--$19,504) 51,284 19,446
Mortgage-backed securities (market value:
1993--$25,342; 1992--$31,961) 25,424 32,310
Loans, net 208,575 239,528
Real estate owned, net 15,322 20,846
Property and equipment 3,536 3,433
Accrued interest receivable, net 1,963 2,386
Other assets 10,846 9,852
-------- --------
Total assets $331,155 $363,887
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Savings deposits $276,672 $298,640
Advances from Federal Home Loan Bank 20,907 35,127
Advances by borrowers for taxes and
insurance 298 327
Accounts payable and accrued expenses 1,848 1,795
Income taxes payable 2,896 2,346
-------- --------
Total liabilities 302,621 338,235
-------- --------
Stockholder's equity
Common stock, $.01 par value;
authorized--12,500,000 shares;
issued and outstanding--
200,000 shares 2 2
Additional paid-in capital 23,962 23,962
Retained earnings 4,570 1,688
-------- --------
Total stockholder's equity 28,534 25,652
-------- --------
Total liabilities and stockholder's
equity $331,155 $363,887
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRIOR TO PARENT
REORGANIZED COMPANY COMPANY REORGANIZATION
------------------------- ------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $18,999 $11,628 $14,999 $34,265
Investment and mortgage-
backed securities 3,482 2,178 3,008 7,221
Other 345 168 193 401
------- ------- ------- -------
Total interest income 22,826 13,974 18,200 41,887
INTEREST EXPENSE
Savings deposits 11,609 6,275 9,841 25,146
Borrowings 1,496 778 1,962 5,880
------- ------ ------ ------
Total interest expense 13,105 7,053 11,803 31,026
------- ------ ------ ------
Net interest income 9,721 6,921 6,397 10,861
Provision for loan losses 125 378 4 5,034
------- ------ ------ ------
Net interest income after
provision for loan
losses 9,596 6,543 6,393 5,827
OTHER INCOME
Service charges on deposit
accounts 694 333 359 684
Gain on sale of loans 518 340 56 718
Other 2,135 404 361 1,326
------ ------ ------ ------
Total other income 3,347 1,077 776 2,728
OTHER EXPENSE
Compensation and benefits 3,344 1,548 1,535 3,074
Occupancy 1,420 896 770 1,513
Other 4,079 2,183 2,074 5,020
------ ------ ------ ------
Total other expense 8,843 4,627 4,379 9,607
------ ------ ------ ------
Income (loss) before income
taxes 4,100 2,993 2,790 (1,052)
Provision for income taxes 1,218 1,305 1,012 1,398
------ ------ ------ -------
NET INCOME (LOSS) $2,882 $1,688 $1,778 $(2,450)
------ ------ ------ -------
------ ------ ------ -------
</TABLE>
See accompany notes to consolidated financial statements.
F-11
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) Total
------ ---------- --------- ------
<S> <C> <C> <C> <C>
PRIOR TO PARENT COMPANY
REORGANIZATION
Balance at January 1, 1991 $ 2 $33,623 $(11,767) $21,858
Net loss -- -- (2,450) (2,450)
----- ------- --------- -------
Balance at December 31, 1991 2 33,623 (14,217) 19,408
Net income -- -- 1,778 1,778
Fresh start valuation -- (9,661) 12,439 2,778
----- ------- -------- -------
Balance at June 30, 1992 2 23,962 -- 23,964
==============================================================================
REORGANIZED COMPANY
Balance at June 30, 1992 2 23,962 -- 23,964
Net income -- -- 1,688 1,688
----- ------- ------ -------
Balance at December 31, 1992 2 23,962 1,688 25,652
Net income -- -- 2,882 2,882
----- ------- ------ -------
Balance at December 31, 1993 $ 2 $23,962 $4,570 $28,534
----- ------- -------- -------
----- ------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRIOR TO PARENT
REORGANIZED COMPANY COMPANY REORGANIZATION
------------------------- ------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,882 $ 1,688 $ 1,778 $ (2,450)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Provision for loan losses 125 378 4 5,034
Provision for depreciation
and amortization 432 295 266 465
Provision for deferred
income taxes -- 698 256 354
Amortization of fresh
start premiums 586 (761) -- --
Amortization of purchased
mortgage servicing rights 101 70 70 182
Realized gain on sales of
loans (518) (340) (56) (718)
Changes in operating assets
and liabilities, net 5,217 1,354 4,350 12,326
-------- -------- ------- --------
Net cash provided by operating
activities 8,825 3,382 6,668 15,193
INVESTING ACTIVITIES
Increase in loans, net of
sales (20,170) (10,051) (414) (4,930)
Proceeds from sales of loans 49,887 27,664 19,723 19,300
Purchases of property and
equipment (661) (169) (146) (1,415)
Proceeds from sale of
property and equipment 321 -- -- --
Purchase of investment
securities (45,333) (3,507) (8,472) (8,016)
Maturities and payments of
investment securities 13,495 2,880 3,445 1,500
Purchases of mortgage-backed
securities (14,061) (1,320) (1,025) (5,202)
Payments on mortgage-backed
securities 19,826 9,630 8,140 7,098
Proceeds from sales of
mortgage-backed securities -- -- -- 10,130
-------- -------- ------- --------
Net cash provided by
investing activities 3,304 25,127 21,251 18,465
</TABLE>
F-13
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRIOR TO PARENT
REORGANIZED COMPANY COMPANY REORGANIZATION
------------------------- ------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Advances from Federal Home
Loan Bank $ 8,500 $ 21,000 $ 330 $ 41,500
Repayment of Federal Home
Loan Bank advances (22,500) (30,000) (23,000) (57,022)
Net increase (decrease) in
demand deposits, NOW
accounts, and savings
deposits 5,072 2,015 5,989 (1,884)
Net decrease in certificates
of deposit (25,082) (17,266) (17,552) (10,473)
-------- -------- -------- --------
Net cash used by financing
activities (34,010) (24,251) (34,233) (27,879)
-------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents (21,881) 4,258 (6,314) 5,779
Cash and cash equivalents at
beginning of period 36,086 31,828 38,142 32,363
-------- -------- -------- --------
Cash and cash equivalents
at end of period $ 14,205 $ 36,086 $ 31,828 $ 38,142
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION AND REORGANIZATION
The consolidated financial statements include the accounts of First
Federal Savings and Loan Association of Charlotte (the "Association" or the
"Company") and its wholly-owned subsidiaries. The Association provides
banking services to customers who are primarily located in Richmond,
Montgomery, Mecklenburg, and contiguous counties in the state of North
Carolina. The Company is a wholly-owned subsidiary of Fairfield Communities,
Inc. ("Fairfield"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
In 1990, Fairfield and twelve wholly-owned subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code. Several other subsidiaries of Fairfield were not part of the Chapter 11
filings, including the Association. On August 14, 1992, the Bankruptcy Court
confirmed the reorganization plans (the "Plans").
Fairfield has implemented, as of June 30, 1992, the recommended accounting
for entities emerging from reorganization set forth in Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7") issued by the American Institute of Certified Public
Accountants ("Fresh Start Reporting"). Accordingly, assets and liabilities of
Fairfield and the Association were adjusted to reflect their estimated fair
values and the accumulated retained deficit was eliminated.
The consolidated balance sheets as of December 31, 1993 and 1992, the
consolidated statement of operations for the year ended December 31, 1993 and
the six months ended December 31, 1992 and the consolidated statements of
stockholder's equity and cash flows for the same periods have been prepared as
if the Association is a new reporting entity. Therefore, a black line has been
shown to separate these periods from the prior period information since the
information has not been prepared on a comparable basis.
Unamortized premiums related to recording interest bearing assets and
liabilities at their fair market values as part of fresh start are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT
----------------------------
DECEMBER 31, DECEMBER 31,
1993 1992
------------- -------------
<S> <C> <C>
Premium applied to:
Mortgage-backed securities $ 511 $1,632
Loans 3,166 4,743
Deposits 1,820 3,712
Advances from the Federal Home Loan Bank 77 297
</TABLE>
The premiums are being amortized over the estimated remaining average
contractual lives of the related assets and liabilities utilizing the interest
method of amortization and giving consideration to the estimated prepayment
speeds and actual prepayment experience of the various loans and securities.
The net effect on income, before income taxes, of the amortization of
premiums related to the fresh start adjustments was a decrease in income of
$586,000 for the year ended December 31, 1993 and an increase of income of
$761,000 for the six months ended December 31, 1992.
F-15
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are stated at cost, adjusted for
amortization of premiums and accretion of discounts using the interest method.
Gains or losses on the sale of these securities are recognized using the
specific identification method at the time of sale. Management has the intent
and the Association has the ability to hold these securities to maturity.
The fair values for investments and mortgage-backed securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values based on quoted market prices of comparable instruments
are used.
In May 1993 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The new statement
supersedes FASB Statement No. 12, "Accounting for Certain Marketable
Securities," and generally replaces the long-standing historical cost
accounting approach to debt securities with one based on fair value. The
Association will implement SFAS 115 during 1994. Management believes the
effect of adopting SFAS 115 will not be significant.
LOANS
For real estate construction loans, which have a weighted average maturity
of less than one year, fair value approximates the carrying value. The fair
values for real estate mortgage and consumer and other loans are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality
and prepayment rates published by the Federal Home Loan Bank. The estimated
fair values of timeshare and lots contract receivables purchased from Fairfield
approximated their carrying amounts based on prior year third-party valuations
and consideration of market rate fluctuations since that time. The carrying
amount of accrued interest approximates its fair value.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate
by management to absorb potential losses in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors. The
allowance is increased by provisions for loan losses charged against income.
REAL ESTATE OWNED
Real estate owned includes property acquired for development or sale,
acquired in settlement of loans or through in-substance foreclosures. Real
estate is generally considered foreclosed in-substance when: (1) the debtor
has little or no equity in the real estate as compared to the current fair
market value of the property, (2) proceeds for repayment of the loan can be
expected to come only from the operation or the sale of the real estate, and
(3) the debtor has either: (a) formally or effectively abandoned control of
the real estate to the Association or (b) retained control of the real estate
but, because of the current financial condition of the debtor or the economic
prospects for the debtor and/or the real estate in the foreseeable future, it
is doubtful that the debtor will be able to rebuild equity in the real estate
or otherwise repay the loan in the foreseeable future. Real estate acquired
for development or sale or in settlement of loans and properties classified
as in-substance foreclosures are recorded at the lower of cost or estimated
fair value at the date of acquisition. Loan losses arising from the
acquisition of such property are charged against the allowance for loan
losses.
F-16
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE OWNED (CONTINUED)
Other investments in real estate are stated at the lower of cost or
estimated fair value. These investments are reviewed regularly and valuation
allowances are established when recorded values exceed estimated fair values.
Interest charges during the period of construction, development or
improvements, if applicable, are capitalized. After construction or
improvements are complete, interest charges are expensed as a period cost.
Loans aggregating approximately $1,767,000 in 1993 and $5,064,000 and
$1,592,000 during the six months ended December 31, 1992 and June 30,
1992, respectively, and $15,357,000 during 1991, were transferred to real
estate owned.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. The provision for depreciation and amortization is computed
principally by the straight-line method based on the estimated useful lives of
the assets. Leasehold improvements are amortized by the straight-line method
over the terms of the related leases.
REVENUE RECOGNITION
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. The Association provides an allowance for loss
for uncollected interest when a loan becomes 90 days past due as to principal
or interest or when, in management's opinion, there is doubt as to the
collectibility of the interest. Such interest ultimately collected is credited
to income in the period of recovery.
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of the
related loan's yield. The Association is generally amortizing these amounts
over the contractual life of the related loans using the interest method.
Commitment fees based on a percentage of a customer's unused line of credit
and fees related to stand-by letters of credit are recognized over the
commitment period.
LOAN SERVICING INCOME
The Association retains a servicing fee for servicing loans sold to
investors. The servicing fee is accrued and credited to operations based upon
the principal amount outstanding. From time to time the Association may sell
portions of its servicing portfolio. Gains, if any, on such sales are
recognized at the time of sale.
INCOME TAXES
The Association and its subsidiaries file a consolidated federal income
tax return with Fairfield. The Association qualifies as a savings and loan
for tax purposes.
The Association adopted SFAS No. 109, "Accounting for Income Taxes,"
issued by the Financial Accounting Standards Board as of June 30, 1992 as part
of the reorganization; therefore, no cumulative effect adjustment to operations
has been recorded. Under the accounting method specified by SFAS 109, a
deferred tax asset or liability is recognized based on the estimated future
tax effects attributable to temporary differences and carryforwards. The
measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for the amount of any tax benefits that, based on available
evidence, are not expected to be realized.
F-17
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Association considers federal funds sold, interest bearing deposits
with other financial institutions, as well as all other highly liquid
investment securities with a maturity of three months or less when purchased
to be cash equivalents. Federal funds are generally purchased and sold for
one-day periods.
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
ADVANCES FROM FEDERAL HOME LOAN BANK
The fair values of advances from the Federal Home Loan Bank are estimated
using discounted cash flow analyses based on rates currently available to the
Association for advances with similar terms and remaining maturities.
SAVINGS DEPOSITS
The fair values disclosed for demand deposits, passbook and statement
savings, and money market accounts are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates in the Association's market area to a schedule of aggregated
expected monthly maturities of such deposits.
OFF-BALANCE-SHEET INSTRUMENTS
Fair values for the Association's off-balance-sheet instruments are based
on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1992 and 1991 financial
statements to conform with classifications used as of December 31, 1993.
3. LIQUIDITY REQUIREMENTS
In order to meet regulatory liquidity requirements, the Association
maintained cash balances of approximately $13.8 million and $16 million as of
December 31, 1993 and 1992, respectively, with the Federal Home Loan Bank.
4. INVESTMENTS IN DEBT SECURITIES
The amortized cost and estimated fair values of investments in debt
securities at December 31 are as follows (dollars in thousands):
F-18
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1993
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
United States Treasury Securities $ 5,519 $ 51 $ -- $ 5,570
Securities of United States Government
agencies and corporations 45,247 184 (274) 45,157
Other investment securities 518 1 -- 519
------- ---- ----- -------
51,284 236 (274) 51,246
Mortgage-backed securities 25,424 -- (82) 25,342
------- ---- ----- -------
$76,708 $236 $(356) $76,588
------- ---- ----- -------
------- ---- ----- -------
<CAPTION>
1992
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
United States Treasury Securities $ 3,002 $ 40 $ -- $ 3,042
Securities of United States Government
agencies and corporations 15,845 27 (9) 15,863
Other investment securities 599 -- -- 599
------- ---- ----- -------
19,446 67 (9) 19,504
Mortgage-backed securities 32,310 -- (349) 31,961
------- ---- ----- -------
$51,756 $ 67 $(358) $51,465
------- ---- ----- -------
------- ---- ----- -------
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1993, by contractual maturity, are shown below (dollars in
thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less $ 500 $ 503
Due after one year through five years 35,605 35,592
Due after five years through ten years 8,295 8,288
Due after ten years 6,884 6,863
------- -------
51,284 51,246
Mortgage-backed securities 25,424 25,342
------- -------
$76,708 $76,588
------- -------
------- -------
</TABLE>
The Association has pledged investment securities with book values of
approximately $3,117,000 and $2,275,000 to secure deposits of state and
municipal agencies at December 31, 1993 and 1992, respectively.
F-19
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS
Loans consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Real estate--construction $ 8,074 $ 8,074 $ 8,379
Real estate--mortgage 141,043 143,366 149,780
Contract receivables purchased from Fairfield:
Timeshare 44,749 44,749 61,029
Lots 7,798 7,798 11,885
Consumer and other 9,780 9,780 10,236
-------- -------- --------
211,444 213,767 241,309
-------- -------- --------
Less:
Loans-in-process (2,510) (2,510) (2,140)
Fresh start valuation adjustment 3,166 -- 4,743
Deferred loan fees and discounts (127) -- (136)
-------- -------- --------
211,973 211,257 243,776
Less allowance for loan losses (see
Notes 12, 14 and 17) (3,398) -- (4,248)
-------- -------- --------
$208,575 $211,257 $239,528
-------- -------- --------
-------- -------- --------
</TABLE>
The Association services loans for investors, which are not included in
the accompanying financial statements. The total amount of these loans was
approximately $137,800,000 and $125,500,000 at December 31, 1993 and 1992,
respectively.
The following table presents information concerning the aggregate amount
of nonperforming loans (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
Nonaccrual loans $4,614 $7,411
Restructured loans 5,547 7,530
Interest income that would have been
recorded under original terms:
Nonaccrual loans 498 548
Restructured loans 604 755
Interest income recorded during the period:
Nonaccrual loans 54 288
Restructured loans 468 605
</TABLE>
F-20
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is an analysis of the allowance for loan losses (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning
of period $4,248 $ 5,678 $ 7,978 $ 5,927
Provision for loan
losses (see Note 11) 125 378 4 5,034
Loans charged-off,
net (975) (1,808) (2,304) (2,983)
------ ------- ------- -------
Balance at end of
period $3,398 $ 4,248 $ 5,678 $ 7,978
------ ------- ------- -------
------ ------- ------- -------
</TABLE>
Loans and mortgage-backed securities aggregating approximately
$36,235,000 and $72,800,000 at December 31, 1993 and 1992, respectively, were
pledged as collateral for advances from the Federal Home Loan Bank.
6. REAL ESTATE OWNED
Real estate owned consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
--------- ---------
<S> <C> <C>
Acquired for development and sale $ 238 $ 1,000
Acquired in settlement of loans 15,084 19,846
------- -------
$15,322 $20,846
------- -------
------- -------
</TABLE>
Included in real estate owned is $1.6 million of timeshare and lot
contracts receivable greater than 90 days delinquent, since these contracts
receivable meet the in-substance foreclosure criteria. In addition, the
Association has acquired $2.8 million of timeshare and lot inventory located
at various Fairfield sites related to respective contracts receivable which
have canceled. The Association has reduced its carrying value in these
amounts by an allowance totaling $1.8 million, which represents amounts
applied in accordance with the Tax Sharing Agreement (see Note 11). $620,000
and $1,173,000 were applied to the defaulted contracts in accordance with the
Tax Sharing Agreement for the years ended December 31, 1993 and 1992,
respectively.
The Association had net revenue relating to real estate owned of
approximately $582,400 for the year ended December 31, 1993 and $120,100 for
the six months ended June 30, 1992, and net expenses of approximately $44,800
and $240,000 for the six months ended December 31, 1992 and for the year ended
December 31, 1991, respectively.
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1992
------ ------
<S> <C> <C>
Loans $ 2,409 $2,723
Investment and mortgage-backed securities 691 633
Allowance for losses on uncollected interest (1,137) (970)
------- ------
$ 1,963 $2,386
------- ------
------- ------
</TABLE>
8. SAVINGS DEPOSITS
Savings deposits and related weighted average rates consist of the
following at December 31 (dollars in thousands):
F-21
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1993 1992
------------------------------------- -------------------------
WEIGHTED ESTIMATED WEIGHTED
BALANCE AVERAGE RATE FAIR VALUE BALANCE AVERAGE RATE
---------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
NOW demand accounts $ 18,532 1.97% $ 18,532 $ 16,238 2.80%
Passbook and statement accounts 13,853 2.54 13,853 13,975 3.05
Money market accounts 40,359 2.89 40,359 39,352 3.60
Certificate accounts:
90 days or less 4,144 4.76 5,329 5.13
6 months 34,232 3.42 44,519 3.97
1 year 66,411 4.48 72,277 5.33
2-3 years 20,353 5.44 16,447 5.98
4 years and longer 38,321 7.80 32,670 8.34
Jumbos 38,647 5.71 54,121 6.10
-------- -------- --------
202,108 205,922 225,363
-------- -------- --------
274,852 4.56% 278,666 294,928 5.15%
---- ----
---- ----
Fresh start valuation premium 1,820 -- 3,712
-------- -------- --------
Total savings deposits $276,672 $278,666 $298,640
-------- -------- --------
-------- -------- --------
</TABLE>
A summary of certificate accounts by maturity at December 31, 1993 is as
follows (dollars in thousands):
<TABLE>
<S> <C>
Year ended December 31:
1994 $143,644
1995 29,802
1996 7,961
Thereafter 20,701
--------
$202,108
--------
--------
</TABLE>
F-22
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SAVINGS DEPOSITS (CONTINUED)
Interest expense on savings deposits consists of the following components
for the periods ended (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Passbook and statement accounts $ 415 $ 259 $ 255 $ 566
NOW and money market accounts 1,689 852 1,054 2,364
Certificate accounts 9,505 5,164 8,532 22,216
------- ------ ------ -------
$11,609 $6,275 $9,841 $25,146
------- ------ ------ -------
------- ------ ------ -------
</TABLE>
At December 31, 1993 and 1992, the Association held approximately $1.7 and
$2.3 million, respectively, of brokered deposits, which generally mature within
one year.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1993, advances from the FHLB consist of the following,
summarized by maturity (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
BALANCE AVERAGE RATE FAIR VALUE
--------- ------------- -----------
<S> <C> <C> <C>
Year ending December 31:
1994 $10,000 5.46 $10,166
1995 2,000 4.74 2,023
1996 5,500 5.03 5,573
1997 3,000 5.62 3,041
Thereafter 330 5.69 302
------- ---- -------
20,830 5.18 21,105
----
----
Fresh start valuation premium 77 --
------- -------
$20,907 $21,105
------- -------
------- -------
</TABLE>
Management anticipates that the advances from the FHLB maturing during
1994 will be renewed to the extent they are not paid.
F-23
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RETIREMENT PLAN
The Association has a defined contribution retirement plan which covers
all eligible employees who attain the age of 21 and have more than 1,000 hours
of service in each plan year. The Association's policy is to fund costs
accrued. Contributions to the plan by the Association are determined based on
a percentage of participants' compensation, as defined, for the plan year.
Retirement expense for the year ended December 31, 1993 and for the six months
ended December 31, 1992 and June 30, 1992 was $237,434, $172,317 and $90,599,
respectively, and $319,739 for the year ended December 31, 1991.
11. INCOME TAXES
Components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
Current:
Federal $ 837 $ 574 $ 723 $1,037
State 4 33 33 7
------ ------ ------ ------
Total 841 607 756 1,044
Deferred:
Federal 301 607 222 358
State 76 91 34 (4)
------ ------ ------ ------
Total 377 698 256 354
------ ------ ------ ------
Total $1,218 $1,305 $1,012 $1,398
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Components of the variance between taxes computed at the expected federal
statutory income tax rate and the provision for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Statutory tax provision (benefit) $1,394 $1,018 $ 949 $ (358)
State income taxes, net of federal benefit 53 82 44 --
Bad debt deduction -- -- (38) 1,343
Other (229) 205 57 413
------ ------ ------ ------
Provision for income taxes $1,218 $1,305 $1,012 $1,398
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
F-24
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
The components of the provision for deferred income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
1993 1992 1992 1991
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Bad debt expense $ 912 $476 $ -- $354
Purchase accounting amortization (468) (60) (59) --
Fresh start amortization (229) 86 -- --
Deferred fees (4) 37 74 (25)
Other 166 159 241 25
----- ---- ---- ----
$ 377 $698 $256 $354
----- ---- ---- ----
----- ---- ---- ----
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1992 1992
------------ ------------ -----------
<S> <C> <C> <C>
Deferred tax liabilities:
Book asset adjustment for fresh start. $ 698 $ 927 $ 841
Purchase accounting -- basis adjustment 577 1,045 1,105
FHLB stock 432 298 227
Basis in partnerships 203 203 214
Other 64 1,402 1,303
------- ------- -------
Total deferred tax liabilities 1,974 3,875 3,690
Deferred tax assets:
Loan loss reserve 3,266 4,177 4,653
Deferred revenue 188 114 151
------- ------- -------
Total deferred tax assets 3,384 4,291 4,804
Valuation allowance for deferred tax assets (1,885) (1,885) (1,885)
------- ------- -------
Net deferred tax assets 1,499 2,406 2,919
------- ------- -------
Net deferred tax liabilities $ 475 $ 1,469 $ 771
------- ------- -------
------- ------- -------
</TABLE>
For tax reporting purposes the Association is allowed a special bad debt
deduction computed under the percentage of taxable income ("PTI") method or
the experience method (which may be computed using the six-year moving average
or the "fill up method"), whichever is more beneficial. The PTI method
generally is limited to approximately 8 percent of taxable income, subject to
certain limitations based on aggregate loan and savings account balances at
the end of the year. If the PTI method is elected, actual losses are not
deductible. Under the experience method, the Association's bad debt deduction
is computed based on actual loan losses.
F-25
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES (CONTINUED)
Effective June 1, 1989, the Association entered into a tax sharing
agreement (the "tax sharing agreement") with Fairfield, which provides that
the Association will remit to Fairfield an amount equal to the estimated
federal income taxes for which the Association would have been liable if it
filed a separate consolidated income tax return. The tax sharing agreement
was subject to a potential amendment as detailed in a Bankruptcy Court order
dated October 22, 1991 approving a Settlement Agreement between the
Association, the OTS and Fairfield. The amendment to the tax sharing
agreement was executed at the time Fairfield's Plan of Reorganization was
confirmed by the Bankruptcy Court. The Settlement Agreement contained an
amendment to the tax sharing agreement (the "Agreement") that was effective
for all amounts due and payable under the Agreement that were unpaid at the
time Fairfield's Plan of Reorganization was confirmed or thereafter and that
first became due and payable on or after October 3, 1990.
In addition, prior to the confirmation date of Fairfield's Plan of
Reorganization ("Confirmation Date") (as defined by the Agreement entered into
in connection with the Settlement Agreement) the Association retained 25% and
after the Confirmation Date 50% of any amounts otherwise payable to Fairfield
under the tax sharing agreement and has applied such amounts against the
defaulted contract account (see Note 13). The 50% of amounts otherwise
payable to Fairfield shall continue to be applied to the defaulted contract
account until each of the following requirements has been met: (i) the balance
of the defaulted contract account is zero or a negative amount; (ii) the
Association's tangible capital equals or exceeds the aggregate principal
amount of the Association's contract receivable portfolio, (iii) Fairfield is
not in bankruptcy or in material payment default under any loan agreement to
which it is a party; (iv) the Association is in compliance with its minimum
regulatory capital requirements; and (v) the members of the affiliated group
of which Fairfield is the common parent have had net income on a consolidated
basis for any three of the preceding four most recent quarters. Thereafter,
so long as the Association has been made "whole," Fairfield will receive all
tax sharing payments to which it is otherwise entitled and will retain all
cash and contract proceeds received from the remarketing effort. At December
31, 1993, the Association has recorded approximately $1.8 million as a
reduction of real estate owned, because it is subject to application against
the defaulted contract account as described above.
The Association paid approximately $571,000 and $2,750,000 (including
$545,000 and $2,700,000 paid to Fairfield) of income taxes during the years
ended December 31, 1993 and 1992, respectively, and $25,800 during the year
ended December 31, 1991. Income taxes applicable to gains on sale of
mortgage-backed securities totaled $28,560 in 1991.
12. COMMITMENTS AND CONTINGENCIES
The Association leases its main office space and four branch facilities
under noncancelable operating leases with terms in excess of one year. The
following is a schedule of minimum rental payments (dollars in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1994 $ 334
1995 333
1996 187
1997 133
1998 80
Thereafter 224
------
$1,291
------
------
</TABLE>
Rental expense aggregated approximately $318,000 for the year ended
December 31, 1993 and $228,000 and $189,000 for the six months ended December
31, 1992 and June 30, 1992, respectively, and $469,000 for the year ended
December 31, 1991. Certain of the lease agreements contain options to renew
at various dates for periods up to five years.
On December 10, 1993, Charlotte T. Curry, who purchased a lot from
Fairfield under an installment sale contract subsequently sold to the
Association, filed suit against the Association, currently pending in Superior
Court in Mecklenburg County, North Carolina, alleging breach of contract,
breach of fiduciary duty and unfair trade practices.
F-26
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The litigation, which seeks class action certification, contests the
method by which Fairfield calculated refunds for lot purchasers whose
installment sale contracts were canceled due to failure to complete payment of
the deferred purchase price for the lot. Most installment lot sale contracts
require Fairfield to refund to a defaulting purchaser the amount paid in
principal, after deducting the greater of (a) 15% of the purchase price of the
lot or (b) Fairfield's actual damages. The plaintiff disputes Fairfield's
method of calculating actual damages, which has historically included certain
sales, marketing and other expenses. In the case of Ms. Curry's lot, the
amount of refund claimed as having been improperly retained is approximately
$3,600. Fairfield estimates that the potential number of people who might be
included in the class definition in the CURRY litigation against the
Association (including certain people subject to statute of limitation and
other defenses and contracts where Fairfield, instead of First Federal, were
economically the party of interest) is less than 165 lot purchasers, with
refund claims amounting in the aggregate to several hundred thousand dollars.
The CURRY lawsuit seeks damages, punitive damages, treble damages under North
Carolina law for unfair trade practices, prejudgment interest and attorney's
fees and costs.
The Association intends to defend the CURRY litigation vigorously. No
provision for liability has been made in the accompanying consolidated
financial statements.
The Association is also involved in various other pending litigation
relating to matters that are in the ordinary course of the Association's
business activities. The results of these litigation proceedings cannot be
predicted with certainty; however in the opinion of the Association's
management, the Association does not have a potential liability in connection
with these other proceedings which would have an adverse material effect on
the financial condition of the Association.
13. TRANSACTIONS WITH RELATED PARTIES
The Association has had, and expects to have in the future, transactions
in the ordinary course of business with its officers and directors. Such
transactions have been on similar terms, including interest rates and
collateral on loans, as those prevailing at the time for comparable
transactions with others, and have involved no more than normal risk or other
potential unfavorable aspects. Loans made to officers and directors
(including companies in which they are principal owners) amounted to
approximately $1,813,000 and $1,514,000 at December 31, 1993 and 1992,
respectively. During the year ended December 31, 1993, $281,000 new loans were
originated, $271,000 were refinanced and repayments aggregated $253,000. At
December 31, 1993, the Association held $745,000 of property in real estate
owned which was acquired from a partnership for which a subsidiary of
Fairfield was the general partner. The loan pursuant to which the Association
took possession of the property was made prior to the acquisition of the
Association by Fairfield. Subsequent to December 31, 1993, the Association
sold this property for approximately book value.
Fairfield services the lot and timeshare contracts sold to the
Association in prior years for a fee of .5% per annum (approximately $328,000
for the year ended December 31, 1993 and $205,000 and $236,000 for the six
months ended December 31, 1992 and June 30, 1992, respectively, and $564,000
for the year ended 1991), on the outstanding principal balance of such
contracts.
In May 1991, Fairfield notified the Association that it could no longer
honor its repurchase commitment and subsequent repurchases of contract
receivables over 90 days delinquent or which have been canceled. The
Association classifies all contracts receivable over 90 days delinquent or
which have canceled and which have not been repurchased by Fairfield
("defaulted contracts") as real estate owned, since the defaulted contracts
meet the in-substance foreclosure criteria. At December 31, 1993 and 1992,
the Association held $3,714,000 and $4,765,000, respectively, of defaulted
contracts in real estate owned.
In connection with the confirmation of the Plans, the Association entered
into a Servicing Agreement with Fairfield, under which Fairfield would
continue to service the Association's contracts receivable portfolio on
essentially the same terms and conditions, including the .5% servicing fee, as
set forth in the interim Servicing Agreement. Additionally, Fairfield and the
Association entered into a Remarketing Agreement whereby Fairfield agreed to
use its
F-27
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
best efforts to remarket timeshare and lots underlying canceled
Association contracts receivable and replace those contracts with new contracts
generated by the remarketing efforts. Fairfield is entitled, pursuant to the
Remarketing Agreement, to retain cash downpayments up to 40% of cash sales and
all down payments, except for the amount of any down payment that exceeds 50%
of the gross sales price of the remarketed inventory. In addition, under the
amended Tax Sharing Agreement, the Association retained 25% and, after
confirmation, 50% of any amounts otherwise payable to Fairfield under the Tax
Sharing Agreement and applied such amounts against the balance of unremarketed
canceled contracts receivable plus accrued interest thereon, less any proceeds
or tax sharing amounts retained by the Association (Defaulted Contract
Account) (see Note 11). Prior to the confirmation of the Plans, the
Association and Fairfield operated under interim remarketing and service
agreements authorized by the Bankruptcy Court with terms similar to those
described above. For the year ended December 31, 1993, Fairfield remarketed
approximately $1.2 million of canceled contracts receivable at amounts which
approximated book value. During the year ended December 31, 1993, the
Association paid $545,000 to Fairfield in accordance with the terms of the Tax
Sharing Agreement.
The Association maintained a general valuation allowance for contracts
receivable purchased from Fairfield of $1,150,000 at December 31, 1993.
14. SUPPLEMENTAL CASH FLOWS INFORMATION
The Association paid $13,171,000 for the year ended December 31, 1993 and
$7,103,000 and $11,840,000 for the six months ended December 31, 1992 and June
30, 1992, respectively, and $31,431,000 for the year ended 1991 in interest on
deposits and other borrowings.
15. PREFERRED STOCK
The Association is authorized to issue 7,500,000 shares of $.01 par value
preferred stock. No preferred shares have been issued.
16. REGULATORY MATTERS
On September 29, 1992, the Office of Thrift Supervision ("OTS"), together
with other federal banking regulatory agencies, adopted rules to implement the
"prompt corrective action" provisions of the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") of 1991 (the "Act"). Significant
requirements of the Act include minimum capital and asset ratios and a
"risk-based" capital to "risk-weighted" asset ratio. Under the new rules,
which were effective December 19, 1992, a thrift institution is "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of 5% or
greater and is not subject to any order to meet and maintain a specific
capital level. At December 31, 1993, the Association had a total risk-based
capital ratio of 14.00%, and a Tier 1 risk-based ratio and a leverage ratio of
8.35%.
The OTS may require an adequately capitalized savings association to
comply with certain mandatory or discretionary supervisory actions as if the
savings association were in the next lower capital category if the OTS
determines, after notice and opportunity for hearing, that in its most recent
examination, the savings association received, and has not corrected, a
less-than-satisfactory rating for any of the equivalent MACRO rating
categories for asset quality, management, earnings, or liquidity.
Beginning in 1990, thrifts were required to deduct from assets and, thus,
from capital a percentage of the aggregate amount of investments in and
extensions of credit to subsidiaries that engage in activities not permissible
for national banks, subject to certain exceptions. These percentage
deductions increase on an accelerating basis over a period ending June 30,
1994, after which time all such investments and extensions of credit will be
deducted from capital. At December 31, 1993, the Association had
approximately $3,872,000 or 1% of assets invested in and loaned to
subsidiaries which may be deemed to be engaged in activities not permissible
for national banks or otherwise not permitted under FIRREA. Management
believes that the Association will be able to reduce or dispose of these
investments within the periods provided in FIRREA without adversely affecting
its operations.
F-28
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REGULATORY MATTERS (CONTINUED)
At December 31, 1993, the Association's total qualified thrift investments
as a percentage of total tangible assets was 69.5%, which exceeded the minimum
of 65% required by the Act.
On August 26, 1992, the Association and the OTS entered into a revised
Supervisory Agreement, pursuant to which the Association agreed, except for
certain enumerated transactions, that neither the Association nor any of its
subsidiaries would enter into any transaction with Fairfield or any of its
subsidiaries without the prior written approval of the Regional Director of the
OTS.
The Association is prohibited from making dividend payments to Fairfield
without prior approval from the OTS.
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Association is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit, standby
letters of credit and loans sold to third parties subject to repurchase
agreements. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement the
Association has in particular classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of those
instruments. The Association uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Unless noted otherwise, the Association does not require collateral or
other security to support financial instruments with credit risk.
Financial instruments whose contract amounts represent credit risk are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CONTRACT ESTIMATED CONTRACT
AMOUNT FAIR VALUE AMOUNT
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Commitments to extend credit $ 9,050 $ 9,054 $10,279
Standby letters of credit -- -- 210
Loans sold subject to repurchase
agreements 17,279 14,353 21,610
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Association upon extension of credit is based on
management's credit evaluation of the counterparty. Collateral held varies but
generally includes commercial or residential real estate.
Standby letters of credit are conditional commitments issued by the
Association to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is generally the same as that
involved in extending loan facilities to customers.
F-29
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Repurchase agreements generally require the Association to repurchase loans
that do not meet the standards of the loan purchase agreements or that become
delinquent within a stated period of time after being sold to the permanent
investor. The Association has purchased special risk insurance against the
recourse obligation on $12.6 million of loan sales as of December 31, 1993.
18. CONCENTRATIONS OF CREDIT RISK
The Association's business activity is primarily with customers located in
the state of North Carolina. At December 31, 1993, the Association had
approximately $7.8 million of real estate construction loans and loan
commitments. All real estate construction loans are reviewed by senior
management and approved by the Association's Loan Committee. The Association
requires collateral on all real estate construction loans and generally
maintains loan to value ratios of no greater than 80%. At December 31, 1993,
the Association has approximately $52.6 million of outstanding lot and timeshare
contracts receivable, which were purchased from Fairfield. The lot and
timeshare contracts receivable are regionally diversified. A minimum
downpayment of 10% was generally required for these lot and timeshare contracts
receivable. See Note 13 for additional information concerning the credit risk
associated with the lot and timeshare contracts receivable purchased from
Fairfield.
19. SALE OF LOANS
During 1993, 1992 and 1991, the Association sold $48.4, $47 and $18.6
million, respectively, of first mortgage loans to the Federal Home Loan Mortgage
Corporation for $48.7, $47.4 and $19.3 million, respectively. The Association
realized a gain on the loan sales of $276,000 in 1993 and $340,000 and $56,000
for the six months ended December 31, 1992 and June 30, 1992, respectively, and
$718,000 for the year ended 1991.
20. SUBSEQUENT EVENT
Subsequent to December 31, 1993, it is anticipated that Fairfield will
enter into a definitive agreement to sell its stock in the Association. The
purchase price of approximately $40 million is to be paid partially in cash and
partially through the conveyance of certain real estate owned, classified loans
and other assets. The sale is subject to numerous conditions, including
completion of due diligence to the satisfaction of the acquirer and obtaining
approvals from Fairfield's lenders and various state and federal regulatory
authorities.
F-30
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
--------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 3,394 $ 3,673
Interest bearing deposits 26,454 10,332
Federal funds sold 200 200
-------- --------
Cash and cash equivalents 30,048 14,205
Investment securities (market value:
1994--$52,584; 1993--$51,246) 52,736 51,284
Mortgage-backed securities (market value:
1994--$15,874; 1993--$25,342) 16,098 25,424
Loans, net 191,293 208,575
Real estate owned, net 15,722 15,322
Other assets 13,595 16,345
-------- --------
Total assets $319,492 $331,155
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Savings deposits $272,055 $276,672
Advances from Federal Home Loan Bank 13,886 20,907
Other liabilities 4,627 5,042
-------- --------
Total liabilities 290,568 302,621
-------- --------
Stockholder's equity
Common stock 2 2
Paid-in capital 23,962 23,962
Retained earnings 4,960 4,570
-------- --------
Total stockholder's equity 28,924 28,534
-------- --------
Total liabilities and stockholder's equity $319,492 $331,155
-------- --------
-------- --------
<FN>
Note: The consolidated balance sheet at December 31, 1993 has been derived
from the audited consolidated financial statements at that date.
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
INTEREST INCOME
Loans, including fees $4,090 $5,142
Investment and mortgage-backed securities 916 1,052
Other 83 93
------ ------
Total interest income 5,089 6,287
------ ------
INTEREST EXPENSE
Savings deposits 2,610 2,959
Borrowings 250 395
------ ------
Total interest expense 2,860 3,354
------ ------
Net interest income 2,229 2,933
Provision for loan losses 59 35
------ ------
Net interest income after provision for loan losses 2,170 2,898
OTHER EXPENSE
Compensation and benefits 925 861
Occupancy 332 340
Other, net 300 560
------ ------
Total other expense 1,567 1,761
------ ------
Income before provision for income taxes 613 1,137
Provision for income taxes 223 413
------ ------
NET INCOME $ 390 $ 724
------ ------
------ ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by operating activities $ 2,383 $ 1,373
-------- --------
INVESTING ACTIVITIES
Decrease (increase) in loans, net of sales (2,003) 6,202
Proceeds from sales of loans 18,801 8,087
Net purchases of property and equipment (76) (64)
Purchases of investment securities (7,993) (15,712)
Maturities and payments of investment securities 6,630 5,735
Purchases of mortgage-backed securities -- (1,037)
Payments on mortgage-backed securities 2,534 6,417
Proceeds from sale of mortgage-backed securities 6,736 --
Net cash received from unconsolidated affiliates 99 (3)
-------- --------
Net cash provided by investing activities 24,728 9,625
-------- --------
FINANCING ACTIVITIES
Repayments of Federal Home Loan Bank advances (7,000) (4,000)
Net increase (decrease) in demand deposits,
NOW accounts, and savings deposits (718) 906
Net decrease in certificates of deposit (3,550) (5,789)
-------- --------
Net cash used by financing activities (11,268) (8,883)
-------- --------
Increase in cash and cash equivalents 15,843 2,115
Cash and cash equivalents at beginning of period 14,205 36,086
-------- --------
Cash and cash equivalents at end of period $ 30,048 $ 38,201
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(UNAUDITED)
The accompanying unaudited financial statements of First Federal Savings
and Loan Association of Charlotte ("First Federal") and its wholly owned
subsidiaries (collectively, the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and with the instructions to Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the statements for the unaudited interim periods
include all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position and the results
of operations of the Company for such periods. Results of operations for the
period ended March 31, 1994 are not necessarily indicative of the results of
operations that may be expected for a full year or any interim period. The
accompanying consolidated financial statements, and related notes thereto,
include the accounts of First Federal and its wholly owned subsidiaries,
with all significant intercompany transactions eliminated.
NOTE 1. SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid totaled $3.2 million and $3.4 million for the three months
ended March 31, 1994 and 1993, respectively.
NOTE 2. CONTINGENCIES AND COMMITMENTS
On December 10, 1993, Charlotte T. Curry, who purchased a lot from
Fairfield Communities, Inc. ("Fairfield") under an installment sale contract
subsequently sold to First Federal, filed suit against First Federal,
currently pending in Superior Court in Mecklenburg County, North Carolina,
alleging breach of contract, breach of fiduciary duty and unfair trade
practices. On April 8, 1994, the complaint was amended (a) adding Fairfield
as a party, (b) adding an additional count against both Fairfield and First
Federal alleging violation of the North Carolina's Racketeer Influenced and
Corrupt Organizations ("RICO") Statute and (c) adding a count against
Fairfield alleging fraud. The litigation, which seeks class action
certification, contests the method by which Fairfield calculated refunds for
lot purchasers whose installment sale contracts were cancelled due to failure
to complete payment of the deferred sales price for the lot. Most installment
lot sale contracts require Fairfield to refund to a defaulting purchaser the
amount paid in principal, after deducting the greater of (a) 15% of the
purchase price of the lot or (b) Fairfield's actual damages. The plaintiff
disputes Fairfield's method of calculating damages, which has historically
included certain sales, marketing and other expenses. In the case of
Ms. Curry's lot, the amount of refund claimed as having been improperly
retained is approximately $3,600. The Curry lawsuit seeks damages, punitive
damages, treble damages under North Carolina law for unfair trade practices
and RICO, prejudgment interest and attorney's fees and costs.
Fairfield and First Federal intend to defend the Curry litigation
vigorously. Fairfield also cancels defaulted lot installment sales
contracts owned by it and its subsidiaries (other than First Federal),
using the same method of calculating refunds as is at issue in the Curry
litigation.
At March 31, 1994, First Federal had commitments to extend credit for
secured loans totaling $7.9 million and loans sold subject to repurchase
agreements of $13.1 million. At March 31, 1994, First Federal had
purchased special risk insurance against this recourse obligation related to
$11.5 million of loan sales.
NOTE 3. SUBSEQUENT EVENT
On April 6, 1994, Fairfield entered into a Stock Purchase Agreement (the
"Agreement") to sell the stock (the "Sale") of its wholly owned subsidiary,
First Federal, to Security Capital Bancorp ("SecCap"). As part of the
proposed transaction, Fairfield is to purchase for cash (a) at book value, net
of reserves, up to approximately $19.8 million, as of March 31, 1994, of
certain real estate, classified loans, joint venture interests and other
assets owned by First Federal, subject to the right of SecCap to elect for
First Federal to retain all or part of such assets, and (b) lot and timeshare
contracts receivable and related assets which First Federal previously
acquired from Fairfield, having a
F-34
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(UNAUDITED)
book value less certain negotiated reserves, at March 31, 1994, of
approximately $49.7 million and a weighted average yield, at March 31, 1994,
of 11.6% on approximately $48.1 million of interest earning receivables.
The Sale is subject to numerous conditions, including the obtaining of
necessary approvals from (i) state and federal regulatory authorities,
(ii) certain Fairfield lenders and (iii) Fairfield's stockholders. There is
no assurance that the conditions to closing will be satisfied or that the
various regulatory approvals will be obtained on terms satisfactory to the
parties. The sale is expected to close by August 1, 1994.
F-35
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLOTTE AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
MARCH 31, PRO FORMA MARCH 31,
1994 ADJUSTMENT(1) 1994
---------- ------------- ----------
<S> <C> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 3,394 $ 69,500 $ 72,894
Interest bearing deposits 26,454 26,454
Federal funds sold 200 200
-------- -------- --------
Cash and cash equivalents 30,048 69,500 99,548
Investment securities 52,736 52,736
Mortgage-backed securities 16,098 16,098
Loans, net 191,293 (55,900) 135,393
Real estate owned, net 15,722 (13,100) 2,622
Other assets 13,595 (500) 13,095
-------- -------- --------
Total assets $319,492 $ -- $319,492
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Savings deposits $272,055 $ $272,055
Advances from Federal Home Loan Bank 13,886 13,886
Other liabilities 4,627 4,627
-------- -------- --------
Total liabilities 290,568 -- 290,568
-------- -------- --------
Stockholder's equity
Common stock 2 2
Paid-in capital 23,962 23,962
Retained earnings 4,960 4,960
-------- -------- --------
Total stockholder's equity 28,924 -- 28,924
-------- -------- --------
Total liabilities and stockholder's equity $319,492 $ -- $319,492
-------- -------- --------
-------- -------- --------
<FN>
(1) The pro forma adjustment reflects Fairfield's purchase of contracts
receivable, certain real estate owned, classified loans, joint venture
interests and other assets for cash at book value, net of reserves.
</TABLE>
F-36
<PAGE>
APPENDICES
Appendix I - Stock Purchase Agreement, dated as of April 5, 1994, between
the Company and SCBC.
Appendix II - Opinion of Capital Resources Group, Inc. relating to the Sale.
Appendix III - Annual Report on Form 10-K/A (No. 2) for the Year Ended
December 31, 1993 of the Company.
Appendix IV - Quarterly Report on Form 10-Q/A (No. 1) for the Quarter Ended
March 31, 1994 of the Company.
<PAGE>
Appendix I -- Stock Purchase Agreement, dated as of April 5, 1994,
between Fairfield Communities, Inc. and
Security Capital Bancorp
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT ("Agreement"), dated as of April 5, 1994,
between FAIRFIELD COMMUNITIES, INC., a Delaware corporation having its
principal office at 2800 Cantrell Road, Little Rock, Arkansas 72202 (the
"Seller"), and SECURITY CAPITAL BANCORP, a North Carolina corporation
having its principal office at 507 West Innes Street, Salisbury, North
Carolina 28144 ("SCBC").
W I T N E S S E T H:
WHEREAS, the Seller owns Two Hundred Thousand (200,000) shares
("Shares") of the common stock of First Federal Savings and Loan
Association of Charlotte (the "Association"), which Shares constitute all
of the issued and outstanding shares of capital stock of the Association;
WHEREAS, the Seller wishes to sell the Shares to SCBC, and SCBC wishes
to purchase and acquire, or to have the Designated Subsidiary (as
hereinafter defined) purchase and acquire, the Shares from the Seller (the
"Acquisition"), all on the terms set forth hereinafter; and
WHEREAS, the parties desire to provide for certain undertakings,
conditions, representations, warranties, covenants and indemnification in
connection with the transactions contemplated hereby;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto do hereby
agree as follows:
ARTICLE I
DEFINITIONS
"Acquisition" shall have the meaning set forth in the preamble of this
Agreement.
"Adverse Consequences" shall mean all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages (including any
trebling thereof), assessments, premiums, penalties, fines, interest,
costs, amounts paid in settlement or in compromise, Liabilities,
obligations, Taxes arising from claims by taxing authorities, liens,
losses, expenses, monetary sanctions awarded during the Litigation, and
fees (including attorneys' fees awarded to third parties), court costs, and
reasonable attorneys', expert witness', investigators', consultants' and
accountants' fees and expenses (of the party incurring or subject to the
foregoing matters) arising from an occurrence of any of the foregoing;
provided, however, (i) with respect solely to Direct Claims, it is the
intention of SCBC and the Seller to include only direct compensatory
damages resulting from any of the above and indirect, consequential,
exemplary and/or punitive damages resulting from any of the above are
specifically excluded from the definition of Adverse Consequences, except
that the Seller shall be entitled, as and when provided under Section
2.4(e), to recover the Penalty as a Direct Claim for SCBC's failure to pay
the Deferred Payments in accordance with provisions of Section 2.4(b) and
(d) of this Agreement, and (ii) with respect to Third Party Claims, it is
the intention of SCBC and the Seller to exclude from the definition of
Adverse Consequences wages, salaries and similar compensation paid by SCBC,
the Association or any of the Retained Association Subsidiaries to their
employees in respect of time spent by such employees in defending such
Third Party Claims, including the Litigation, but to include out-of-pocket
expenses incurred by such employees.
1
<PAGE>
"Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated
under the Securities Exchange Act of 1934, as amended.
"Agreement" shall have the meaning set forth in the preamble of this
Agreement.
"Association" shall have the meaning set forth in the preamble of this
Agreement, as modified by the provisions of Section 2.5.
"Association Common Stock" shall have the meaning set forth in Section
3.3 of this Agreement.
"Association Financial Statements" shall mean (i) the audited
consolidated balance sheets (including related notes and schedules, if any)
of the Association as of December 31, 1993, 1992 and 1991 and the related
audited consolidated statements of operations, stockholder's equity and
cash flows (including related notes and schedules, if any) for each of the
periods ended December 31, 1993 and 1992, June 30, 1992, and December 31,
1991 as have been Previously Disclosed (or, in the case of the period ended
December 31, 1993, as will be disclosed to SCBC prior to the Effective
Time) and (ii) the Association's unaudited consolidated balance sheets
(including related notes and schedules, if any) as of September 30, 1993
and the related unaudited consolidated statements of operations,
stockholder's equity and cash flows for the three-month and nine-month
periods ended September 30, 1993 as have been Previously Disclosed and,
with respect to interim periods ended subsequent to December 31, 1993, as
will be provided to SCBC prior to the Effective Time.
"Association Letter" shall mean the letter dated as of the date
hereof, from the Association to SCBC, containing certain representations
and warranties to SCBC as of the date hereof.
"Association Subsidiaries" shall mean any corporation, commercial
bank, industrial bank, savings association, savings bank, partnership,
Joint Venture, limited liability company, business trust, or other
organization more than 10% of the stock or ownership interest of which is
owned, directly or indirectly, by the Association, as Previously Disclosed.
"Bank Holding Company Act" shall mean the Bank Holding Company Act of
1956, as amended.
"Bankruptcy Litigation" shall mean all threatened and hereafter
asserted claims against SCBC, the Association or a Retained Association
Subsidiary by the trustee in bankruptcy or by any other party in interest
in the bankruptcy cases of Carley Capital Group, James E. Carley or L.
David Carley for alleged fraudulent transfers or preferential transfers to
the Association or any Association Subsidiary by the Carley Capital Group
or entities related to the Carley Capital Group.
"Budgeted Reserves" shall mean New Reserves in respect of Other Assets
in an amount equal to the sum of (i) $1,250,000, plus (ii) an amount
determined by multiplying the number of months during the Interim Period
(or portion of a calendar month if the Closing does not occur on the last
day of a calendar month) times $20,000 (or proportionate lesser amount for a
portion of a calendar month in which the Closing occurs).
"Capped Interim Period Earnings Amount" shall mean an amount (which
may be a negative number) equal to the lesser of (i) the amount of the
Interim Period Earnings, and (ii) One Million Eight Hundred Twenty-Five
Thousand Dollars ($1,825,000) plus, in the event the Closing occurs on a
date after the Target Date, an amount (which may be a negative number)
equal to one hundred percent (100%)
2
<PAGE>
of the Interim Period Earnings attributable to the period of time commencing
after the Target Date and ending on and including the Closing Date (the
"Post-Target Date Interim Period Earnings").
"Cash" shall mean currency of the United States of America.
"Cash Equivalents" shall mean stocks, bonds, notes, obligations, other
forms of intangible property or whatever else has been received by the
Association during the Interim Period, except Cash, real property or
tangible personal property, (i) as a payment on, a distribution from, a
restructuring or reorganization of, a sale or other disposition of, or as a
result of a foreclosure or other asset realization procedure on, any
Excluded Loans, Excluded Real Estate and JV Interests or Repurchased
Timeshare and Lot Assets, which (ii) has a quantifiable monetary value
determinable under GAAP at the time of its receipt by the Association, and
which (iii) has been credited against the Gross Book Value of the
particular Excluded Loan, Excluded Real Estate and JV Interest or
Repurchased Timeshare and Lot Asset in respect of which it was received.
"Class Action Litigation" shall mean (i) the civil action styled
CHARLOTTE T. CURRY, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY
SITUATED V. FIRST FEDERAL SAVINGS & LOAN ASSOCIATION OF CHARLOTTE, Case No.
93 CVS 7963, filed in the General Court of Justice, Superior Court
Division, Forsyth County, North Carolina and subsequently transferred to
the General Court of Justice, Superior Court Division, Mecklenberg County,
North Carolina, and any and all other claims now or hereafter asserted
against SCBC, the Association or a Retained Association Subsidiary in such
civil action, and (ii) any civil action commenced against SCBC, the
Association, the successor to the Association after the Merger, or any
Retained Association Subsidiary which (X) is filed by or on behalf of one
or more Persons who are described as a member of the purported class, as
defined in the complaint filed in the Curry litigation, and who opts out of
any settlement or award in the Curry litigation, or (Y) is filed subsequent
to dismissal of the Curry litigation without prejudice by or on behalf of
one or more Persons who are described as a member of the purported class,
as defined in the complaint filed in the Curry litigation.
"Closing" shall have the meaning set forth in Section 5.8(a) of this
Agreement.
"Closing Date" shall have the meaning set forth in Section 5.8(a) of
this Agreement.
"Commissioner" shall have the meaning set forth in Section 5.1 of this
Agreement.
"Continuing Employees" shall have the meaning set forth in Section 5.9
of this Agreement.
"Controlled Group of Corporations" shall have the meaning set forth in
Tax Code Section 1563.
"CRA" shall mean the Community Reinvestment Act of 1977, as amended.
"Deferred Payment Amount" shall mean a portion of the Purchase Price
equal to the dollar amount specified on Appendix 1.
"Deferred Payment Security Interests" shall have the meaning set forth
in Section 2.4(c).
"Designated Subsidiary" shall mean the SCBC Subsidiary, if any,
designated by SCBC as set forth in Section 8.7 hereof.
3
<PAGE>
"Direct Claim" shall mean any claim by an Indemnified Party on account
of an Indemnifiable Loss that does not result from a Third Party Claim.
"Effective Time" shall mean the time and date specified pursuant to
Section 5.8 hereof as the effective time of the Acquisition.
"Effects of Extraordinary Items" shall be determined at the Effective
Time and shall mean an amount (which may be a negative number) equal to (i)
the sum of (A) an amount equal to all New Reserves in respect of Excluded
Assets, but only to the extent that such New Reserves are subtracted in
accordance with Sections 2.2(b)(i), (ii) and (iii) hereof from the Net Book
Value of the Excluded Assets to be purchased by the Seller or have been
taken into account in determining the gains and losses on Excluded Assets
sold or otherwise disposed of during the Interim Period for purposes of
clauses (i)(B) and (ii) hereof, and (B) an amount equal to all losses on
the sales or other dispositions of Excluded Assets during the Interim
Period, determined in accordance with GAAP and without regard to the
effects of federal, state and local income Taxes and other Taxes in the
nature of income Taxes, minus (ii) an amount equal to all gains on the
sales or other dispositions of Excluded Assets during the Interim Period,
determined in accordance with GAAP and without regard to the effects of
federal, state and local income Taxes and other Taxes in the nature of
income Taxes.
"Employee Benefit Plan" shall mean any (i) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (ii) qualified defined contribution retirement plan or
arrangement which is an Employee Pension Benefit Plan, (iii) qualified
defined benefit retirement plan or arrangement which is an Employee Pension
Benefit Plan, (iv) Employee Welfare Benefit Plan or material fringe benefit
plan or program, or (v) stock option, stock purchase, stock appreciation,
stock or cash bonus, or similar plan or arrangement.
"Employee Pension Benefit Plan" shall have the meaning set forth in
ERISA Section 3(2).
"Employee Welfare Benefit Plan" shall have the meaning set forth in
ERISA Section 3(1).
"Environmental Agency" shall have the meaning set forth in Section
3.12(f) of this Agreement.
"Environmental Law" shall have the meaning set forth in Section
3.12(d) of this Agreement.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Excluded Assets" shall mean (i) the Excluded Loans; (ii) the Excluded
Real Estate and JV Interests; (iii) the Repurchased Timeshare and Lot
Assets; (iv) all Association Subsidiaries that are not Retained Association
Subsidiaries; (v) Proceeds; (vi) all loans wholly charged off as of
September 30, 1993 and in respect of which all original collateral, if any,
had been realized and liquidated by the Association as of September 30,
1993; (vii) all claims, demands, causes of action or other rights and the
like, including, but not limited to, claims against any borrowers,
guarantors, sureties, insurers under policies of insurance existing at or
prior to the Effective Time and claims against Persons asserting claims
against the Association and its successors and assigns, whether in
litigation, arbitration or otherwise, related to, or guaranteeing or
insuring against risks of loss associated with, the assets described in
clauses (i) through (vi) of this definition or arising from or related to,
or guaranteeing or insuring against risks of loss associated with, the
Excluded Liabilities or other matters with respect to which the Seller
shall be obligated after the Effective Time to indemnify SCBC, the
Association and the Retained Association
4
<PAGE>
Subsidiaries and all present and future judgments, fines, settlement proceeds,
awards or other recoveries of any kind (collectively, "Recoveries") from the
litigation or settlement of such claims, demands or causes of actions; and
(viii) all records and original documents which pertain to or are utilized by
the Association and the Association Subsidiaries to administer, reflect,
monitor, evidence or record information with respect to the operation or
ownership of any of the assets described in the other clauses of this
definition or with respect to the Excluded Liabilities.
"Excluded Liabilities" shall mean all liabilities and obligations of
the Association or any of the Association Subsidiaries arising prior to or
after the Effective Time in respect of or in connection with the Excluded
Assets, including, but not limited to, all obligations of the Association
to fund future advances on the Excluded Loans.
"Excluded Loans" shall mean the loans and other items listed on
Exhibit A hereto and all related escrow accounts and servicing rights
associated therewith and all Proceeds therefrom.
"Excluded Real Estate and JV Interests" shall mean the real estate,
Joint Ventures and other assets listed on Exhibit B hereto, all interests
of the Association and the Retained Association Subsidiaries therein and
all Proceeds therefrom.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation, or any
successor thereto.
"Federal Reserve Board" shall mean the Board of Governors of the
Federal Reserve System, or any successor thereto.
"FHLB of Atlanta" shall mean Federal Home Loan Bank of Atlanta.
"Fiduciary" shall have the meaning set forth in ERISA Section 3(21).
"GAAP" shall mean generally accepted accounting principles in effect
in the United States from time to time, as applied by the entity in respect
of which the term is used consistently with its past practices.
"Gross Book Value" shall mean the book value of an asset, plus or
minus, adjustments, if any, for the following: undisbursed loan balances,
accrued interest, deferred fees, deferred interest and reserves for
uncollected interest, but not reducing such book value by the amounts of
specific valuation allowances and charge-offs and, when used in reference
to or in respect of Repurchased Timeshare and Lot Assets, Timeshare and Lot
Reserves as defined in the definition of "Net Book Value," which are
reflected in the books and records of the Association at September 30,
1993.
"Hazardous Materials" shall have the meaning set forth in Section
3.12(e) of this Agreement.
"HMDA" shall mean the Home Mortgage Disclosure Act, as amended.
"HOLA" shall mean the Home Owners' Loan Act, as amended.
"Homeowners Litigation" shall mean the civil action styled CARSON POND
HOMEOWNERS'
5
<PAGE>
ASSOCIATION V. CAROLINA FINANCIAL SERVICE CORPORATION, ET AL, Case No. 92 CVS
12275, filed in the General Court of Justice, Superior Court Division,
Mecklenberg County, North Carolina, and all other claims
now or hereafter asserted against the Association or any Retained
Association Subsidiary in such civil action or in a civil action filed by
the Carson Pond Homeowners' Association subsequent to the dismissal of the
pending action without prejudice for any acts or omissions by any of them
prior to the Closing which claims are based generally upon the factual
allegations set forth in the complaint in the aforesaid pending litigation.
"Indemnification Security Interests" shall have the meaning set forth
in Section 8.4(a).
"Indemnifiable Losses" shall mean any and all Adverse Consequences
resulting from Litigation or an event, circumstance or occurrence giving
rise to a Direct Claim or a Third Party Claim, except to the extent that
such Adverse Consequences are the result of any action taken or omitted to
be taken by the Indemnified Party in breach of its obligations under this
Agreement or under the Responsibilities Agreement or in violation of law.
"Indemnified Party" shall mean any Person entitled to indemnification
under this Agreement.
"Indemnifying Party" shall mean any Person required to provide
indemnification under this Agreement.
"Indemnity Payment" shall mean any amount of Indemnifiable Losses
required to be paid pursuant to this Agreement.
"Intellectual Property" shall mean (i) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations, continuations-
in-part, revisions, extensions, and reexaminations thereof, (ii) all
trademarks, service marks, trade dress, logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, (iii)
all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (iv) all mask works
and all applications, registrations, and renewals in connection therewith,
(v) all trade secrets and confidential business information (including
ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information and business and marketing plans and proposal(s)), (vi) all
computer software (including data related documentation), source codes and
site licenses, (vii) all other proprietary rights, and (viii) all copies
and tangible embodiments thereof (in whatever form or medium).
"Interim Period" shall mean the period commencing on and including
October 1, 1993 and ending as of the Effective Time.
"Interim Period Earnings" shall mean consolidated net earnings of the
Association and the Association Subsidiaries during the Interim Period,
determined (i) in accordance with GAAP, (ii) without regard to the effects
of federal, state and local income Taxes and other Taxes in the nature of
income Taxes, and (iii) without regard to the effects of any of the
components that determine the Effects of Extraordinary Items.
6
<PAGE>
"Joint Venture" shall mean any joint venture, partnership or similar
arrangement in which the Association or any Association Subsidiary is a
member, party or partner (whether general or limited), as Previously
Disclosed."
"Knowledge" shall mean the actual knowledge of the Seller's senior
executive officers and directors (including, without limitation, the
Seller's senior executive officers responsible for Tax matters and the
Seller's representatives on the Association's Board of Directors) after
reasonable inquiry of the executive officers and directors of the
Association and each Retained Association Subsidiary, the Person or Persons
responsible for the day-to-day operations of any Association Subsidiary
that is not a Retained Association Subsidiary but over which the
Association or any Retained Association Subsidiary exercises managerial
control, and the Seller's and the Association's attorneys, accountants and
other professionals involved in matters related to the Seller, the
Association and/or any Association Subsidiary.
"Liability" shall mean any liability (whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and
whether due or to become due), including any liability for Taxes.
"Litigation" shall mean the Bankruptcy Litigation, the Class Action
Litigation and/or the Homeowners' Litigation, as applicable.
"Litigation Security Interests" shall have the meaning set forth in
Section 8.4(a).
"Loan" shall have the meaning set forth in Section 3.23 of this
Agreement.
"Material Adverse Event" shall mean any event, matter, item or
circumstance (other than as a result of changes (a) in banking or thrift
laws or regulations of general applicability or interpretations thereof by
court or governmental entities, (b) in GAAP, (c) in interest rates, or (d)
when used in respect of the Association and the Association Subsidiaries,
in or relating to the Excluded Assets) that in and of itself, or when
combined with all similar events, matters, items or circumstances,
reasonably could be expected to have, now or in the future, a material
adverse effect on the business, financial condition, operations, results of
operations or prospects of the Association and the Retained Association
Subsidiaries, taken as a consolidated whole (unless otherwise indicated
herein), or SCBC and the SCBC Subsidiaries, taken as a consolidated whole
(unless otherwise indicated herein), as the case may be, but when used in
respect of the Association and the Retained Association Subsidiaries, shall
not include those changes which would reasonably be expected to occur as a
reasonable consequence of the Acquisition, including, without limitation,
the consequences of employee resignations and employee relations
difficulties.
"Merger" shall have the meaning set forth in Section 2.5 of this
Agreement.
"Multiemployer Plan" shall have the meaning set forth in ERISA Section
3(37).
"Net Book Value" shall mean (i) when used in reference to or in
respect of an asset other than a Repurchased Timeshare and Lot Asset, the
Gross Book Value of such asset less charge-offs (net of recoveries) and
specific valuation allowances allocated to that asset which are reflected
in the books and records of the Association at September 30, 1993 in
accordance with GAAP and in the Ordinary Course of Business, and (ii) when
used in reference to or in respect of Repurchased Timeshare and Lot Assets,
the Gross Book Value of such assets minus (A) the amount of the Timeshare
and Lot Reserve Account on the Association's books and records at September
30, 1993, minus (B) the amount of the general
7
<PAGE>
reserve account attributable to Repurchased Timeshare and Lot Assets on the
Association's books and records at September 30, 1993, and minus (C) any
separate interest reserve attributable to Repurchased Timeshare and Lot Assets
on the Association's books at September 30, 1993 (the reserve accounts
described in clauses (A), (B) and (C) hereof, without reference to balances at
September 30, 1993, being referred to in this Agreement as the "Timeshare and
Lot Reserves"), plus (D) the aggregate amount of the Timeshare and Lot
Reserves at September 30, 1993 reallocated by the Association during the
Interim Period as contemplated by Section 5.3(k) hereof.
"New Reserves," when used in reference to or in respect of a category
or classification of the Association's assets, shall mean the aggregate of
the charge-offs (net of recoveries) and general and specific valuation
provisions for loss contingencies on assets of the Association within that
category or classification of assets that are entered by the Association on
its books and records during the Interim Period in accordance with GAAP and
in the Ordinary Course of Business; provided, however, except to the extent
that the Association reallocates general or specific reserves during the
Interim Period as contemplated by the provisions of Section 5.3(k) hereof,
such aggregate shall not include (i) any valuation provisions resulting
from allocations made of valuation allowances (general or specific)
existing on the Association's books at September 30, 1993, and (ii) any
charge-offs (net of recoveries) and valuation provisions (general or
specific) in respect of Other Assets entered by the Association on its
books and records during the Interim Period that are not expensed in
calculating Interim Period Earnings.
"OTS" shall mean the Office of Thrift Supervision, its predecessor,
the Federal Home Loan Bank Board, and any successor to the Office of Thrift
Supervision.
"Ordinary Course of Business" shall mean the ordinary course of
business of the entity respecting which this term is used, conducted in the
same manner as theretofore conducted during the 18 months preceding the
date of this Agreement and consistent with the entity's past policies,
practices, and methods (including with respect to quantity and frequency)
in effect during such 18-month period (except as modified at the request of
SCBC as provided in Section 5.3(a)), but shall expressly exclude the
initiation of new, or the modification of the terms of existing,
transactions with Affiliates not required by financial institution
regulatory authorities.
"Other Assets" shall mean all assets of the Association and the
Retained Association Subsidiaries other than the Excluded Assets.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"PCBs" shall have the meaning set forth in Section 3.12(b) of this
Agreement.
"Penalty" shall mean the amount payable by SCBC to the Seller as and
when provided in Section 2.4(e).
"Period End" shall have the meaning set forth in Section 8.2(a) of
this Agreement.
"Person" shall mean an individual, a partnership, a corporation, a
commercial bank, an industrial bank, a savings association, a savings bank,
a limited liability company, an association, a joint stock company, a
trust, a business trust, a Joint Venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political
subdivision thereof).
8
<PAGE>
"Previously Disclosed" shall mean information disclosed in a letter
from the Seller making such disclosure specifically referring to this
Agreement and arranged in paragraphs corresponding to the Sections,
subsections and items of this Agreement applicable thereto, and delivered
to SCBC, and shall include statements made in the Association Letter.
"Proceeds" shall mean any real property, personal property, stocks,
bonds, notes (including promissory notes delivered to and accepted by the
Association in connection with the sale of an asset), obligations or other
forms of intangible property or whatever else is received by the
Association or an Association Subsidiary during the Interim Period, except
Cash and Cash Equivalents, as a payment on, a distribution from, the sale
or other disposition of, or a restructuring or reorganization of, or as a
result of a foreclosure, deed in lieu of foreclosure, cancellation of a lot
contract receivable, or other asset realization procedure on an Excluded
Asset.
"Prohibited Transaction" shall have the meaning set forth in ERISA
Section 406 and Tax Code Section 4975.
"RCRA" shall have the meaning set forth in Section 3.12(e) of this
Agreement.
"Reportable Event" shall have the meaning set forth in ERISA Section
4043.
"Repurchased Timeshare and Lot Assets" shall mean all of the timeshare
and lot contract receivables which were originated by the Seller or
Affiliates of the Seller other than the Association and sold to the
Association, all related escrow accounts and servicing rights associated
therewith and all Proceeds therefrom.
"Responsibilities Agreement" shall mean the agreement, the form of
which is attached as Exhibit D, to be executed and delivered by the Seller
and SCBC at the Closing.
"Restrictions on Transfer" shall mean any restriction, limitation, or
prohibition upon an owner's right, power or authority to transfer, sell, or
otherwise convey full title and ownership rights in a security, including,
but not limited to, any restriction, limitation or prohibition arising
under federal or state securities laws or regulations, voting trusts, court
orders, agreements among or between shareholders, and agreements with third
parties.
"Retained Association Subsidiaries" shall mean those Association
Subsidiaries set forth on Exhibit C hereto.
"Rights" shall mean warrants, options, rights (whether stock
appreciation rights, conversion rights, exchange rights, profit
participation rights, or otherwise), convertible securities and other
arrangements or commitments which obligate an entity to issue, otherwise
cause to become outstanding, sell, transfer, pledge, or otherwise dispose
of any of its capital stock or other ownership interests, or any voting
rights thereof or therein.
"SCBC" shall have the meaning set forth in the preamble of this
Agreement.
"SCBC Subsidiaries" shall mean Security Bank and Trust Company;
OMNIBANK, Inc., A State Savings Bank; Citizens Savings, Inc., A State
Savings Bank; Home Savings Bank, Inc., A State Savings Bank; First Cabarrus
Corporation; Estates Development Corporation; and, First Security Credit
9
<PAGE>
Corporation.
"Section 338 Forms" shall have the meaning set forth in Section 5.3(i)
of this Agreement.
"Security Interest" shall mean any mortgage, deed of trust, pledge,
lien, encumbrance, charge, or other security interest, other than (i) liens
for Taxes not yet due and payable or for Taxes that the taxpayer is
contesting in good faith through appropriate proceedings, and (ii) purchase
money liens and liens securing rental payments under capital lease
arrangements.
"Seller" shall have the meaning set forth in the preamble of this
Agreement.
"Seller's Payment" shall have the meaning set forth in Section 2.2(b)
of this Agreement.
"Shares" shall have the meaning set forth in the preamble of this
Agreement.
"Significant Contract" shall mean (a) any note, bond, mortgage or
other instrument which evidences or secures indebtedness of the Association
(other than a deposit) or a Retained Association Subsidiary with a balance
outstanding of $25,000 or more, which cannot be redeemed or prepaid at the
option of the Association or the Retained Association Subsidiary for an
amount which, when added to the outstanding principal balance, would be
less than $25,000, (b) any agreement, arrangement, commitment, contract or
other instrument, except a lease of real or personal property, to which the
Association or any Retained Association Subsidiary is a party or by which
they are bound, if (i) such agreement, arrangement, commitment, contract or
instrument was not made in the Ordinary Course of Business by the
Association or such Retained Association Subsidiary, or (ii) the
performance or nonperformance of such agreement, arrangement, commitment,
contract or instrument could either (X) increase the liabilities or
decrease the assets of the Association or such Retained Association
Subsidiary, or (Y) decrease the income or increase the expenses of the
Association or such Retained Association Subsidiary, in each case by
$25,000 or more over the remaining term of the obligation, exclusive of all
optional renewal periods and extensions of the term; provided, however,
that any such agreement, arrangement, commitment, contract or other
instrument shall not be deemed to a Significant Contract in the event the
Association or such Retained Association Subsidiary has the contractual
right to terminate the agreement, arrangement, commitment, contract or
other instrument in question on 30 days notice or less, without incurring a
penalty or premium in excess of $25,000. It is understood that Significant
Contacts do not include loans or commitments to fund loans or to extend
credit.
"Significant Lease" shall mean (a) any lease of real or personal
property, or any sublease of real property, by the Association or any
Association Subsidiary, as lessee, pursuant to which the Association or the
Association Subsidiary reasonably anticipates the payment of aggregate
rent, taxes, insurance, utilities (if applicable) and other charges in
excess of $25,000 over the remaining term of the lease, exclusive of all
optional renewal periods and optional extensions of the term (provided,
however, that any such lease shall not be deemed a Significant Lease in the
event the Association or the Association Subsidiary has the contractual
right to terminate the lease in question on 30 days' notice or less,
without incurring a penalty or premium in excess of $25,000); or (b) any
lease of real or personal property, or any sublease of real property, by
the Association or any Association Subsidiary, as lessor, pursuant to which
the Association or the Association Subsidiary reasonably anticipates the
collection of aggregate rent in excess of $25,000 over the remaining term
of the lease, exclusive of all optional renewal periods and extensions of
the term (provided, however, that any such lease shall not be deemed a
Significant Lease in the event the Association or the Association
Subsidiary has the contractual right to terminate the lease
10
<PAGE>
in question on 30 days' notice or less, without incurring a penalty or premium
in excess of $25,000).
"Target Date" shall mean July 31, 1994 or such later date as shall be
determined by extending the Target Date after July 31, 1994 by one day for
each Late Day (as such term is defined in Section 5.1 hereof). By way of
example, if under Section 5.1 there are an aggregate of six Late Days, then
the Target Date shall mean August 6, 1994.
"Tax" or "Taxes" shall mean any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, withholding, excise,
severance, stamp, occupation, premium, windfall profits, environmental
(including taxes under Tax Code Section 59A), customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax or taxes of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Code" shall mean the Internal Revenue Code of 1986, as amended.
"Tax Return" shall mean any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Tax Sharing Agreement" shall have the meaning set forth in Section
2.3(b) of this Agreement.
"Termination" when used in reference to or in respect of the
Bankruptcy Litigation, the Class Action Litigation, or the Homeowners
Litigation, shall mean (i) an order, ruling or judgment of a court or a
binding award of an arbitrator that is no longer subject to review,
reversal, modification or amendment by appeal or writ of CERTIORARI, which
ends such Litigation against SCBC, the Association and the Retained
Association Subsidiaries, (ii) any compromise or settlement of such
Litigation that, upon payment of all Liabilities against SCBC, the
Association and/or the Retained Association Subsidiaries created thereby,
will be completely implemented and consummated and that, if necessary, has
been approved by an order, ruling or judgment of the applicable court that
is no longer subject to review, reversal, modification or amendment by
appeal or writ of CERTIORARI, or (iii) insofar as such Litigation is
defined to include claims with respect to which an action has not been
commenced and for which an action is not commenced in the future, either
(A) a written opinion (containing only such limitations as are mutually
acceptable to SCBC and the Seller) from counsel mutually acceptable to SCBC
and the Seller that all such claims are barred by the applicable statute of
limitations, or (B) the date which is the sixth (6th) anniversary of the
Closing Date.
"Third Party Claim" shall mean any claim, action or proceeding made or
brought by any Person that is not a party hereto or an Affiliate of a party
hereto.
"Timeshare and Lot Reserves" shall have the meaning set forth in the
definition of the term "Net Book Value."
Other terms used herein are defined elsewhere in this Agreement.
11
<PAGE>
ARTICLE II
PURCHASE AND SALE OF SHARES; MERGER OF THE ASSOCIATION
SECTION 2.1. ACQUISITION OF SHARES
(a) At the Closing, upon satisfaction of the conditions contained in
Article VI hereof, (i) the Seller shall sell and deliver the Shares to
SCBC, and (ii) in exchange therefor, SCBC shall pay the Purchase Price, as
defined and calculated in accordance with Section 2.1(b) below, to the
Seller as follows: the Deferred Payment Amount shall be paid by SCBC at
the times set forth in, upon satisfaction of the conditions contained in,
and in accordance with the other terms of Section 2.4 hereof, and an amount
(the "Cash Payment Amount") equal to the excess of the Purchase Price over
the Deferred Payment Amount shall be paid to the Seller by SCBC in
immediately available funds; provided that, the Seller may elect pursuant
to Section 2.2(d) hereof to cause SCBC to pay all or a portion of the Cash
Payment Amount to the Association or a Retained Association Subsidiary as
an offset to, and a credit against, the Seller's Payment. The Purchase
Price shall constitute the entire purchase price to be paid by SCBC for the
Shares.
(b) The "Purchase Price" for the Shares means Forty Million Three
Hundred Fifty Thousand Dollars ($40,350,000), plus the excess, if any, of
the Earnings Adjustment, as defined and calculated in accordance with
Section 2.1(c) below, over the aggregate of payments for Taxes on taxable
income earned during the Interim Period made by the Association during the
Interim Period in accordance with the Tax Sharing Agreement or by the
Association or SCBC pursuant to the provisions of Section 2.3(a) hereof,
regardless of whether such payments are cash payments made by the
Association to the Seller or credits (by way of provisions, allocations or
otherwise) made by the Association to the Timeshare and Lot Reserves. The
Seller understands that the Earnings Adjustment could be a negative number
which, under the foregoing formula, would have the effect of reducing the
Purchase Price by the absolute value of such negative number.
(c) The "Earnings Adjustment" means and shall be the amount
determined either under clause (i), (ii) or (iii) below, whichever applies:
(i) If the Interim Period Earnings are an amount less than
$2,625,000, then the Earnings Adjustment shall be an amount (which may be a
negative number) equal to (a) the Capped Interim Period Earnings Amount,
minus (B) the amount of the Effects of Extraordinary Items.
(ii) If the Interim Period Earnings minus the amount of the
Effects of Extraordinary Items are an amount equal to or more than
$2,625,000, then the Earnings Adjustment shall be the Capped Interim Period
Earnings Amount.
(iii) If (A) Interim Period Earnings are an amount more than
$2,625,000, and (B) Interim Period Earnings minus the amount of the Effects
of Extraordinary Items are an amount (the "Clause (iii) Amount") that is
less than $2,625,000, then the Earnings Adjustment shall be an amount equal
to the Capped Interim Period Earnings Amount, minus an amount equal to (C)
$2,625,000 minus (D) the Clause (iii) Amount.
(d) The amount of the Interim Period Earnings, the Post-Target Date
Interim Period Earnings,
12
<PAGE>
if necessary, the Effects of Extraordinary Items and the Earnings Adjustment
shall be estimated in the Ordinary Course of Business of the Association as of
the Effective Time, and such estimated amount shall be used in calculating the
Purchase Price. As soon as reasonably practicable following the Effective
Time, the actual amount of the Interim Period Earnings, the Post-Target Date
Interim Period Earnings, if necessary, the Effects of Extraordinary Items and
the Earnings Adjustment shall be determined by the Seller and SCBC, and any
difference between the Purchase Price calculated using the actual amount of
the Interim Period Earnings, the Post-Target Date Interim Period Earnings, if
necessary, the Effects of Extraordinary Items and the Earnings Adjustment
and the Purchase Price calculated at the Closing by using the estimated
amount of the Interim Period Earnings, the Post-Target Date Interim Period
Earnings, if necessary, the Effects of Extraordinary Items and the Earnings
Adjustment shall be paid by the appropriate party hereto within ten (10)
days after such determination.
SECTION 2.2 PURCHASE OF EXCLUDED ASSETS.
(a) At the Closing and immediately prior to the Effective Time, upon
satisfaction of the conditions contained in Article VI hereof other than
Section 6.3(m), the Seller shall purchase from the Association or the
applicable Retained Association Subsidiary, and the Association or the
applicable Retained Association Subsidiary shall transfer and assign to the
Seller, all of the Excluded Assets and, in exchange therefor, the Seller
shall pay an amount equal to the Seller's Payment, as defined and
calculated in accordance with Section 2.2(b) below, to the Association or
the applicable Retained Association Subsidiary in immediately available
funds and shall assume the Excluded Liabilities. The Seller's Payment and
the assumption by the Seller of the Excluded Liabilities shall constitute
the entire purchase price to be paid by Seller for the Excluded Assets.
(b) The "Seller's Payment" means the sum of the amounts determined in
clauses (i), (ii) and (iii) below:
(i) the Net Book Value of the Excluded Loans (A) minus all New
Reserves in respect of Excluded Loans and (B) minus all Cash and Cash
Equivalents received by the Association in respect of Excluded Loans, but
only to the extent such Cash and Cash Equivalents received did not increase
Interim Period Earnings;
(ii) the Net Book Value of the Excluded Real Estate and JV
Interests and, to the extent they are not included within the term
"Excluded Real Estate and JV Interests," the Association Subsidiaries other
than the Retained Association Subsidiaries (A) minus all New Reserves in
respect of Excluded Real Estate and JV Interests and (B) minus all Cash and
Cash Equivalents received by the Association in respect of Excluded Real
Estate and JV Interests and, to the extent they are not included within the
term "Excluded Real Estate and JV Interests," the Association Subsidiaries
other than the Retained Association Subsidiaries, but only to the extent
such Cash and Cash Equivalents received did not increase Interim Period
Earnings; and
(iii) the Net Book Value of the Repurchased Timeshare and Lot
Assets, (A) minus all New Reserves in respect of Repurchased Timeshare and
Lot Assets, including all New Reserves attributable to Timeshare and Lot
Reserves, and (B) minus all Cash and Cash Equivalents received by the
Association in respect of Repurchased Timeshare and Lot Assets, but only to
the extent such Cash and Cash Equivalents
13
<PAGE>
received did not increase Interim Period Earnings.
(c) Notwithstanding the definitions of the terms "Excluded Assets"
and "Proceeds" and the provisions of Section 2.2(a) above, SCBC shall have
the right to identify Excluded Loans and Excluded Real Estate and JV
Interests, and Proceeds therefrom (but not Repurchased Timeshare and Lot
Assets and Proceeds therefrom), to be retained by the Association or a
Retained Association Subsidiary, which right shall be subject to the terms
and conditions of this Section 2.2(c). SCBC shall identify to Seller all
Excluded Loans and Excluded Real Estate and JV Interests, and Proceeds
therefrom, to be retained by the Association or a Retained Association
Subsidiary by delivery of written notice on or before the date five (5)
days before the Closing Date. Any Excluded Asset or Proceeds therefrom so
identified by SCBC shall continue to be considered Excluded Assets for all
other purposes of this Agreement other than for Seller's obligation to
acquire such assets as Excluded Assets under Section 2.2(a) hereof.
(d) Notwithstanding the provisions of Sections 2.1(a) and 2.2(a)
hereof, the Seller shall have the right to elect to cause SCBC to pay all
or a portion of the Cash Payment Amount to the Association and/or any
Retained Association Subsidiary from which Excluded Assets are to be
transferred, as an offset to, and a credit against, the Seller's Payment
(the portion of the Cash Payment Amount to be paid to any Retained
Association Subsidiary shall not exceed the portion of the Seller's Payment
otherwise to be paid to such Retained Association Subsidiary), and the
Seller shall have the option to acquire the stock of Carolina Financial
Services Corporation, a Retained Association Subsidiary ("CFSC"), and any
and all loans from the Association or any Retained Association Subsidiary
(other than CFSC) to CFSC at an aggregate purchase price equal to the sum
of the Net Book Value of such shares and the Net Book Value of all such
loans at the Closing Date, in lieu of acquiring from CFSC the Excluded
Assets owned by CFSC. For purposes of the foregoing sentence, the
definition of "Net Book Value" shall be deemed to refer to the Closing Date
rather than to September 30, 1993. The Seller shall exercise the right and
the option described in the foregoing provisions of this Section 2.2(d) by
delivering written notice to SCBC on or before the date five (5) days
before the Closing Date and by causing the Association and CFSC to transfer
all of the assets of CFSC that are not Excluded Assets to the Association
immediately prior to the Closing.
SECTION 2.3. TAX SHARING LIABILITY.
(a) At the Closing, upon satisfaction of the conditions in Article VI
hereof, other than Section 6.3(m), and immediately prior to the Effective
Time, the Association shall pay to the Seller the Tax Sharing Liability.
In the event that the Association is not permitted to make such payment to
the Seller by the OTS, SCBC shall make such payment on behalf of the
Association. The parties hereto do not intend any such payment of the
amount of the Tax Sharing Liability to constitute a portion of the Purchase
Price.
(b) The "Tax Sharing Liability" shall mean any unpaid amount for
Taxes the Association is obligated to advance to the Seller for taxable
income earned during the Interim Period pursuant to Sections 4 and 6 of the
Tax Sharing Agreement, dated August 17, 1990, among the Seller and certain
of its subsidiaries, including the Association and certain of the
Association Subsidiaries, as amended November 14, 1990 and September 14,
1992 (the "Tax Sharing Agreement"), excluding any Tax Liabilities arising
from or in connection with the Section 338(g) Election or the Section
338(h) Election described in Section 5.3, and less the amount, if any, of
prior overpayments as reflected on the Association's books and records.
14
<PAGE>
(c) The amount of the Tax Sharing Liability shall be estimated in the
Ordinary Course of Business of the Association as of the Closing Date. As
soon as reasonably practicable following the Effective Time, the actual
amount of the Tax Sharing Liability as of the Closing Date shall be
determined by the Seller and SCBC and any difference between the Tax
Sharing Liability as estimated and the actual Tax Sharing Liability shall
be paid by the Seller to the Association or by the Association to the
Seller, as the case may be, within ten (10) days after such determination.
(d) Notwithstanding the provisions of Section 2.2(a) and 2.3(a)
hereof, the Seller shall have the right to cause all or a portion of the
amount of the Tax Sharing Liability, as estimated as of the Closing Date,
to be retained by the Association or paid to any Retained Association
Subsidiary from which Excluded Assets are to be transferred as an offset
to, and a credit against, the Seller's Payment. The Seller shall exercise
this right by delivering written notice to SCBC and the Association on or
before the date five (5) days prior to the Closing Date.
SECTION 2.4. DEFERRED PAYMENT AMOUNT - INTEREST ACCRUAL AND PAYMENTS.
(a) In order to induce SCBC to agree to consummate the Acquisition
before Termination of the Litigation, Seller and SCBC agree to defer
payment of the Deferred Payment Amount until after Closing and to pay the
Deferred Payment Amount in accordance with, as and when provided in this
Section 2.4. Except as provided in this Section 2.4, SCBC shall have no
right or authority or claim to the Deferred Payment Amount and shall have
no right or authority to set off against payment(s) of the Deferred Payment
Amount any amounts due and owing by Seller to SCBC, the Association or the
Retained Association Subsidiaries in respect of matters other than the
Litigation or to delay the payment(s) of the Deferred Payment Amount
pending the final resolution of any such other matters. The unpaid part of
the Deferred Payment Amount shall accrue interest at an adjusting annual
rate equal to the annual rate of interest paid by Security Bank and Trust
Company, an SCBC Subsidiary, on certificates of deposit having principal of
$100,000 or more and a term of five (5) years (the "CD Rate"), with such
rate being adjusted and re-set at such times, and in tandem with, changes
in the CD Rate (the "Interest Rate"), until the earlier of the time (i) the
Deferred Payment Amount has been paid in full by SCBC in accordance with,
as and when provided in Section 2.4(b) or (ii) cash in an amount equal to
the unpaid balance of the Deferred Payment Amount shall have been delivered
to the Escrow Agent as provided in Section 2.4(d). Accrued interest shall
be added to the balance of the Deferred Payment Amount at the end of each
calendar month and shall thereafter be a part of the Deferred Payment
Amount.
(b) As soon as practicable but in no event later than 15 days after
the Termination of the relevant Litigation (or at Closing in the event
Termination of the relevant litigation has occurred at least 15 days prior
to the Closing Date), SCBC shall make one or more installment payments (the
"Deferred Payments") of the Deferred Payment Amount as follows:
(i) After Termination of the Class Action Litigation, SCBC shall
pay to the Seller or, to the extent the Seller has not made adequate
provision for the full satisfaction of such Liability by means satisfactory
to SCBC, to such Persons other than the Seller as necessary to satisfy and
pay in full any Liability of SCBC, the Association and the Retained
Association Subsidiaries created by such Termination, an amount equal to
Percentage A on Appendix 1 times the initial Deferred Payment Amount, plus
all or the applicable portion of the amounts retained by SCBC pursuant to
the provisions of clauses (ii) and (v) of this Section 2.4(b) plus interest
accrued at the Interest Rate on such amounts from the Closing
15
<PAGE>
Date.
(ii) After Termination of the Bankruptcy Litigation, SCBC shall
pay to the Seller or, to the extent the Seller has not made adequate
provision for the full satisfaction of such Liability by means satisfactory
to SCBC, to such Persons other than the Seller as necessary to satisfy and
pay in full any Liability of SCBC, the Association and the Retained
Association Subsidiaries created by such Termination, an amount equal to
(A) if the Class Action Litigation previously has been Terminated,
Percentage B on Appendix 1 times the initial Deferred Payment Amount plus
interest accrued at the Interest Rate on such amount from the Closing Date,
or (B) if the Class Action Litigation has not been Terminated, Percentage C
on Appendix 1 times the initial Deferred Payment Amount plus interest
accrued at the Interest Rate on such amount from the Closing Date.
(iii) After Termination of the Homeowners' Litigation, SCBC
shall pay to the Seller or, to the extent the Seller has not made adequate
provision for the full satisfaction of such Liability by means satisfactory
to SCBC, to such Persons other than Seller as necessary to satisfy and pay
in full any Liability of SCBC, the Association and the Retained Association
Subsidiaries created by such Termination, an amount equal to Percentage D
on Appendix 1 times the initial Deferred Payment Amount plus interest
accrued at the Interest Rate on such amount from the Closing Date.
(iv) After Termination of all Litigation, SCBC shall pay to the
Seller the remaining balance of the Deferred Payment Amount provided that
all Liabilities of SCBC, the Association and the Retained Association
Subsidiaries created by all Terminations of all Litigation have been fully
satisfied and paid.
(v) Notwithstanding the foregoing provisions of this Section
2.4(b), SCBC may withhold any Deferred Payment which it would otherwise be
obligated to pay under the foregoing provisions of this Section 2.4(b) if
and only if SCBC in its good faith and reasonable judgment, based on
information made available to the Seller (by way of example, and not
limitation, assertions of new claims or new theories of liability in the
Class Action Litigation, information indicating inaccuracies in the
estimates of potential Liability from Litigation contained in letters of
the Seller's independent auditors provided to SCBC in advance of the
execution of this Agreement, and assertions of fraudulent conveyance claims
in the Bankruptcy Litigation) and supported by a written opinion of legal
counsel selected by SCBC and reasonably acceptable to the Seller,
determines that for the sole purpose of securing Seller's obligation to
indemnify SCBC, the Association and the Retained Association Subsidiaries
for Indemnifiable Losses suffered by reason of the Litigation, the balance
of the Deferred Payment Amount that would remain after such payment would
not be sufficient to fully pay and satisfy the potential Liabilities of
SCBC, the Association and the Retained Association Subsidiaries from
Litigation for which there has not been a Termination.
(c) The Seller shall grant to SCBC, as collateral agent for its
benefit and the benefit of the Association and each of the Retained
Association Subsidiaries (the "Collateral Agent"), perfected first
16
<PAGE>
liens and security interests on and in the Deferred Payment Amount and interest
accrued thereon ("Deferred Payment Security Interests"), which Deferred
Payment Security Interests shall be released in proportion to and to the
same extent as the Deferred Payment Amount is paid to the Seller, or to
other Persons, as provided in Section 2.4(b).
(d) Notwithstanding the foregoing provisions of this Section 2.4,
upon the first to occur of (A) SCBC's failure to make a Deferred Payment in
accordance with, as and when provided in Section 2.4(b) hereof, which
failure is determined to have been in bad faith as provided in Section
2.4(e) hereof, (B) a "change-in-control" of SCBC (which term shall mean (i)
the adoption of a plan of merger or share exchange by SCBC pursuant to
which the holders of SCBC's voting capital stock as of the Closing Date as
a group would receive less than 50% of the voting capital stock of the
surviving corporation, (ii) the acquisition of more than 25% of SCBC's
outstanding voting capital stock by any Person pursuant to a transaction or
series of transactions not approved by a formal resolution adopted by a
majority of the members of SCBC's Board of Directors in office prior to
such Person's acquisition of more than 10% of such voting capital stock and
continuing in office at the time of such vote, or (iii) the adoption of an
agreement by SCBC pursuant to which it would sell to a Person (other than
an SCBC Subsidiary) the capital stock or assets of one or more SCBC
Subsidiaries which, in the aggregate, constitute more than 40% of SCBC's
then existing consolidated total assets), and (C) a decline in the ratio
(expressed as a percentage) of consolidated tangible capital to
consolidated total assets of SCBC to less than three and one-half percent
(3.5%), SCBC shall deposit with Wachovia Bank of North Carolina, N.A. or
any other bank acceptable to SCBC and the Seller (the "Escrow Agent") cash
in an amount equal to the unpaid balance of the Deferred Payment Amount
plus interest accrued at the Interest Rate on such amount from the end of
the prior calendar month, which cash shall be held, invested and
administered by the Escrow Agent pursuant to an escrow agreement the form
and substance of which shall be mutually acceptable to the Seller, SCBC and
the Escrow Agent.
(e) If SCBC fails to make a Deferred Payment in accordance with, as
and when provided in either Section 2.4(b) or Section 2.4(d) hereof (the
"Defaulted Deferred Payment"), and such failure is determined to have been
in bad faith (as hereafter defined), SCBC shall pay and the Seller shall be
entitled to receive, in addition to the Defaulted Deferred Payment and
interest accrued thereon, an amount (the "Penalty") equal to twenty percent
(20%) of the sum of the amount of the Defaulted Deferred Payment plus
interest accrued thereon at the Interest Rate from the end of the prior
calendar month. The term "bad faith" shall mean the failure to make a
Deferred Payment for any reason other than (i) SCBC's honest, good faith
and reasonable belief that Termination of the relevant Litigation has not
occurred, or (ii) SCBC's honest, good faith and reasonable determination
pursuant to Section 2.4(b)(v) that it may withhold the Deferred Payment.
SECTION 2.5. MERGER OF THE ASSOCIATION
It is anticipated that SCBC will, as soon as practicable following the
Acquisition and after certain necessary interim steps, cause the
Association to be merged with and into an SCBC Subsidiary (the "Merger").
All references in this Agreement to the Association pertaining to any time
or event occurring at or after the effectiveness of the Merger shall be
deemed to be references to the SCBC Subsidiary which is the successor of
the Association resulting from the Merger.
17
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller represents and warrants to SCBC as follows:
SECTION 3.1. ORGANIZATION, GOOD STANDING AND AUTHORITY OF SELLER
The Seller is duly organized, validly existing, and in good standing
as a general business corporation under the laws of the State of Delaware,
and has the powers and privileges of a general business corporation,
including, without limitation, full power to carry on its business. The
Seller is duly qualified to do business in the States of Arkansas and North
Carolina.
SECTION 3.2. WARRANTY OF TITLE TO THE SHARES
The Seller holds of record and beneficially owns, and has good and
marketable title to, the Shares and, except as Previously Disclosed, the
Shares are not subject to any Restrictions on Transfer, Taxes, Security
Interest, or Rights. Except as Previously Disclosed, the Seller is not a
party to any voting trust, shareholders' agreement, proxy, voting trust, or
other agreement or understanding with respect to the Shares or the voting
rights associated therewith.
SECTION 3.3. CAPITAL STRUCTURE OF THE ASSOCIATION
The authorized capital stock of the Association consists of 20,000,000
shares of capital stock, of which 12,500,000 shares are common stock, par
value $.01 per share ("Association Common Stock"), and of which 7,500,000
shares are preferred stock, par value $.01 per share (the "Association
Preferred Stock"). As of the date hereof, there were 200,000 shares of the
Association Common Stock issued and outstanding, and the Shares constitute
all of such outstanding Association Common Stock. All outstanding shares
of the Association Common Stock have been duly issued, are validly
outstanding, fully paid and nonassessable. Except as Previously Disclosed,
there are no Rights authorized, issued or outstanding with respect to the
capital stock of the Association. None of the outstanding shares of the
Association's capital stock has been issued in violation of the preemptive
rights of any person. There are no shares of Association Preferred Stock
outstanding.
SECTION 3.4. ORGANIZATION, STANDING AND AUTHORITY
The Association is a federal savings and loan association duly
organized, validly existing and in good standing under the laws of the
United States with full corporate power and authority to carry on its
business as now conducted and is duly qualified to do business in the
states of the United States and foreign jurisdictions where its ownership
or leasing of property or the conduct of its business requires such
qualification. The officers and directors of the Association have been
accurately and completely Previously Disclosed to SCBC.
SECTION 3.5. OWNERSHIP OF ASSOCIATION SUBSIDIARIES
The Association does not own, directly or indirectly, any outstanding
capital stock or other voting securities or ownership interests of any
corporation, commercial bank, industrial bank, savings association, savings
bank, partnership, Joint Venture, limited liability company, business
trust, or other organization, except for the Association Subsidiaries and
except as Previously Disclosed. The outstanding
18
<PAGE>
shares of capital stock or other voting securities or ownership interests of
the Retained Association Subsidiaries are validly issued and outstanding,
fully paid and nonassessable, and all such shares are directly or indirectly
owned by the Association free and clear of all Restrictions on Transfer,
Taxes, and Security Interests. No Rights are authorized, issued or
outstanding with respect to the capital stock or other voting securities or
ownership interests of any of the Retained Association Subsidiaries and there
are no voting trusts, shareholders' agreements, proxies or other agreements or
understandings with respect thereto.
SECTION 3.6. ORGANIZATION, STANDING AND AUTHORITY OF THE ASSOCIATION
SUBSIDIARIES
Each of the Retained Association Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
State of North Carolina. Each of the Retained Association Subsidiaries (i)
has full power and authority to carry on its business as now conducted,
(ii) is duly qualified to do business in the states of the United States
and foreign jurisdictions where its ownership or leasing of property or the
conduct of its business requires such qualification where failure to so
qualify would constitute a Material Adverse Event with respect to the
Association and the Retained Association Subsidiaries, and (iii) is not
presently engaged in any activities that have not been Previously
Disclosed. The officers and directors of each Association Subsidiary have
been accurately and completely Previously Disclosed to SCBC.
SECTION 3.7. AUTHORIZED AND EFFECTIVE AGREEMENT
(a) Subject to the approval of the Acquisition by the Seller's
shareholders as set forth in Section 6.1(a), the Seller has all requisite
corporate power and authority to enter into, to deliver, and (subject to
receipt of all required governmental approvals as set forth in Section 5.1)
to perform all of its obligations under this Agreement. The execution and
delivery of this Agreement have been, and upon the approval of the
Acquisition by the Seller's shareholders as set forth in Section 6.1(a),
the consummation of the transactions contemplated hereby, other than the
Merger, will have been, duly and validly authorized by all necessary
corporate action in respect thereof on the part of the Seller. This
Agreement constitutes a legal, valid and binding obligation of the Seller,
which is enforceable against the Seller in accordance with its terms,
subject as to enforceability, to bankruptcy, insolvency and other laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(b) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated hereby, nor compliance by the
Seller with any of the provisions hereof shall (i) conflict with or result
in a breach of any provision of the certificate of incorporation (or, as
applicable, the charter) or bylaws of the Seller, the Association or any
Retained Association Subsidiary; (ii) except as Previously Disclosed,
conflict with, or constitute or result in a breach of, any term, condition
or provision of, or constitute a default under, or give rise to any right
of termination, cancellation or acceleration with respect to, or result in
the creation or imposition of any Security Interest upon any material
property or asset of the Seller, the Association or any Retained
Association Subsidiary pursuant to, any note, bond, mortgage, indenture,
lease, license, agreement, instrument, or other arrangement or obligation
to which the Seller, the Association or any Retained Association Subsidiary
is a party or by which it is bound; or (iii) except as Previously Disclosed
and subject to receipt of all required governmental approvals as set forth
in Section 5.1, violate any order, ruling, decree, charge, writ,
injunction, regulatory agreement or memorandum of understanding,
constitution, statute, rule or regulation applicable to the Seller, the
Association or any Association Subsidiary.
19
<PAGE>
SECTION 3.8. FINANCIAL STATEMENTS; ORGANIZATIONAL DOCUMENTS; MINUTE BOOKS
(a) Except as Previously Disclosed, the Association Financial
Statements present fairly or will present fairly, as the case may be, the
consolidated balance sheets of the Association and the Association
Subsidiaries as of the dates indicated and the consolidated statements of
operations, stockholder's equity and cash flows for the periods then ended
in conformity with GAAP, are correct and complete, and are consistent with
the books and records of such entities; provided, however, that the
Association Financial Statements for the three-month period ended September
30, 1993 and for any interim period subsequent to the year-ended December
31, 1993 will be subject to normal year-end adjustments (which adjustments,
based on presently known facts, will not be material individually or in the
aggregate).
(b) The Seller or the Association previously has delivered to SCBC
true, complete and correct copies of the certificates of incorporation (or,
as applicable, the charters) and bylaws, and previously has provided to
SCBC access to all minute books, stock certificate books and stock transfer
records, of the Association and the Retained Association Subsidiaries. The
minute books of each of the Association and the Retained Association
Subsidiaries contain accurate records of all corporate actions of its
shareholder and Board of Directors (including committees of its Board of
Directors). SCBC shall receive true, complete and correct copies of any
additions, deletions, or modifications to any of the items described in
this Section 3.8(b) made after February 25, 1994.
SECTION 3.9. OPERATIONS SINCE SEPTEMBER 30, 1993
(a) Except as Previously Disclosed, from September 30, 1993 to the
date of this Agreement, there has not been any change in the business,
financial condition, operations or results of operations of the Association
and the Association Subsidiaries taken as a consolidated whole that would
constitute a Material Adverse Event with respect to the Association and the
Retained Association Subsidiaries.
(b) To the Knowledge of the Seller, from September 30, 1993 to the
date of this Agreement: (i) neither the Association nor any Association
Subsidiary has sold, leased, transferred, or assigned any of its assets,
tangible or intangible, other than for a fair consideration in the Ordinary
Course of Business; (ii) neither the Association nor, except as Previously
Disclosed, any Association Subsidiary has entered into any agreement,
contract, lease, license, loan, loan commitment, or deposit
collateralization agreement (or a series of related agreements, contracts,
lease, licenses, loans, loan commitments, or deposit collateralization
agreements) outside the Ordinary Course of Business; (iii) no party
(including the Association and the Association Subsidiaries) has
accelerated, terminated, modified or cancelled any agreement, contract,
lease, license, loan, loan commitment, or deposit collateralization
agreement (or series of related agreements, contracts, leases, licenses,
loans, loan commitments, or deposit collateralization agreements) involving
more than Twenty-Five Thousand Dollars ($25,000) to which the Association
or any of the Retained Association Subsidiaries is a party or by which any
of them is bound outside the Ordinary Course of Business; (iv) neither the
Association nor any Retained Association Subsidiary has imposed, or
suffered the imposition of, any Security Interest upon any of its assets,
tangible or intangible, except Security Interests granted in connection
with the purchase of equipment or supplies in the Ordinary Course of
Business; (v) neither the Association nor any Retained Association
Subsidiary has made any capital expenditure (or series of related capital
expenditures) involving more than Fifty Thousand Dollars ($50,000) outside
the Ordinary Course of Business; (vi) except as Previously Disclosed,
neither the Association nor any Retained Association Subsidiary has made
any capital investment in, any loan (other than an owner-occupied residential
mortgage loan and/or construction loan, in each case having an initial
principal balance of less than $300,000, made to the homeowner and made
20
<PAGE>
in the Ordinary Course of Business) to, or any acquisition of the
investments or loans (other than U.S. government securities and investment
grade corporate securities), of any Person, either involving more than
Fifty Thousand Dollars ($50,000) or outside the Ordinary Course of
Business; (vii) neither the Association nor any Retained Association
Subsidiary has issued any note, bond, or other debt security or created,
incurred, assumed, or guaranteed any indebtedness for borrowed money or
capitalized lease obligation except in the Ordinary Course of Business;
(viii) neither the Association nor any Association Subsidiary has delayed
or postponed the payment of accounts payable and other Liabilities outside
the Ordinary Course of Business; (ix) except as Previously Disclosed,
neither the Association nor any Retained Association Subsidiary has
cancelled, compromised, waived, or released any right or claim it may have
against any Person (or series of related rights and claims) either
involving more than Twenty-Five Thousand Dollars ($25,000) or outside the
Ordinary Course of Business; (x) neither the Association nor any Retained
Association Subsidiary has granted any license or sublicense of any rights
under or with respect to any Intellectual Property; (xi) there has been no
change made or authorized in the certificate of incorporation (or, as
applicable, the charter) or bylaws of the Association or any Retained
Association Subsidiary; (xii) neither the Association nor any Retained
Association Subsidiary has issued, sold, or otherwise disposed of any of
its capital stock, or granted any Rights with respect to its capital stock,
or agreed to, or allowed the imposition of, any Restriction or Transfer
with respect to its capital stock; (xiii) neither the Association nor any
Retained Association Subsidiary has declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock
(whether in cash or in kind) or redeemed, purchased, or otherwise acquired
any of its capital stock; (xiv) neither the Association nor any Retained
Association Subsidiary has experienced any damage, destruction, or loss
(whether or not covered by insurance) to its property in excess of Fifty
Thousand Dollars ($50,000) per occurrence; (xv) except as Previously
Disclosed, neither the Association nor any Association Subsidiary has made
any loan to, or entered into any other transaction with, any of its
directors, officers, employees or other Affiliates; (xvi) neither the
Association nor any Association Subsidiary has entered into any collective
bargaining agreement, written or oral, or modified the terms of any
existing such contract or agreement; (xvii) neither the Association nor any
Retained Association Subsidiary has granted any increase in the
compensation of any of its directors, officers, employees, or independent
contractors outside the Ordinary Course of Business; (xviii) except as
Previously Disclosed, neither the Association nor any Association
Subsidiary has adopted, amended, modified or terminated any bonus, profit-
sharing, incentive, severance, or other plan, contract, or commitment for
the benefit of any of its directors, officers, and employees (or taken any
such action with respect to any other Employee Benefit Plan); (xix) neither
the Association nor any Retained Association Subsidiary has entered into
any employment contract or consulting agreement, nor has the Association or
any Retained Association Subsidiary made any material change in employment
or engagement terms for any of its directors, officers, employees or
independent contractors outside the Ordinary Course of Business; (xx)
neither the Association nor any Retained Association Subsidiary has made or
pledged to make any charitable or other capital contribution outside the
Ordinary Course of Business; (xxi) there has not been any other material
occurrence, event, incident, action, failure to act, or transaction outside
the Ordinary Course of Business involving the Association or any
Association Subsidiary; and (xxii) neither the Association nor any
Association Subsidiary or any Retained Association Subsidiary, as the case
may be, has committed to do, or to permit the occurrence of, any of the
foregoing.
SECTION 3.10. ABSENCE OF UNDISCLOSED LIABILITIES
To the Knowledge of the Seller, except as Previously Disclosed,
neither the Association nor any Association Subsidiary has any Liability
the payment, accrual or liquidation of which would constitute a Material
Adverse Event with respect to the Association and the Retained Association
Subsidiaries or
21
<PAGE>
that, when combined with all similar Liabilities, would constitute a Material
Adverse Event with respect to the Association and the Retained Association
Subsidiaries.
SECTION 3.11. PROPERTIES
(a) Except as Previously Disclosed, the Association and the
Association Subsidiaries have good and marketable title to, or leasehold
interests in, all of the properties and assets, real and personal,
reflected on the consolidated balance sheet included in the Association
Financial Statements as of September 30, 1993 or acquired after such date,
free and clear of all Security Interests, except (i) pledges to secure
deposits and other liens incurred in the Ordinary Course of Business of the
Association, (ii) such imperfections of title, easements, restrictions,
covenants, and encumbrances, if any, as are not material in character,
amount or extent and do not affect the current use, occupancy, or value, or
the marketability of title thereto, and (iii) dispositions and encumbrances
for adequate consideration in the Ordinary Course of Business of the
Association. Except as Previously Disclosed, each Significant Lease
pursuant to which the Association or any Retained Association Subsidiary,
as lessee, leases real or personal property, are, with respect to the
Association or such Retained Association Subsidiary, valid and enforceable
in accordance with their respective terms.
(b) With respect to each parcel of real estate owned by the
Association or an Association Subsidiary that is not an Excluded Asset:
(i) there are no pending or, to the Knowledge of the Seller, threatened
condemnation proceedings, lawsuits, or administrative actions relating to
such parcel or other matters affecting materially and adversely the current
use, occupancy, or value thereof; (ii) to the Knowledge of the Seller, such
parcel and all improvements thereon have received all approvals of
governmental authorities (including all material licenses and permits)
required in connection with the ownership or operation thereof and has been
operated and maintained in accordance with applicable laws, rules, and
regulations; (iii) except as Previously Disclosed, there are no leases,
subleases, licenses, concessions, or other agreements, written or oral,
granting to any party or parties the right of use or occupancy of any
portion of such parcel; (iv) there are no outstanding options or rights of
first refusal to purchase such parcel, or any portion thereof or interest
therein; (v) to the Knowledge of Seller, no parties (other than the
Association or one of the Association Subsidiaries) are in possession of
such parcel, other than tenants under any Previously Disclosed leases who
are in possession of space to which they are entitled; (vi) such parcel
abuts on and has direct vehicular access to a public road, or has access to
a public road via a permanent, irrevocable, appurtenant easement
benefitting such parcel, of real property, and access to such parcel is
provided by paved public right-of-way with adequate curb cuts available;
and (vii) other than as Previously Disclosed, all real property taxes with
respect to such parcel which are currently due and payable with respect to
such parcel have been paid in full or will be paid prior to delinquency or
are being properly contested and are fully reserved in the Association
Financial Statements.
SECTION 3.12. ENVIRONMENTAL MATTERS
(a) To the Knowledge of the Seller, except as Previously Disclosed,
neither the Association or any Association Subsidiary nor any property
owned or operated by the Association or any Association Subsidiary has been
or is in violation of, nor does the Association or any Association
Subsidiary have any Liabilities under, any Environmental Law (as defined in
Section 3.12(d) hereof). There are no actions, suits or proceedings,
demands, claims, notices, or investigations (including, without limitation,
notices, demand letters or requests for information from any Environmental
Agency (as defined in Section 3.12 (f) hereof)), instituted, pending, or,
to the Seller's Knowledge, threatened, relating to any Liability
22
<PAGE>
under any Environmental Law of the Association or any Association Subsidiary
or respecting any property owned or operated by Association or any Association
Subsidiary.
(b) To the Knowledge of the Seller, except as Previously Disclosed,
(i) no Hazardous Materials (as defined in Section 3.12(e) hereof) have been
generated, treated, stored or disposed of at, or transported to or from,
any properties owned or operated by the Association or any Association
Subsidiary at any time, except in compliance with applicable Environmental
Laws, (ii) no friable asbestos containing material is in use, or is or has
been stored or disposed of, on or upon any properties owned or operated by
the Association or any Association Subsidiary, (iii) no polychlorinated
biphenyls ("PCBs") are located on or in any properties owned or operated by
the Association or any Association Subsidiary in any form or device,
including, without limitation, in the form of electrical transformers,
fluorescent light fixtures with ballasts, or cooling oils, except in
compliance with applicable Environmental Laws, and (iv) no underground
storage tanks are located on any properties owned or operated by the
Association or any Association Subsidiary or were located on any properties
owned or operated by the Association or any Association Subsidiary and
subsequently removed or filled.
(c) The representations in Section 3.12(a) and (b) above shall also
apply to any property in which the Association or any Association
Subsidiary obtained a Security Interest, other than owner-occupied, single-
family residences. The representations in Section 3.12(a) and (b) above
and in the preceding sentence shall not apply to the extent that, in the
opinion of the Association's management, the results of such actions,
suits, proceedings, demands, claims, notices or investigations, or the
presence of such Hazardous Materials, substances or items on such property,
is not likely to result in a Material Adverse Event with respect to the
Association and the Retained Association Subsidiaries.
(d) "Environmental Law" means any federal, state, local or foreign
law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction or
agreement with any Environmental Agency relating to (i) the protection,
preservation or restoration of the environment (including, without
limitation, air water vapor, surface water, groundwater, drinking water
supply, surface soil, subsurface soil, plant and animal life or any other
natural resource), and/or (ii) the usage, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release, or disposal of any substance presently listed, defined, designated
or classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(e) "Hazardous Materials" means solid waste (as that term is defined
under the Resource Conservation and Recovery Act, 42 U.S.C.A. Section 6901 ET
SEQ. ("RCRA"), and the regulations adopted pursuant to RCRA), hazardous waste
(as that term is defined under RCRA and the regulations adopted pursuant to
RCRA), hazardous substances (as that term is defined in the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C.A. Section
9601 ET SEQ. ("CERCLA"), and the regulations adopted pursuant to CERCLA), and
other pollutants, including, without limitation, any solid, liquid, gaseous
or thermal irritant or contaminant, such as smoke, vapor, soot, fumes,
acids, alkalis or chemicals.
(f) "Environmental Agency" means the United States Environmental
Protection Agency, the North Carolina Department of Environment, Health and
Natural Resources, any state agency in a state where the Association or any
Association Subsidiary owns or operates properties which is equivalent in
jurisdiction to the North Carolina Department of Environment, Health and
Natural Resources, or any other federal, state or local agency responsible
for regulating or enforcing laws, rules, regulations and
23
<PAGE>
ordinances relating to (i) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface soil, subsurface soil,
plant and animal life or any other natural resource), and/or (ii) the use,
storage, recycling, treatment, generation, transportation, processing,
handling, labeling, production, release, or disposal of any substance
presently listed, defined, designated or classified as hazardous, toxic,
radioactive, or dangerous, or otherwise regulated, whether by type or by
quantity, including any material containing any such substance as a
component.
SECTION 3.13. ALLOWANCE FOR LOAN LOSSES
Except as Previously Disclosed, the allowance for loan losses
respecting Other Assets reflected on the unaudited consolidated balance
sheets at September 30, 1993 and for the interim periods ended subsequent
to December 31, 1993 is or will be adequate in the opinion of the
Association's management in all material respects as of their respective
dates under the requirements of GAAP to provide for losses relating to or
inherent in the Other Assets.
SECTION 3.14. TAX MATTERS
(a) Except as Previously Disclosed, the Association and the
Association Subsidiaries, and each of their predecessors, have timely filed
all Tax Returns required by applicable law to be filed by them by the
Effective Time (taking into account all applicable extensions) and have
paid, or where payment is not required to have been made, have set up an
adequate reserve or accrual for the payment of, all Taxes required to be
paid in respect of the periods covered by such Tax Returns and, as of the
Effective Time, will have paid, or where payment is not required to have
been made, will have set up an adequate reserve or accrual for the payment
of, all Taxes for any subsequent periods ending on or prior to the
Effective Time.
(b) Except as Previously Disclosed, (i) all Tax Returns filed by or
on behalf the Association and the Association Subsidiaries are complete and
accurate in all material respects; (ii) the Seller has no Knowledge of any
extension of time within which to file any Tax Return that is required to
be filed by, or on behalf of, the Association or any Association
Subsidiary; (iii) the Seller has no Knowledge of any claim made by an
authority in a jurisdiction where the Association or any Association
Subsidiary does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction; and (iv) there are no Security Interests on
any of the assets of any of the Association or any Association Subsidiary
that arose in connection with any failure or alleged failure to pay any
Tax.
(c) The Association and each Association Subsidiary has withheld and
paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee and, to the Knowledge of the Seller,
any independent contractor, depositor, other creditor, shareholder, or
other third party.
(d) To the Knowledge of Seller, no taxing authority plans to assess
any additional Taxes against the Association or any Association Subsidiary
for any period for which Tax Returns have been filed. There is no dispute
or claim concerning any Tax Liability of the Association or any Association
Subsidiary (i) claimed or raised by any authority in writing or (ii) of
which the Seller has Knowledge. The Seller previously has made available
to SCBC copies of the Seller's federal consolidated income Tax Returns for
the calendar years 1989, 1990, 1991 and 1992 and the Association previously
has delivered to SCBC all state, local and foreign income Tax Returns filed
by or on behalf of the Association or any
24
<PAGE>
Association Subsidiary for taxable periods ended on or after June 1, 1989.
(e) To the Knowledge of Seller, neither the Seller, the Association
nor any Association Subsidiary has waived statute of limitations in respect
of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency that is or will be a Liability of the Association
or any Association Subsidiary.
(f) Neither the Association nor any Association Subsidiary has filed
a consent under Tax Code Section 341(f) concerning collapsible
corporations. The Seller has no Knowledge that the Association or any
Association Subsidiary has made any payments, is obligated to make any
payments, or is a party to any agreement that under certain circumstances
could obligate it to make any payments that will not be deductible under
Tax Code Section 280G regarding excess parachute payments. The Association
and each Association Subsidiary has disclosed in the Seller's consolidated
federal income Tax Returns all positions taken therein that could give rise
to a substantial understatement of federal income Tax by the Association or
any Association Subsidiary within the meaning of Tax Code Section 6662
(taking into account the existence of substantial authority for such
position).
(g) The unpaid Taxes of the Association and the Association
Subsidiaries (i) did not, as of September 30, 1993, exceed the reserve for
Tax Liability set forth on the face of the consolidated balance sheet as of
September 30, 1993 included in the Association Financial Statements, and
(ii) will not exceed that reserve as adjusted for operations and
transactions through the Effective Time in accordance with the past custom
and practice of the Association and the Association Subsidiaries in filing
their Tax Returns.
SECTION 3.15. EMPLOYEE BENEFIT PLANS
(a) The Seller has Previously Disclosed, and the Association has
provided to SCBC true, correct and complete copies of, all Employee Benefit
Plans maintained for the benefit of employees or former employees of the
Association or any Association Subsidiary, including all Summary Plan
Descriptions, together with (i) all related trust agreements, insurance
contracts and other funding agreements which implement each such Employee
Benefit Plan, (ii) the most recent actuarial and financial reports
prepared with respect to any Employee Pension Benefit Plan, (iii) the most
recent annual reports filed with any government agency with respect to each
Employee Benefit Plan, and (iv) all rulings and determination letters and
any open requests for rulings or letters that pertain to any Employee
Benefit Plan.
(b) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) complies in form and in operation in all
respects with the applicable requirements of ERISA and the Tax Code, except
where the failure to comply would not constitute a Material Adverse Event
with respect to the Association and the Association Subsidiaries.
(c) All required reports and descriptions (including Form 5500 Annual
Reports, Summary Annual Reports, PBGC-1's, and Summary Plan Descriptions)
have been filed or distributed appropriately with respect to each such
Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title I
of ERISA and of Tax Code Section 4980B have been met with respect to each
such Employee Benefit Plan which is an Employee Welfare Benefit Plan.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been paid to each
such Employee Benefit Plan which is an Employee Pension Benefit Plan and all
contributions for any period ending at or before the Effective Time which
25
<PAGE>
are not yet due have been paid to each such Employee Pension Benefit
Plan or accrued by the Association and the Association Subsidiaries in the
Ordinary Course of Business. All premiums or other payments for all
periods ending on or before the Effective Time have been paid with respect
to each such Employee Benefit Plan which is an Employee Welfare Benefit
Plan.
(e) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan and which is intended to be a "qualified plan" meets the
requirements of a "qualified plan" under Tax Code Section 401(a) and,
except as Previously Disclosed, has received, since December 31, 1989, a
favorable determination letter from the Internal Revenue Service.
(f) With respect to each Employee Benefit Plan that the Association
or any of the Association Subsidiaries maintains or ever has maintained or
to which any of them contributes, ever has contributed, or ever has been
required to contribute:
(i) No such Employee Benefit Plan which is an Employee Pension
Benefit Plan (other than any Multiemployer Plan) has been the subject of a
Reportable Event as to which notices would be required to be filed with the
PBGC. No proceeding by the PBGC to terminate any such Employee Pension
Benefit Plan (other than any Multiemployer Plan) has been instituted or, to
the Knowledge of the Seller, threatened.
(ii) There have been no Prohibited Transactions with respect to
any such Employee Benefit Plan. No Fiduciary has any Liability for breach
of fiduciary duty or any other failure to act or comply in connection with
the administration or investment of the assets of any such Employee Benefit
Plan. No action, suit, proceeding, hearing, or investigation with respect
to the administration or the investment of the assets of any such Employee
Benefit Plan (other than routine claims for benefits) is pending or, to the
Knowledge of the Seller, threatened. The Seller has no Knowledge of any
basis for any such action, suit, proceeding, hearing, or investigation.
(g) Neither the Association, any of the Association Subsidiaries nor
any of the other members of the Controlled Group of Corporations that
include the Association and the Association Subsidiaries contributes to,
ever has contributed to, or ever has been required to contribute to any
Multiemployer Plan or has any Liability (including withdrawal Liability)
under any Multiemployer Plan.
(h) Neither the Association nor any Association Subsidiary maintains
any defined benefit plans. Neither the Association nor any of the
Association Subsidiaries has incurred, and the Seller has no Knowledge of
any reason to expect that any of the Association or the Association
Subsidiaries will incur, any Liability to the PBGC (other than PBGC premium
payments) or otherwise under Title IV of ERISA (including any withdrawal
Liability) or under the Tax Code with respect to any such Employee Benefit
Plan which is an Employee Pension Benefit Plan and that is maintained or
ever has been maintained by the Association, any Association Subsidiary or
a Controlled Group of Corporations which includes the Association.
SECTION 3.16. CERTAIN CONTRACTS
(a) Except as Previously Disclosed, at the date hereof neither the
Association nor any Association Subsidiary is a party to, is bound or
affected by, or receives benefits under (in each case whether written or
oral) (i) any Significant Contract, (ii) any agreement, indenture or other
instrument relating to the
26
<PAGE>
borrowing of money by the Association or any Retained Association Subsidiary
or the guarantee by the Association or any Retained Association Subsidiary of
any obligation of another Person, (iii) any agreement, arrangement or
commitment relating to the employment of an independent contractor or the
employment, election or retention in office of any present or former officer,
director, or employee, or providing for severance benefits upon the
termination of any such relationship, or (iv) any collective bargaining
agreement or other understanding with a labor union.
(b) Neither the Association nor any Association Subsidiary is in
default, which default would constitute a Material Adverse Event with
respect to the Association and the Retained Association Subsidiaries under
any Significant Contract or any agreement, commitment, arrangement or other
indenture described in Section 3.16(a), whether written or oral, and there
has not occurred any event that, with the lapse of time or giving of notice
or both, would constitute such a default.
SECTION 3.17. LEGAL PROCEEDINGS; REGULATORY APPROVALS
Except as Previously Disclosed, at the date hereof there are (i) no
outstanding injunctions, judgments, orders, decrees, rulings or regulatory
directives against the Association or any Association Subsidiary or to
which the Association or any Association Subsidiary is a party, and (ii) no
actions, suits, claims, governmental investigations or proceedings have
been instituted, are pending or, to the Knowledge of the Seller, are
threatened (or unasserted but considered by the Association and the Seller
probable of assertion and which if asserted would have at least a
reasonable probability of an unfavorable outcome) against the Association
or any Association Subsidiary or against any asset, interest, or right of
the Association or any Association Subsidiary, or against any officer,
director or employee of any of them that in any such case, if decided
adversely, might constitute a Material Adverse Event with respect to the
Association and the Retained Association Subsidiaries. To the Knowledge of
the Seller, there are no actual or threatened actions, suits or proceedings
against the Association, any Association Subsidiary, or the Seller which
present a claim to restrain or which would have the effect of prohibiting
the transactions contemplated herein. Except as Previously Disclosed,
there is no fact or condition (including, but not limited to, compliance
with the CRA and HMDA), relating to the Association or any Association
Subsidiary of which the Seller has Knowledge that would prevent the Seller,
the Association or SCBC from obtaining all of the federal and state
regulatory approvals contemplated herein.
SECTION 3.18. COMPLIANCE WITH LAWS
To the Knowledge of the Seller, except as Previously Disclosed, each
of the Association and the Association Subsidiaries is in compliance in all
material respects with all statutes and regulations applicable and material
to the conduct of its business (except for any violations that do not
constitute a Material Adverse Event with respect to the Association and the
Retained Association Subsidiaries), and neither the Association nor any
Association Subsidiary has received notification from any agency or
department of federal, state or local government (i) asserting a violation
or possible violation of any such statute or regulation and which violation
would constitute a Material Adverse Event with respect to the Association
and the Retained Association Subsidiaries, (ii) threatening to revoke any
license, franchise, permit or government authorization, or (iii)
restricting or in any way limiting its operations. Except as Previously
Disclosed, neither the Association nor any Association Subsidiary is
subject to any regulatory or supervisory cease and desist order, agreement,
directive, memorandum of understanding or commitment, and none of them has
received any communication requesting that they enter into any of the
foregoing. Without limiting the generality of the foregoing, to the
Knowledge of the Seller, the Association and each Association Subsidiary
has timely filed all currency transaction reports required to
27
<PAGE>
be filed and taken all other actions required under the Currency and Foreign
Transactions Reporting Act, 31 U.S.C. Section 5301 ET SEQ., and its
implementing regulations.
SECTION 3.19. BROKERS AND FINDERS
Except as Previously Disclosed, none of the Seller, the Association or
any Association Subsidiary nor any of their respective officers, directors,
employees or Affiliates has employed any broker, finder or financial
advisor or incurred any liability for any fees or commissions or other
payments in connection with the transactions contemplated herein (except
for fees to accountants and lawyers).
SECTION 3.20. INSURANCE
The Association and the Retained Association Subsidiaries each
currently maintains insurance in the amounts and for the coverage
Previously Disclosed. A copy of each such insurance policy previously has
been provided to SCBC, and the annual premium for each such policy has been
Previously Disclosed. With respect to each such policy, to the Knowledge
of the Seller the policy is legal, binding, enforceable and in full force
and effect; neither the Association nor any Retained Association Subsidiary
is in breach or default thereof, and to the Knowledge of the Seller, no
event has occurred which, with the lapse of time or the giving of notice,
or both, would constitute such a breach or default, or permit termination,
modification, or acceleration, under that policy. Except as Previously
Disclosed, neither the Association nor any Retained Association Subsidiary
has received any notice of a premium increase or cancellation with respect
to any insurance policy or bond, and within the last three years, neither
the Association nor any Retained Association Subsidiary has been refused or
received any notice of termination with respect to any insurance coverage
sought or applied for.
SECTION 3.21. REPURCHASE AGREEMENTS
Except as Previously Disclosed, neither the Association nor any of the
Association Subsidiaries is a party to any agreement pursuant to which the
Association or any Association Subsidiary has purchased securities subject
to an agreement to resell, any agreement pursuant to which the Association
or the Association Subsidiary has sold securities subject to an agreement
to repurchase, any interest rate swap agreement, any other interest rate
hedging agreement, or any other similar agreement.
SECTION 3.22. DEPOSIT ACCOUNTS OF THE ASSOCIATION
(a) The deposit accounts of the Association are insured by Savings
Association Insurance Fund of the FDIC to the maximum extent permitted by
federal law, and the Association has paid all premiums and assessments and
filed all reports required under the FDIA and under the National Housing
Act.
(b) The Association is a member in good standing of the FHLB of
Atlanta and owns the requisite amount of stock in the FHLB of Atlanta.
(c) The Association is a "qualified thrift lender," as such term is
defined in the HOLA and in the OTS' regulations thereunder.
(d) The Association is a qualified seller and servicer for the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation.
28
<PAGE>
SECTION 3.23. LOANS
Except as Previously Disclosed, with respect to each loan on the books
and records of the Association or any Association Subsidiary, including
check overdraft extensions of credit, unfunded portions of outstanding
lines of credit and loan commitments but excluding the Excluded Loans (a
"Loan"): (i) such Loan is a valid loan and is evidenced by a promissory
note or other evidence of indebtedness with respect thereto; (ii) its
principal balance as shown on the books and records of the Association or
any Association Subsidiary is true and correct as of the last date shown
thereon; (iii) to the Knowledge of the Seller, all purported signatures on
and executions of any document in connection with such Loan are genuine;
(iv) all related documentation required or necessary to enforce repayment
of the Loan, to collect upon all guarantees of such Loan and to enforce all
liens or Security Interests in any collateral for such Loan has been signed
or executed by all necessary parties including, with regard to Loans which
are secured, all deeds of trusts, financing statements, security agreements
and similar documents related thereto; (v) the Association or the
Association Subsidiary has custody of all documents or microfilm records
thereof related to such Loan (as such documents relate to the matters
described in clauses (i) - (iv) and (vi) and (vii) hereof); (vi) to the
extent secured, such Loan has been secured by valid liens and Security
Interests which have been perfected; and (vii) to the Knowledge of the
Seller, such Loan is the legal, valid and binding obligation of the obligor
named therein, subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting creditors'
rights and to general equity principles. All Loans on the books and
records of the Association or any Association Subsidiary have been
originated and administered in accordance with the terms of the underlying
notes related thereto. To the Knowledge of the Seller, neither the terms
of such Loans, nor any of the loan documentation, nor the manner in which
such Loans have been administered and serviced, violates any federal, state
or local law, rule, regulation or ordinance applicable thereto, including,
without limitation, Regulation O of the Federal Reserve Board, 12 C.F.R.
Section 563.43, the Federal Truth-In-Lending Act, Regulation Z of the Federal
Reserve Board, the Equal Credit Opportunity Act, and state laws, rules and
regulations relating to consumer protection, installment sales and usury.
SECTION 3.24. RELATED PARTY LOANS, INVESTMENTS AND TRANSACTIONS
(a) Except as Previously Disclosed, neither the Association nor any
Association Subsidiary is a party to any loan or investment, including any
loan guaranty, with, or is liable for any Liability of, any director or
executive officer of the Seller, the Association, an Association Subsidiary
or any Affiliate of any of the foregoing.
(b) The Seller has Previously Disclosed all agreements, arrangements
and commitments of any kind, whether oral or written, between the
Association and/or any Association Subsidiary, on the one hand, and the
Seller or any of its Affiliates, on the other hand.
(c) Neither the Seller nor any of its Affiliates (other than the
Association and the Retained Association Subsidiaries) owns, or will own as
of the Effective Time (other than Excluded Assets), any assets, tangible or
intangible, which currently are used in the business of the Association or
any Retained Association Subsidiary.
SECTION 3.25. REPRESENTATIONS AND WARRANTIES OF THE ASSOCIATION
The Seller acknowledges that SCBC has received and relied upon the
Association Letter. The Seller represents and warrants that the
representations and warranties contained in the Association Letter
29
<PAGE>
are, to the best of its Knowledge, correct in all material respects, such
Association Letter being a material inducement to SCBC's execution of this
Agreement and SCBC's willingness to consummate the transactions
contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SCBC
SCBC represents and warrants to the Seller as follows:
SECTION 4.1. ORGANIZATION, STANDING AND AUTHORITY OF SCBC
SCBC is a general business corporation duly organized, validly
existing and in good standing under the laws of the state of North Carolina
with full corporate power and authority to carry on its business as now
conducted and is duly qualified to do business in the states of the United
States and foreign jurisdictions where its ownership or leasing of property
or the conduct of its business requires such qualification and where
failure to so qualify would constitute a Material Adverse Event with
respect to SCBC and the SCBC Subsidiaries. SCBC is registered as a bank
holding company under the Bank Holding Company Act.
SECTION 4.2. AUTHORIZED AND EFFECTIVE AGREEMENT
(a) SCBC has all requisite corporate power and authority to enter
into and perform all of its obligations under this Agreement. The
execution and delivery of this Agreement and consummation of the
transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action in respect thereof on the part of SCBC.
This Agreement constitutes a legal, valid and binding obligation of SCBC,
enforceable against it in accordance with its terms subject, as to
enforceability, to bankruptcy, insolvency and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles.
(b) Neither the execution and delivery of this Agreement, nor
consummation of the transactions contemplated hereby, nor compliance by
SCBC with any of the provisions hereof shall (i) conflict with or result in
a breach of any provision of the articles of incorporation (or, as
applicable the charter) or bylaws of SCBC or any SCBC Subsidiary, (ii)
constitute or result in a breach of any term, condition or provision of, or
constitute a default under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of
any lien, charge or encumbrance upon any property or asset of SCBC or any
SCBC Subsidiary pursuant to, any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation, or (iii) subject to receipt of
all required governmental approvals set forth in Section 5.1, violate any
order, ruling, decree, charge, writ, injunction, regulatory agreement or
memorandum of understanding, constitution, statute, rule or regulation
applicable to SCBC or any SCBC Subsidiary.
SECTION 4.3. LEGAL PROCEEDINGS; REGULATORY APPROVALS
There are no actual or, to the best knowledge of SCBC, threatened
actions, suits or proceedings which present a claim or restrain or prohibit
the transactions contemplated herein. No fact or condition (including, but
not limited to, CRA and HMDA compliance) relating to SCBC or any SCBC
Subsidiary known to SCBC exists that would prevent SCBC from obtaining all
of the federal and state regulatory
30
<PAGE>
approvals contemplated herein.
SECTION 4.4. REPRESENTATIONS OF THE DESIGNATED SUBSIDIARY
Should SCBC designate a Designated Subsidiary as provided in Section
8.7, by a certificate of the President of the Designated Subsidiary
delivered to the Seller at the Closing, the Designated Subsidiary shall
represent and warrant to the Seller matters of the type set forth in
Sections 4.1, 4.2 and 4.3 to the extent applicable to the Designated
Subsidiary.
ARTICLE V
COVENANTS
SECTION 5.1. APPLICATIONS
As promptly as practicable after the date hereof, SCBC and the Seller
(if and to the extent required) shall (and the Seller shall, to the extent
required, cause the Association to) submit applications for prior approval
of the transactions contemplated herein to the Federal Reserve Board, the
OTS, the FDIC and the Commissioner of Banks of North Carolina
("Commissioner") and any other federal, state or local government agency,
department or body the approval of which is required for consummation of
the Seller's purchase of the Repurchased Timeshare and Lot Assets as
provided herein, the Acquisition and the Merger. SCBC, the Association and
the Seller promptly shall furnish one another with copies after filing of
applications made by it with these or any other regulatory agencies. The
Seller and SCBC each represent and warrant to the other that all
information concerning it and its directors, officers and shareholders (and
concerning, in the case of the Seller, the Association and the Association
Subsidiaries, and, in the case of SCBC, the SCBC Subsidiaries), included
(or submitted for inclusion) in any such application shall be true, correct
and complete in all material respects. Notwithstanding anything contained
in this Section 5.1 or in Section 5.2 below, the Seller shall use its best
efforts in good faith (and shall cause the Association and the Association
Subsidiaries to use their best efforts in good faith) to (i) submit, not
later than April 22, 1994, to the appropriate regulatory authorities all
applications, if any, that the Seller, the Association or the Association
Subsidiaries may be required under this Section 5.1 to submit, and (ii)
deliver, not later than April 15, 1994 (or such later date that is 15 days
after the Seller's receipt of SCBC's written request hereunder, if such
request is not received by April 1, 1994), all information concerning it,
the Association and the Association Subsidiaries, and their respective
directors, officers and shareholders, that SCBC may request in writing for
inclusion in any regulatory applications that SCBC or the SCBC Subsidiaries
may be required to submit under this Section 5.1, and (iii) deliver, within
six (6) days after receipt of written request therefor, all additional
information requested either by SCBC or a regulatory authority, as the case
may be, to supplement any applications submitted by the Seller as
contemplated by clause (i) hereof or to supplement any information
delivered to SCBC as contemplated by clause (ii) hereof for inclusion in
responses to requests for additional information to supplement any such
applications. If the Seller, the Association or any of the Association
Subsidiaries is delayed in submitting any applications beyond April 22,
1994 as contemplated by clause (i) of the immediately preceding sentence,
or is delayed in submitting information in response to requests from SCBC
or regulatory authorities beyond the date contemplated by clause (ii) of
the immediately preceding sentence, or is delayed in delivering additional
information in response to requests therefor from SCBC or any regulatory
authorities beyond six (6) days as contemplated by clause (iii) of the
immediately preceding sentence, then each day that such delivery or
submission is delayed shall be considered a "Late Day," notwithstanding the
use by the Seller, the Association and the Association Subsidiaries of best
efforts in good faith to make such delivery or submission within the
required time
31
<PAGE>
period. By way of example, if the Seller does not submit a
required application until April 27, 1994 and the Association does not
deliver information requested by SCBC until April 19, 1994, the Seller,
having received the request therefor on April 1, 1994, then the total
number of Late Days is nine (five Late Days for the delay associated with
the Seller's submission of its application and four Late Days for the delay
associated with the Association's delivery of the information requested by
SCBC). For purposes of the foregoing, any submission or delivery or notice
which would otherwise be required to be made on a day which is a Saturday,
Sunday or holiday shall be extended until the next day which is not a
Saturday, Sunday or holiday and such extension shall not be considered a
delay and no Late Days shall accrue solely as a result of such extension.
SECTION 5.2. BEST EFFORTS
SCBC and the Seller shall each use its best efforts in good faith
(and, in the case of the Seller, the Seller shall cause the Association and
the Association Subsidiaries to use, and, in the case of SCBC, SCBC shall
cause the SCBC Subsidiaries to use, their best efforts in good faith) to
(i) furnish such information as may be required in connection with and
otherwise cooperate in the preparation and filing of the documents referred
to in Section 5.1 above, and (ii) take or cause to be taken all action
necessary or desirable on its or their part so as to permit consummation of
the Acquisition and the Merger at the earliest possible date, including,
but not limited to, the acquisition of all third-party consents; provided,
however, that neither SCBC nor the Seller shall be required to expend other
than nominal amounts of money to acquire third-party consents under
contracts or leases to which the Association or any Retained Association
Subsidiary is a party. Neither SCBC nor the Seller shall take, or cause or
to the best of its ability permit to be taken, any action that would
substantially delay or impair the prospects of completing the Acquisition
or the Merger.
SECTION 5.3. CERTAIN ACCOUNTING AND TAX MATTERS
(a) The Seller and SCBC shall consult and cooperate on a mutually
satisfactory basis with each other concerning such accounting and financial
matters, including, but not limited to, the Section 338(g) Election and the
Section 338(h) Election, each as described below, as may be necessary,
appropriate or required to facilitate the Acquisition and the Merger
(taking into account SCBC's policies, practices and procedures), including,
without limitation, issues arising in connection with the Association's
record keeping, loan classification, valuation adjustments, levels of loan
loss reserves and other accounting practices; provided, however, that the
Association shall not be required to make any material change to its loan,
investment, business or accounting practices unless SCBC shall have
notified the Seller that all conditions to SCBC's obligations to effect the
Acquisition, other than those set forth in Section 6.3(a), (d), (e),
(h)(ii), (k), (l) and (m), have been satisfied; and, provided further, that
should any such requested change have an effect on the amounts of the
Purchase Price, the Seller's Payment and/or the Tax Sharing Liability, SCBC
and the Seller shall increase or decrease, as applicable, the Purchase
Price, the Seller's Payment and the Tax Sharing Liability, as applicable,
to compensate (i.e., factor out) for such effect. Nothing in this Section
5.3 shall require the Association to make any material change in its loan,
investment, business or accounting practices other than in accordance with
HOLA and OTS' regulations.
(b) The Tax Sharing Agreement between the Seller and the Association
will be terminated as of the Effective Time and will have no further effect
for any taxable year (whether the current year, a future year or a past
year); provided that, such termination will not affect any right of the
Seller or SCBC under this Agreement, including, but not limited to, under
Section 2.3.
32
<PAGE>
(c) Except as provided in Sections 5.3(d) and (e), SCBC will prepare
and file or cause to be prepared or filed all Tax Returns relating to the
Association or any of the Retained Association Subsidiaries which are
required to be filed after the Effective Time. Except as otherwise
expressly provided herein, SCBC will pay or cause to be paid all Taxes
required to be paid with respect to such Tax Returns, but payment of such
Taxes will not be treated as a waiver of any rights of SCBC under Section
2.3 or to indemnification under this Agreement.
(d) The Seller will file its consolidated federal income Tax Return
for its taxable year which includes the Closing Date, and will report
thereon the income of the Association and the Association Subsidiaries
through the Effective Time as required by applicable law. The Seller will
pay all Taxes required to be paid with respect to such consolidated federal
income Tax Return, but payment of such Taxes will not be treated as a
waiver of any rights of the Seller under this Agreement, including without
limitation rights pursuant to Section 2.3. In order to assist the Seller
in preparation of such consolidated federal income Tax Returns, SCBC will
prepare and deliver to (or cause to be prepared and delivered to) the
Seller the information which the Association and the Retained Association
Subsidiaries have customarily provided to the Seller and other information
necessary for preparation of such Tax Return within 60 days of the Seller's
request therefor, and shall also provide additional information and access
as provided in Section 5.3(j).
(e) The Seller will prepare or will cause to be prepared any (i) Tax
Returns required by law to be filed by the Association or the Association
Subsidiaries for taxable years ending at or before the Effective Time,
taking into account any extensions which have been customarily taken or
requested in prior years; and (ii) any North Carolina income Tax Returns
required to be filed by the Association or the Association Subsidiaries for
taxable years ending at or before the Effective Time, regardless of when
filing is required. Except for Taxes required to be paid with respect to
all federal income Tax Returns described in the preceding sentence, which
the Seller shall pay, the Seller, the Association or the Retained
Association Subsidiaries will pay all Taxes required to be paid with
respect to the income Tax Returns described in the preceding sentence
consistent with past practices and in the Ordinary Course of Business. To
the extent any Tax Return prepared by the Seller pursuant to this Section
5.3(e) has not been filed as of the Effective Time, SCBC will provide any
additional information or assistance as may be reasonably requested in
connection with the finalization of such Tax Return and will cause the
appropriate persons to sign and file such Tax Return, provided that the
Seller represents and warrants in writing that such Tax Return has been
prepared in good faith with all due care and is correct and complete in all
material respects.
(f) In accordance with Section 8.2 hereof, the Seller agrees to
indemnify SCBC from and against any Adverse Consequences that SCBC may
suffer resulting from, arising out of, relating to, in the nature of, or
caused by any Liability of the Association or any of the Association
Subsidiaries under Section 1.1502-6 of the regulations promulgated by the
U.S. Department of the Treasury under the Tax Code (or any similar
provision of state, local or foreign law or regulations).
(g) Except as otherwise provided in this Section 5.3, SCBC will
control all audits, refund claims and other proceedings involving any Tax
Return filed by the Association or any Retained Association Subsidiary.
SCBC will give prompt notice to the Seller of any audit, refund claim or
other proceeding involving any Tax Return relating (in whole or in part) to
periods or transactions prior to the Effective Time, and will consult with
the Seller and give due regard to the Seller's interests in any
negotiations or discussions unless SCBC reasonably concludes that the
Seller will not be required to make any payment under this Agreement by reason
of the subject of the negotiation or discussion, in which case the Seller
33
<PAGE>
will have no further liability under this Agreement with respect to
such periods or transactions. SCBC and its Affiliates and agents will not
concede, settle or compromise any claim or deficiency related to such Tax
Returns without the prior written consent of the Seller, which consent
shall not be unreasonably withheld; failure to obtain such consent will be
treated as a waiver by SCBC of any right to indemnification with respect to
Adverse Consequences related to the matter conceded, settled or
compromised.
(h) The Seller will control all audits, refund claims and other
proceedings related to (i) the federal consolidated income Tax Return of
the Seller and (ii) any North Carolina income Tax Return filed by the
Association or any Association Subsidiary with respect to periods ended at
or prior to the Effective Time. SCBC and the Seller will give prompt
notice to the other party of any audit, refund claim or other proceeding
involving any such income Tax Return, and will cooperate with each other in
good faith in the conduct of such audit, claim or proceeding.
(i) SCBC is eligible to, and will, make a timely election under the
Tax Code Section 338(g) (the "Section 338(g) Election"), and both the
Seller and SCBC are eligible to make, and will join in making, a timely
election under Tax Code Section 338(h)(10) (the "Section 338(h) Election"),
with respect to the purchase of the Shares under this Agreement. The
parties will make corresponding elections with respect to each Retained
Association Subsidiary unless, after consultation with the Seller, (A) SCBC
determines, in good faith and in its reasonable judgment, that such
elections would increase its overall federal and state income Tax
Liabilities on a consolidated basis and that the present value of such
increase exceeds the present value of any compensating payments to SCBC
offered by the Seller, or (B) the Seller requests in writing that such
elections not be made and SCBC does not determine, in good faith and in its
reasonable judgment, that (x) such elections would decrease its overall
federal and state income Tax Liabilities on a consolidated basis and (y)
the present value of such decrease exceeds the present value of any
compensating payments to SCBC offered by the Seller. SCBC will deliver to
the Seller a duly executed and completed Internal Revenue Service Form 8023
as well as drafts of any required attachments (collectively, the "Section
338 Forms"), no later than 60 calendar days prior to the date the Section
338 Forms are required to be filed. In the event of any dispute with
regard to the content of any Section 338 Form, the parties will diligently
attempt to resolve such dispute. Once finalized, the Seller will promptly
cause the Section 338 Forms to be duly executed by an officer of the
Seller, and will return such Section 338 Forms to SCBC. SCBC will duly and
timely file the Section 338 Forms in accordance with applicable Tax laws,
and will provide written evidence to the Seller that it has done so.
Neither SCBC nor the Seller will, and each will cause their Affiliates not
to, take any action to modify or revoke the Section 338(g) Election or the
Section 338(h) Election contained in, or the content of, any Section 338
Form (or any comparable state or local form) without the express written
consent of the other party. SCBC and the Seller agree to report the
transactions contemplated by this Agreement in a manner consistent with the
Section 338(g) Election and the Section 338(h) Election (and, where
applicable, similar non-federal elections) and not to take any position
contrary thereto. The obligations and procedures set forth in this Section
5.3(i) will apply for purposes of making elections for purposes of the
North Carolina state and local income Tax laws and regulations which are
similar to elections under Tax Code Section 338(g) or Tax Code Section
338(h)(10). The Seller will pay any Tax attributable to the making of a
Section 338(h) Election and, subject to Section 8.2 hereof, will indemnify
SCBC, the Association and the Retained Association Subsidiaries against any
Adverse Consequences arising out of any failure to pay such Tax.
(j) To facilitate the performance of obligations and exercise of
rights pursuant to this Agreement, without limiting the generality of any
obligations hereunder, each party will provide or cause its Affiliates
34
<PAGE>
to provide to the other party and its agents reasonable access during normal
business hours to any records, files or other materials relating to any Tax
Returns of the Association and the Association Subsidiaries, and with
reasonable access to any employees or agents having knowledge relating to
such Tax Returns. Each of the parties hereto shall reimburse the other
party for all out-of-pocket disbursements and expenditures (but not rents,
utilities, internal duplication costs, employee salaries or other overhead)
reasonably incurred by the other party in preparing and delivering
information pursuant to the foregoing items of this Section 5.3.
(k) During the Interim Period, the Seller shall use its best efforts,
consistent with GAAP and accounting standards imposed by the OTS, to cause
the Association to establish Budgeted Reserves by the Closing Date. As a
means of creating Budgeted Reserves for purposes of complying with the
requirements set forth in the immediately preceding sentence, the
Association may reallocate to its general reserves in respect of Other
Assets up to $1.25 million of the valuation allowances (general or
specific) existing on the Association's books at September 30, 1993 in
respect of Excluded Assets and all such reallocated reserves shall be
considered Budgeted Reserves.
SECTION 5.4. INVESTIGATION AND CONFIDENTIALITY
The Seller will keep SCBC advised of all material developments
relevant to the business of the Association and the Association
Subsidiaries and to consummation of the transactions contemplated herein,
and SCBC will advise the Seller of any Material Adverse Event with respect
to SCBC and the SCBC Subsidiaries that is likely adversely to affect
consummation of the transactions contemplated herein. SCBC may make or
cause to be made such continuing investigation of the financial and legal
condition of the Association and the Association Subsidiaries as SCBC
reasonably deems necessary or advisable in connection with the transactions
contemplated herein; provided, however, that such continuing investigation
shall be reasonably related to such transactions and shall not interfere
unnecessarily with normal operations. The Seller agrees to furnish SCBC
and its advisors with such financial data and other information with
respect to its business, financial condition and Tax matters as SCBC shall,
from time to time, reasonably request. No investigation pursuant to this
Section 5.4 shall affect or be deemed to modify any representation or
warranty made by, or the conditions to the obligations hereunder of, either
party hereto. SCBC shall, and shall cause its directors, officers,
employees, attorneys and advisors to, maintain the confidentiality of all
information obtained in such investigation or pursuant to the letter
agreement, dated August 31, 1993, between the Seller and SCBC which is not
otherwise publicly disclosed by the Seller, said undertaking with respect
to confidentiality to survive any termination of this Agreement pursuant to
Section 7.1 hereof.
SECTION 5.5. PRESS RELEASES
SCBC and the Seller shall agree with each other as to the form and
substance of any press release related to this Agreement or the
transactions contemplated hereby, and consult with each other as to the
form and substance of other public disclosures related thereto; provided,
however, that nothing contained herein shall prohibit either party,
following notification to the other party, from making any disclosure which
its counsel deems necessary under applicable securities laws.
SECTION 5.6. FORBEARANCES OF THE ASSOCIATION
Except with the prior written consent of SCBC, between the date hereof
and the Effective Time, the two representatives of the Seller serving on
the Association's Board of Directors shall use their best
35
<PAGE>
influences, and shall cast their votes as directors, consistent with their
fiduciary duties as directors and in compliance with all laws, including, but
not limited to, the federal Bank Merger Act and applicable antitrust laws, to
cause the Association not to, and to cause each Retained Association
Subsidiary not to:
(a) carry on its business other than in the Ordinary Course of
Business, or establish or acquire any new subsidiary or Joint Venture or
cause or permit any Retained Association Subsidiary to engage in any new
activity or expand any existing activities (but the foregoing shall not
prevent the Association and the Retained Association Subsidiaries from
pursuing and closing loans and other transactions in respect of the
Excluded Assets or, if not in respect of the Excluded Assets, that
previously were approved by their respective Board of Directors and with
respect to which their managements have made a legally enforceable
commitment to third parties).
(b) declare, set aside, make or pay any dividend or other
distribution in respect of its capital stock;
(c) issue any shares of its capital stock to any Person; or recognize
on its stock transfer records any transfer, sale or conveyance of any of
the Shares to any other Person; or enter into, or permit the imposition of,
a Restriction on Transfer respecting the Shares;
(d) issue, grant or authorize any Rights with respect to any of its
capital stock or effect any recapitalization, reclassification, stock
dividend, stock split or like change in capitalization;
(e) amend its certificate of incorporation (or, as applicable, its
charter) or bylaws; impose, or suffer the imposition, on any share of stock
held by the Association in any Retained Association Subsidiary of any
Security Interest or permit any such Security Interest to exist; or waive
or release any material right or cancel or compromise any material debt or
claim other than the Litigation and other than in the Ordinary Course of
Business;
(f) merge or consolidate with any other Person or permit any other
Person to merge into it, acquire control over any other Person; permit any
Person to acquire control over it; or liquidate, sell or otherwise dispose
of any assets (other than Excluded Assets) or acquire any assets (other
than Proceeds from Excluded Assets), other than in the Ordinary Course of
Business;
(g) fail to comply in any material respect with any laws,
regulations, ordinances, governmental actions, or any memorandum of
understanding or consent agreement with financial institution regulatory
authorities applicable to it and to the conduct of its business except
where the Association or any Association Subsidiary is in good faith
contesting the validity of any of the foregoing or where the failure to so
comply would not constitute a Material Adverse Event with respect to the
Association or the Retained Association Subsidiary;
(h) increase the rate of compensation of any of its directors,
officers, employees, or independent contractors, or pay agree to pay any
bonus, or provide or agree to provide any other new employee benefit or
incentive, to any of its directors, officers, or employees, except in the
Ordinary Course of Business;
(i) enter into or substantially modify (except as may be required by
applicable law) any Employee Benefit Plan, any other plan or arrangement, or
any trust agreement related thereto, in respect of any of its directors,
officers or other employees, except that the Association may amend the Policy
36
<PAGE>
(which term is defined in Section 8.2(a) hereof) to clarify the exclusion from
coverage under the Policy of employees employed under written employment or
severance agreements;
(j) solicit or encourage inquiries or proposals with respect to,
furnish any information relating to, or participate in any negotiations or
discussions concerning, any acquisition or purchase of the Shares, or other
shares of the capital stock or other voting securities of the Association
or any Retained Association Subsidiary, all or a substantial portion of the
assets of, or a substantial equity interest in, the Association or any
Retained Association Subsidiary, or any merger, consolidation or other
business combination involving the Association or any Retained Association
Subsidiary other than as contemplated by this Agreement; or authorize or
permit any officer, director, agent or Affiliate to do any of the above; or
fail to notify SCBC immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated with, the
Association or any Retained Association Subsidiary;
(k) enter into or modify (i) any agreement, contract, arrangement,
lease, license, loan, loan commitment or deposit collateralization
agreement (or series of agreements, contracts, arrangements, leases,
licensees, loans, loan commitments or deposit collateralization agreements)
involving more than Twenty-Five Thousand Dollars ($25,000) other than in
the Ordinary Course of Business and other than any such contracts,
agreements, etc. in respect of Excluded Assets, (ii) any agreement or
memorandum of understanding with financial institution regulatory
authorities, (iii) any agreement, indenture or other instrument relating to
the borrowing of money by the Association or any Retained Association
Subsidiary or the guarantee by the Association or any Retained Association
Subsidiary of any indebtedness, except for deposits and advances from the
FHLB of Atlanta occurring in the Ordinary Course of Business, (iv) any
agreement, arrangement or commitment relating to the employment of, or
severance of, an independent contractor or the employment, severance,
election or retention in office of any present or former director or
officer or employee, except in the Ordinary Course of Business; or (v) any
collective bargaining agreement or other understanding with a labor union;
(l) change its lending, investment, loan loss provisions, or asset
liability management policies or practices in any material respect except
as may be required by applicable law or as contemplated in Section 5.3(k)
hereof;
(m) change its methods of accounting in effect at September 30, 1993,
except as required by changes in GAAP concurred in by its independent
auditors, or change any of its methods of reporting income and deductions
for federal income Tax purposes from those employed in the preparation of
its federal income Tax Returns for the year ended December 31, 1992, except
as required by changes in law;
(n) delay or postpone the recognition of any Liability or accelerate
the recognition of income in any manner not consistent with GAAP;
(o) fail to keep its business and properties substantially intact,
including its relationships with depositors, borrowers, other customers,
and employees;
(p) sell, lease, transfer, or assign any assets, tangible or
intangible, other than Excluded Assets or for a fair consideration in the
Ordinary Course of Business;
(q) impose, or suffer the imposition of, any Security Interest upon
any of its assets, tangible or intangible, except Security Interests in
Excluded Assets or Security Interests granted in connection with
37
<PAGE>
the purchase of equipment or supplies in the Ordinary Course of Business;
(r) make any capital expenditure (or series of related capital
expenditures) involving more than Fifty Thousand Dollars ($50,000) outside
the Ordinary Course of Business;
(s) make any capital investments in, any loan (other than an owner-
occupied residential mortgage loan and/or construction loan, in each case
having an initial principal balance of less than $300,000 made to the
homeowner and made in the Ordinary Course of Business and other than a loan
made in connection with the sale or disposition of Excluded Assets which
constitutes Proceeds) to, or any acquisition of the investments or loans
of, any Person, either involving more than Fifty Thousand Dollars ($50,000)
or outside the Ordinary Course of Business;
(t) cancel, compromise, waive, or release any right or claim it may
have against any Person (or any series of related rights and claims) unless
such claim or right involves (i) an Excluded Asset or (ii) an amount not to
exceed Twenty-Five Thousand Dollars ($25,000) and such cancellation,
waiver, compromise or release is in the Ordinary Course of Business or
(iii) as related to or associated with the Litigation;
(u) grant any license or sublicense of any rights under or with
respect to any Intellectual Property;
(v) make any loan to, or enter into any other transaction with, any
of its directors, officers, or employees (other than in accordance with the
Association's past practices and policies regarding loans to employees
(including with respect to frequency and amount) in existence during the
preceding 18 months) or other Affiliates;
(w) make any pledge to make any charitable or other capital
contribution outside the Ordinary Course of Business; or
(x) agree to do any of the foregoing.
The Association shall cause the Association Subsidiaries that are not
Retained Association Subsidiaries not to do or permit, or agree to do or
permit, those matters set forth in items (g), (i), (j), (k)(ii), (k)(iii),
(k)(v), (l), (m), (n), (p) and (s).
SECTION 5.7. FORBEARANCES OF THE SELLER
Except with the prior written consent of SCBC between the date hereof
and the Effective Time, the Seller shall not:
(a) transfer, sell or convey any of the Shares, or any Rights to any
of the Shares, to any other Person, or enter into, or permit the imposition
of, a Restriction on Transfer respecting the Shares;
(b) grant any Security Interest in any of the Shares to any other
Person;
(c) vote the Shares to approve any merger of the Association or any
Retained Association Subsidiary with or into any other Person, any
consolidation of the Association or any Retained Association Subsidiary
with any other Person, any sale, exchange or disposition by the Association or
38
<PAGE>
any Retained Association Subsidiary of any assets (other than Excluded
Assets), or any liquidation of the Association, any Retained Association
Subsidiary or their respective assets (other than Excluded Assets).
(d) solicit or encourage inquiries or proposals with respect to,
furnish any information relating to, or participate in any negotiations or
discussions concerning, any acquisition or purchase of the Shares or other
shares of the capital stock or other voting securities of the Association
or any Retained Association Subsidiary, all or a substantial portion of the
assets (other than Excluded Assets) of, or a substantial equity interest
in, the Association or any Retained Association Subsidiary or any merger,
consolidation or other business combination involving the Association or
any Retained Association Subsidiary other than as contemplated by this
Agreement; or authorize or permit any officer, director, agent or Affiliate
to do any of the above; or fail to notify SCBC immediately if any such
inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated
with, the Seller, the Association or any Retained Association Subsidiary;
(e) enter or permit any of its Affiliates to enter, into agreements,
commitments or understandings with the Association or any Retained
Association Subsidiary providing for the extension of credit to the Seller
or any of its Affiliates; or
(f) agree to do any of the foregoing.
SECTION 5.8. CLOSING; EFFECTIVE TIME
(a) The transactions contemplated by this Agreement (other than the
Merger) shall be consummated at a closing (the "Closing") to be held at the
offices of SCBC's counsel, Brooks, Pierce, McLendon, Humphrey & Leonard,
L.L.P., Suite 2000, Renaissance Plaza, 230 North Elm Street, Greensboro,
North Carolina, or such other place as shall be agreed to by SCBC and the
Seller, on the fifth business day following satisfaction of the conditions
to consummation of the Acquisition set forth in Article VI hereof or such
later date as the parties may otherwise agree (the "Closing Date"). The
Acquisition shall be effective as of the Closing on the Closing Date or at
such other time and date specified by the parties at the Closing (the
"Effective Time"); provided, however, that solely for financial accounting
and Tax reporting purposes, the Seller's purchase of the Excluded Assets,
the Association's payment of the Tax Sharing Liability and the Acquisition,
in that order, shall be deemed effective as of 11:59:59 o'clock p.m.,
Greensboro, North Carolina time, on the Closing Date. The Merger shall
occur at such time as may be specified by SCBC, which may be either at the
Effective Time or thereafter.
(b) The Closing shall be conducted pursuant to and in accordance with
a closing escrow agreement to be executed by the Seller, SCBC, the
Association and an escrow agent to be selected by mutual agreement of the
Seller and SCBC (the "Closing Escrow Agent"). The form and substance of
the closing escrow agreement shall be reasonably satisfactory to the Seller
and SCBC and shall obligate the Closing Escrow Agent to hold all documents
and funds deposited with it pursuant to the closing escrow agreement until
it has received all such documents and funds and until it has been
authorized to deliver and, if necessary, record such documents and release
such funds by joint instructions of the Seller, SCBC and the Association.
Notwithstanding anything set forth herein to the contrary, the Seller and
SCBC contemplate that the closing escrow agreement will require the
Association to deliver to the Closing Escrow Agent all executed transfer
documents pertaining to the Excluded Assets and to require the Seller to
deposit with the Closing Escrow Agent the Seller's Payment, subject to such
credits and offsets as are provided in this Agreement.
39
<PAGE>
At the Closing: (i) the Seller shall deliver to SCBC (A) the various
certificates, instruments and documents described in Section 6.3, (B) in
executed forms, the Responsibilities Agreement and Appropriate security
documents and Intercreditor Agreements, all as described in Section 8.4,
(C) in executed form, a security agreement, in form and substance
satisfactory to SCBC and its counsel, granting the Deferred Payment
Security Interests and, if necessary to establish the first priority of
such Deferred Payment Security Interests, Intercreditor Agreement(s), (D)
stock certificates representing ownership of the Shares, endorsed for
transfer, at SCBC's election to SCBC or the Designated Subsidiary, and (E)
evidence of the revocation of all proxies in respect of the Shares granted
to the OTS and of the termination of all agreements between the OTS and the
Seller with regard to the Shares and/or the Association, which revocation
and termination may be conditioned upon the consummation of the
Acquisition; (ii) the Seller shall deliver the Seller's Payment to the
Association and/or to any Retained Association Subsidiary from which
Excluded Assets are to be transferred, except as provided in the following
clauses (iii) and (iv); (iii) SCBC shall deliver to the Seller the Cash
Payment Amount, subject to the Seller's right under Section 2.2(d) to cause
all or a portion of the Cash Payment Amount to be paid to the Association
and/or to any Retained Association Subsidiary as an offset to, and as a
credit against, the Seller's Payment; and (iv) the Association, or SCBC on
behalf of the Association, shall deliver to the Seller the amount of the
estimated Tax Sharing Liability as of the Effective Time, subject to the
Seller's right under Section 2.3(d) to cause all or a portion of such
estimated Tax Sharing Liability to be retained by the Association and/or
paid to any Retained Association Subsidiary as an offset to, and credit
against, the Seller's Payment; and, (v) the Association shall deliver to
the Seller the License and Services Agreement described in Section 5.9.
(c) In the case at any time after the Effective Time any further
action is necessary to carry out the purposes of this Agreement, each of
the Seller and SCBC will take such further action (including the execution
and delivery of such further instruments and documents) as the other may
reasonably request, all at the sole cost and expense of the requesting
party (unless the request is made in connection with a claim for indemnity
pursuant to Article VIII and the requesting party is SCBC and is entitled
to indemnification therefor under Section 8.2). The Seller acknowledges
and agrees that from and after the Effective Time the original records
(including Tax records), agreements, and financial data of any sort of the
Association and the Retained Association Subsidiaries (except to the extent
such records constitute Excluded Assets), wherever now located, shall be
located at the main offices of the Association or at such other location as
SCBC shall determine, and shall be the property of the Association;
provided, however, that SCBC shall provide the Seller access to certain of
such records as provided in Section 5.3(j).
SECTION 5.9. EMPLOYEES AND EMPLOYEE BENEFIT PLANS
(a) As of the Effective Time the employees of the Association and the
Retained Association Subsidiaries (other than Robert T. Waugh who shall
remain employed under his Previously Disclosed employment agreement with
the Association) shall remain employees of the Association and the Retained
Association Subsidiaries (the "Continuing Employees") with only such rights
as to continued employment as exist under North Carolina law with respect
to persons not parties to employment agreements with their employer. SCBC,
the Association or the Retained Association Subsidiaries may terminate any
such Continuing Employee in accordance with SCBC's employment policies and
practices at any time thereafter; provided, that M.L. Beall, a current
employee of the Association, will be employed by the Seller as of the
Effective Time on terms acceptable to Mr. Beall and the Seller, and will be
permitted to conduct his activities for the Seller from the premises of the
Association as provided in a License and Services Agreement attached hereto
as Exhibit E. During the period following the Acquisition, if a Continuing
Employee remains in the employ of the Association or a Retained Association
Subsidiary, he
40
<PAGE>
or she shall be eligible to receive group hospitalization,
medical, life, disability and other benefits comparable to those provided
to the present employees of the SCBC Subsidiaries. With respect to
Continuing Employees, SCBC shall waive "pre-existing conditions" provisions
under its health care insurance plan in connection with the admission of
such Continuing Employees to such Plan. Following the Merger, the
Association's Money Purchase Pension Plan (the "MPP Plan") shall be
terminated, and the rights and interests of the Continuing Employees of the
Association and the Retained Association Subsidiaries in such plan shall
become fully vested, with each participating employee having the right or
option either to receive the benefits to which they are entitled as a
result of the termination of the MPP Plan or to have such benefits "rolled"
into the 401(k) Plan maintained by SCBC and the SCBC Subsidiaries for the
benefit of their employees, and on the same basis and applying the
eligibility standards as would apply to employees of SCBC and the SCBC
Subsidiaries, recognizing the past service of those Continuing Employees of
the Association and the Retained Association Subsidiaries as if such
service had been performed on behalf of SCBC and the SCBC Subsidiaries for
vesting and qualification, but not for funding, purposes. Following the
Merger, the Continuing Employees of the Association and the Retained
Association Subsidiaries shall be entitled to participate, to the same
extent and on the same terms as the employees of SCBC, in any retirement,
pension, medical insurance or similar plans in effect for the benefit of
the employees of SCBC and the SCBC Subsidiaries (but not in deferred
compensation, split-dollar insurance, incentive bonus, stock option, stock
appreciation rights, stock ownership or long term incentive compensation
plans or arrangements established for the benefit of certain of SCBC's
employees) which when considered as a whole shall be no less favorable than
the benefits currently provided to the employees of the Association. For
purposes of participating in all plans and benefits of SCBC, such
Continuing Employees shall receive credit for their period of service to
the Association and the Retained Association Subsidiaries for participation
and vesting purposes only. The foregoing provisions of this Section 5.9(a)
are not intended to confer, and should not be construed to confer, any
right upon or contract in favor of any employee of the Association or any
Retained Association Subsidiary.
(b) The Association shall make all required contributions to the MPP
Plan in a manner consistent with its past practices and in a percentage
amount no higher than that made over the past two (2) fiscal years.
Contributions made to the MPP Plan in previous periods which were forfeited
by former participants in the MPP Plan, which are currently credited to a
deferred forfeiture account and which are currently being accreted into
income (approximately $199,000) shall not be allocated to the MPP Plan
participants and shall remain credited to the deferred forfeiture account,
except to the extent they are accreted into income prior to the Effective
Time in a manner consistent with past practices.
SECTION 5.10. CONSENT OF LENDER AND OTHER NECESSARY CONSENTS.
At the earliest practicable time after the date of this Agreement, the
Seller shall advise The First National Bank of Boston (the "Lender") and
each other Person identified on Appendix 2 hereto of the terms and
conditions of this Agreement and the transactions contemplated herein, and
diligently shall seek (a) all approvals of, and consents to, this Agreement
and such transactions from the Lender (the "Lender's Approval") and from
each such other Person (collectively, the "Other Necessary Approvals") as
are required or necessary under all agreements, instruments and other
understandings between or among the Seller, its Affiliates and the Lender
or each such other Person, as the case may be, for the Acquisition to be
effected, upon the terms and conditions described herein, at the Closing,
(b) the Lender's written confirmation of its acceptance of the terms and
conditions of, and of its intent to execute and deliver at the Closing, the
FNBB Intercreditor Agreement, the form and substance of which shall be
satisfactory to SCBC and its legal counsel (the "Lender's Confirmation"),
and (c) the Lender's written
41
<PAGE>
commitment to fund the Seller's purchase of the Excluded Assets to the extent
the cash proceeds of the Acquisition to the Seller are not sufficient to do so
(the "Lender's Commitment").
SECTION 5.11. DESIGNATED LOANS.
SCBC and the Seller have agreed that the Loans listed on Exhibit H
hereto (the "Designated Loans") will be retained by the Association and
will not be Excluded Loans. Notwithstanding the foregoing, if (i) there
occurs a default under the terms of any document evidencing or securing a
Designated Loan and such default has not been cured within any applicable
cure period set forth in such document(s) after delivery of any required
notice of such default, or (ii) any representation or warranty pertaining
to a Designated Loan set forth in this Agreement is determined to be
inaccurate or untrue, then the Seller shall purchase such Designated Loan
either (A) at the Closing and as an Excluded Loan, if the events described
in clauses (i) or (ii) hereof shall occur prior to the Closing Date, or (B)
within ten (10) days after the Seller's receipt of written demand from SCBC
setting forth the circumstances requiring such purchase, in which case the
Seller shall pay SCBC a cash purchase price equal to the unpaid principal
balance and accrued interest due on such Designated Loan on the date of the
Seller's purchase thereof minus the amount of any specific valuation
allowances in respect of such Designated Loan existing on the books of the
Association as of the Closing Date. The purchase of such Designated Loan
by the Seller shall be SCBC's sole remedy and recourse for the borrower's
default on a Designated Loan or the inaccuracy or untruthfulness of any
representation or warranty of the Seller pertaining to such Designated Loan
set forth in this Agreement.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. CONDITIONS PRECEDENT -- SCBC AND THE SELLER
The respective obligations of SCBC and the Seller to effect the
transactions contemplated by this Agreement shall be subject to
satisfaction or waiver of the following conditions at or prior to the
Effective Time:
(a) The approval of the Acquisition by the Seller's shareholders
shall have been duly and validly taken; and
(b) Neither SCBC, any SCBC Subsidiary, the Seller, the Association
nor any Association Subsidiary shall be subject to any order, decree,
judgment, ruling, or injunction of a court or governmental body of
competent jurisdiction which enjoins or prohibits consummation of the
transactions contemplated herein, nor shall any of them be a party or
subject to any pending action, suit or proceeding before any court or
governmental agency of competent jurisdiction wherein an unfavorable order,
decree, judgment, ruling, or injunction would (i) enjoin or prohibit
consummation of the transactions contemplated herein, (ii) cause any of the
transactions contemplated herein to be rescinded following consummation,
(iii) adversely affect the right of SCBC to own and/or to vote the Shares
or to control the Association and the Retained Association Subsidiaries, or
(iv) affect adversely the right of the Association or any Retained
Association Subsidiary to own its assets and to operate its business.
SECTION 6.2. CONDITIONS PRECEDENT -- THE SELLER
The obligations of the Seller to effect the transactions contemplated
by this Agreement shall be
42
<PAGE>
subject to satisfaction of the following additional conditions at or prior to
the Effective Time unless waived by the Seller pursuant to Section 7.3 hereof:
(a) The representations and warranties of SCBC set forth in Article
IV hereof (and, if applicable, the representations and warranties of the
Designated Subsidiary made as provided in Section 8.7) shall be true and
correct in all material respects as of the date of this Agreement and as of
the Effective Time as though made on and as of the Effective Time (or on
the date when made in the case of any representation and warranty which
specifically relates to an earlier date), except as otherwise contemplated
by this Agreement or consented to in writing by the Seller (which consent
may not be unreasonably withheld);
(b) SCBC shall have in all material respects performed all material
obligations and complied with all material covenants required by this
Agreement;
(c) SCBC shall have delivered to the Seller a certificate, dated as
of the Closing Date and signed on its behalf by its Chief Executive
Officer, to the effect that the conditions set forth in Sections 6.1(b),
6.2(a), 6.2(b), 6.2(d) and 6.3(b) to the extent applicable to SCBC or any
SCBC Subsidiary, have been satisfied and that there are no actions, suits,
claims, governmental investigations or procedures instituted, pending or,
to the best of his knowledge, threatened that reasonably may be expected to
constitute a Material Adverse Event with respect to SCBC and the SCBC
Subsidiaries or that present a claim or demand to restrain or prohibit the
transactions contemplated herein;
(d) All approvals from the Federal Reserve Board, the OTS, the FDIC,
the Commissioner and any other state or federal government agency,
department or body necessary or required to effect the Seller's purchase of
the Repurchased Timeshare and Lot Assets as provided herein and the
Acquisition and the Merger on the terms and conditions set forth herein
shall have been received, all conditions imposed therein which are to be
satisfied prior to the Effective Time shall have been so satisfied, all
applicable notice and waiting periods shall have passed, and all such
approvals shall be in effect;
(e) SCBC shall have demonstrated its ability to make the deliveries
required of it under Section 5.8(b);
(f) The Seller shall have received such opinions of SCBC's counsel as
it shall reasonably request; and
(g) The Seller shall have received the Lender's Approval, the Other
Necessary Approvals and the Lender's Commitment.
SECTION 6.3. CONDITIONS PRECEDENT -- SCBC
The obligations of SCBC to effect the transactions contemplated by
this Agreement shall be subject to satisfaction of the following additional
conditions at or prior to the Effective Time unless waived by SCBC pursuant
to Section 7.3 hereof:
(a) The representations and warranties of the Seller set forth in
Article III hereof and of the Association in the Association Letter shall
be true and correct in all material respects as of the date of this
Agreement and as of the Effective Time as though made as of the Effective
Time (or on the date when made in the case of any representation and
warranty which specifically relates to an earlier date),
43
<PAGE>
except as otherwise contemplated by this Agreement or consented to in writing
by SCBC (which consent may not be unreasonably withheld);
(b) All approvals from the Federal Reserve Board, the OTS, the FDIC,
the Commissioner and any other state or federal government agency,
department or body necessary or required to effect the Acquisition on the
terms and conditions set forth herein or necessary or required to effect
the Merger shall have been received, all conditions imposed therein which
are to be satisfied prior to the Effective Time have been so satisfied, all
notice periods and waiting periods required after the granting of any such
approvals shall have passed, and all such approvals shall be in effect;
provided, however, that no such approval shall contain any term or impose
any condition or requirement that is a term, condition or requirement that
has not heretofore been normally imposed in transactions of the nature of
the Acquisition and the Merger and that would constitute a Material Adverse
Event (which term, solely for the purposes of this sentence, shall be
deemed not to include parenthetical item (a) of the definition of "Material
Adverse Event" set forth in Article I) with respect to the Association and
the Retained Association Subsidiaries or the Association's successor
pursuant to the Merger;
(c) The Seller shall have in all respects performed all material
obligations and complied with all covenants, each in all material respects,
required by this Agreement;
(d) The Seller shall have delivered to SCBC a certificate, dated as
of the Closing Date and signed on behalf of the Seller by its Chief
Executive Officer, to the effect that the conditions set forth in Sections
6.1(a), 6.1(b), 6.3(a) (except, with respect to representations and
warranties of the Association in the Association Letter, qualified to the
Seller's Knowledge), 6.3(b) and 6.3(c), to the extent applicable to the
Seller, the Association or any of the Association Subsidiaries, have been
satisfied and that there are no actions, suits, claims, governmental
investigations or procedures instituted, pending or, to the best of the
Seller's Knowledge, threatened that reasonably may be expected to
constitute a Material Adverse Event in respect of the Association and the
Retained Association Subsidiaries or that present a claim or demand to
restrain or prohibit the transactions contemplated herein;
(e) SCBC shall have received such opinions of the Seller's counsel
and the Association's counsel as it shall reasonably request;
(f) The Association and the Association Subsidiaries shall have
conducted their businesses as provided in Section 5.6;
(g) A change in the business, financial condition, operations,
results of operations or prospects of the Association and the Association
Subsidiaries, taken as a consolidated whole, that constitutes a Material
Adverse Event with respect to the Association and the Retained Association
Subsidiaries shall not have occurred since September 30, 1993.
(h) SCBC shall have received: (i) prior to the execution of this
Agreement a signed copy of the Association Letter; and (ii) prior to the
Closing, a letter dated as of the Closing Date, and in form and substance
satisfactory to SCBC, signed on behalf of the Association by the Chief
Executive Officer and the Chief Financial Officer of the Association and
confirming that the matters referred to in Section 6.3(a) hereof insofar as
they relate to the representations and warranties of the Association;
(i) SCBC shall have received, effective as of the Effective Time, the
resignations of the directors of the Association and each Retained
Association Subsidiary (if and to the extent requested by SCBC at
44
<PAGE>
least ten (10) days prior to the Effective Time);
(j) The Seller shall have demonstrated its ability to make the
deliveries required of it under Section 5.8(b);
(k) The Lender shall have given the Lender's Approval and shall have
executed and delivered the FNBB Intercreditor Agreement, and the Other
Necessary Approvals shall have been given;
(l) All UCC-1 financing statements and other Appropriate security
documents necessary to perfect the Deferred Payment Security Interests, the
Indemnification Security Interests and the Litigation Security Interests
shall have been filed with, and accepted for filing and filed of record by,
all registrars of deeds, UCC filing authorities and similar governmental
offices where such filings are required to perfect and establish of record
such first liens and security interests; and
(m) The Seller (or its designated Affiliate) (i) shall have purchased
the Excluded Assets and assumed the Excluded Liabilities pursuant to one or
more purchase and assumption agreements with the Association and the
Retained Association Subsidiaries, and shall have executed and delivered,
or executed and received, all necessary related documents and instruments,
all of which agreements, documents and instruments shall be in form,
substance, and effect reasonably satisfactory to SCBC and its counsel, and
(ii) shall have advised SCBC of whether (A) it has paid the Seller's
Payment to the Association and/or any Retained Association Subsidiary in
immediately available funds, or (B) it desires to cause SCBC to deliver all
or a portion of the Cash Payment Amount to the Association and/or to any
Retained Association Subsidiaries as an offset to, and as a credit against,
the Seller's Payment, and/or (C) it desires to cause the Association to
retain, and/or to pay to any Retained Association Subsidiary, all or a
portion of the amount of the estimated Tax Sharing Liability as an offset
to, and as a credit against, the Seller's Payment.
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
SECTION 7.1. TERMINATION
This Agreement may be terminated:
(a) at any time on or prior to the Effective Time, by the mutual
consent in writing of the parties hereto;
(b) at any time on or prior to the Effective Time, by SCBC in writing
if the Seller has, or by the Seller in writing if SCBC has, in any material
respect, breached (i) any covenant or undertaking contained herein or (ii)
any representation or warranty contained herein, which breach has been
materially adverse, and in the case of (i) or (ii) if such breach has not
been cured by the earlier of 20 days after the date on which written notice
of such breach is given to the party committing such breach or the
Effective Time;
(c) on the Closing Date and prior to the Effective Time, by either
party hereto in writing, if any of the conditions precedent to the
obligations of such party to consummate the transactions contemplated
hereby have not been satisfied or fulfilled, other than by reason of the
failure of such party to fulfill its
45
<PAGE>
obligations under Section 5.2;
(d) at any time, by either party hereto in writing, if any of the
applications for prior approval referred to in Section 5.1 hereof are
denied, and the time periods for appeals and requests for reconsideration
have run;
(e) by either party hereto in writing, if the Effective Time has not
occurred by 5:00 o'clock, p.m., Greensboro, North Carolina time, on
September 30, 1994 (or such later date as the parties shall mutually
agree);
(f) at any time after the 45th day after the date of this Agreement,
by SCBC in writing, if prior to the time SCBC exercises its right of
termination under this Section 7.1(f), the Seller shall have not delivered
to SCBC written evidence of the Lender's Approval and the Other Necessary
Approvals or if the Lender shall have not provided to the Seller the
Lender's Confirmation, together with the definitive form of the FNBB
Intercreditor Agreement, and the Lender's Commitment, in each case
satisfactory in form and substance to SCBC and its counsel;
(g) at any time after the 75th day after the date of this Agreement,
by the Seller in writing, (i) if the Seller shall not have received the
Lender's Approval and the Other Necessary Approvals, the Lender's
Confirmation (together with the definitive form of the FNBB Intercreditor
Agreement) or the Lender's Commitment on or prior to the time the Seller
exercises its right of termination under this Section 7.1(g), (ii) if the
Lender shall have given the Lender's Commitment and the Lender's
Confirmation but thereafter refuses to honor the Lender's Commitment or to
execute and deliver at the Closing the FNBB Intercreditor Agreement, or
(iii) if, after diligently exercising its best efforts in good faith, the
Seller is unable to satisfy any of the conditions to funding of the
Lender's Commitment and the purchase of the Excluded Assets, and the Seller
provides satisfactory evidence to SCBC that, after diligently exercising
its best efforts in good faith, the Seller will be unable to fund its
purchase of the Excluded Assets through its own resources and/or through
borrowings from Persons other than the Lender; or
(h) at any time, by either party hereto in writing, if such party
determines in good faith that any condition precedent to such party's
obligations to consummate the Acquisition is or would be impossible to
satisfy.
SECTION 7.2. EFFECT OF TERMINATION
(a) In the event this Agreement is terminated pursuant to Section 7.1
hereof, this Agreement shall become void and have no further effect, except
that (i) the provisions relating to confidentiality and expenses set forth
in Sections 5.4 and 8.1, respectively, and (ii) the provisions relating to
the consequences of termination set forth in Section 7.2(b), shall survive
any such termination, and (iii) a termination pursuant to Section 7.1(b)
shall not, except as otherwise may be provided pursuant to Section 7.2(b),
relieve the breaching party from liability for an uncured breach of the
covenant, undertaking, representation, or warranty giving rise to such
termination. Without affecting any right, claim, or cause of action
against the Seller, SCBC agrees not to assert any right, claim or cause of
action against the Association in the event of the termination of this
Agreement for any reason.
(b) In the event of termination of this Agreement by SCBC pursuant to
Section 7.1(b) as a result of a deliberate or wilful action or inaction by
the Seller, or in the event of termination by the Seller other
46
<PAGE>
than pursuant to Section 7.1, the Seller shall pay to SCBC Nine Hundred Twenty-
Five Thousand Dollars ($925,000) within 30 days of written notice to the
Seller by SCBC following such termination. In the event of termination by
the Seller pursuant to Section 7.1(b) as a result of a deliberate or wilful
action or inaction by SCBC, or in the event of termination of this
Agreement by SCBC other than pursuant to Section 7.1, SCBC shall pay to the
Seller Nine Hundred Twenty-Five Thousand Dollars ($925,000) within 30 days
of written notice to SCBC by the Seller following such termination. Any
amount paid pursuant to this Section 7.2(b) shall represent the liquidated
damages of the party receiving such amount and shall constitute such
party's sole and exclusive remedy for such termination.
SECTION 7.3. WAIVER
Except with respect to any required regulatory approval, each party
hereto by written instrument signed by the chief executive officer of such
party, may at any time extend the time for the performance of any of the
obligations or other acts of the other party hereto and may waive (i) any
inaccuracies of the other party in the representations and warranties
contained in this Agreement or any document delivered pursuant hereto, (ii)
compliance with any of the covenants, undertakings or agreements of the
other party, or satisfaction of any of the conditions precedent to its
obligations, contained herein or (iii) the performance by the other party
of any of its obligations set out herein. No waiver by either such party
of any default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. EXPENSES
Each party hereto shall bear and pay all costs and expenses incurred
by it in connection with the transactions contemplated by this Agreement,
including fees and expenses of its own financial consultants, accountants
and counsel, except (a) as otherwise provided for pursuant to Section
7.2(b), and (b) as otherwise provided in Sections 8.2, 8.3, 8.4 and 8.5;
provided, however, if the Seller shall terminate this Agreement in
compliance with Section 7.1(g)(ii) or (iii), then within ten (10) days of
the date of such termination, the Seller shall reimburse SCBC, in
immediately available funds, an amount equal to the sum of (i) all fees
paid or payable, and all expenses reimbursed or reimbursable, by SCBC to
its outside attorneys, independent accountants, investment advisors, loan
review consultants, computer consultants and other outside advisors and
consultants in connection with services, analyses, considerations or
activities undertaken in connection with the Acquisition, the Merger and/or
this Agreement, (ii) all application and similar fees paid by SCBC or any
SCBC Subsidiary to governmental agencies or departments in connection with
the Acquisition or the Merger, and (iii) the sum of $20,000 as full
reimbursement to SCBC and the SCBC Subsidiaries for out-of-pocket expenses
incurred by them for travel, copying, telephone tolls and similar matters.
SECTION 8.2. INDEMNIFICATION
SCBC and the Seller agree that upon consummation of the Acquisition at
the Closing, the provisions of this Section 8.2 shall become and be in full
force and effect.
47
<PAGE>
(a) Subject to the limitations set forth in this Section 8.2(a) and
in Section 8.2(c) hereof, and in accordance with the procedures set forth
in Section 8.3 hereof and, if applicable, the Responsibilities Agreement,
the Seller shall indemnify and hold harmless SCBC, the Association and/or
each of the Retained Association Subsidiaries from and against all
Indemnifiable Losses suffered by it or them by reasons of:
(i) the untruthfulness or the inaccuracy of any representation
or warranty of the Seller or the breach of any covenant or agreement of the
Seller contained in this Agreement, other than the representations,
warranties, covenants and agreements set forth in Sections 3.2, 3.3,
5.3(f), 5.3(i) and 5.11 hereof;
(ii) the untruthfulness or the inaccuracy of any representations
or warranties of the Seller set forth in Sections 3.2 and 3.3 of this
Agreement;
(iii) the breach of any agreement or covenant of the Seller set
forth in Sections 5.3(f) and 5.3(i) of this Agreement;
(iv) the Class Action Litigation;
(v) the Homeowners Litigation;
(vi) the Bankruptcy Litigation;
(vii) any "Excess Severance Benefit" claimed against the
Association or its successor after the Merger by any hereafter named
employee of the Association if he or she is involuntarily terminated by the
Association or by its successor after the Merger within twelve (12) months
after the Effective Time: Betty Allison; Rick Downey; Sandy Harlan; John
Johns; Barry Lesley; Sandra Lully; and Anelson Watkins (the "Named
Employees"). The term "Excess Severance Benefit" means an amount equal to
the excess, if any, of the lump sum benefit a Named Employee claims he or
she is entitled to receive from the Association or its successor after the
Merger over the amount of the lump sum severance benefit that would have
been paid to that Named Employee pursuant to the severance policy of the
Association entitled "First Federal Severance and Separation Plan," as in
effect on March 1, 1994 (the "Policy"), if he or she had been eligible for
a lump sum severance benefit under the Policy and if he or she had been
involuntarily terminated on such date of termination; and
(viii) the breach of any agreement or covenant of the Seller set
forth in Section 5.11 of this Agreement.
A claim for indemnification pursuant to clause (i) of this Section
8.2(a) may be made at any time on or before 11:59:59 o'clock, p.m.,
Greensboro, North Carolina time on the nine hundred thirteenth (913th) day
after the Closing Date (the "Period End"). A claim for indemnification
pursuant to clause (iii) of this Section 8.2(a) may be made at any time on
or before the date which is the sixth (6th) anniversary of the Closing
Date. A claim for indemnification under clauses (ii) and (vii) of this
Section 8.2(a) may be made at any time prior to 30 days following the
expiration of the applicable statute of limitations governing actions which
could be brought arising out of the matters for which indemnification
48
<PAGE>
is provided in such clauses. Any claim for indemnification under clauses
(iv), (v) and (vi) may be made at any time prior to 15 days after the
Termination of the Litigation giving rise to such claim. Any claim for
indemnification under clause (viii) of this Section 8.2(a) shall be made
within 15 days after the Seller's failure to purchase a Designated Loan in
respect of which SCBC has made demand in accordance with the provisions of
Section 5.11 hereof. Any claim for indemnification under clause (i) or
(iii) of this Section 8.2(a) that is not made within the time period
provided herein shall be forever barred, notwithstanding any longer period
provided in any otherwise applicable statute of limitations or any other
rule or law to the contrary.
With respect to claims for indemnification under clauses (i) of this
Section 8.2(a) (but no other claims for indemnification under this Section
8.2(a) which shall be payable without limitation), the Seller shall not be
required to make an Indemnity Payment for a single claim unless and until
the amount of Indemnifiable Losses arising from that claim exceed $50,000
(the "single-loss deductible"), after which amount the Seller shall pay all
Indemnifiable Losses arising from that claim to the extent such
Indemnifiable Losses exceed the single-loss deductible. Notwithstanding
the foregoing, the Seller shall make an Indemnity Payment of all
Indemnifiable Losses arising from a claim under clause (i) of this Section
8.2(a), without regard to the single-loss deductible of $50,000, if and
when the aggregate amount of Indemnifiable Losses for which the Seller has
not made Indemnity Payments as a result of the single-loss deductible
equals $225,000 (the "aggregate-loss deductible") to the extent such
Indemnifiable Losses exceed the aggregate-loss deductible. For purposes of
determining whether or not the $50,000 single-loss deductible and/or any
part of the $225,000 aggregate-loss deductible is available with respect to
a claim for indemnification under clause (i) of this Section 8.2(a), the
Indemnifiable Losses of SCBC, the Association and the Retained Association
Subsidiaries arising from a single claim shall be aggregated, and each
dollar of Indemnifiable Loss of SCBC, the Association and/or a Retained
Association Subsidiary from a claim (taking into consideration requirements
imposed in the specific representation, warranty, covenant or agreement
alleged to have been violated, such as a "materiality" or "Material Adverse
Event" threshold, which must be satisfied before such representation,
warranty, covenant or agreement can be violated and a corresponding claim
for indemnification may be made) shall be charged against the single-loss
and aggregate-loss deductibles; provided, however, each dollar of
Indemnifiable Losses recovered by SCBC, the Association and/or any of the
Retained Association Subsidiaries from any Person that is not an Affiliate
of any of them prior to the making of such a claim for indemnification
shall not be charged against the single-loss deductible or the aggregate-
loss deductible. By way of example only, if the first six claims for
indemnification under clause (i) of this Section 8.2(a) are separate and
are made by SCBC in the following order and for Indemnifiable Losses in the
amounts of $49,900, $49,900, $49,900, $49,900 $25,000 and $500 (determined
in each instance after taking into consideration any "materiality,"
"Material Adverse Event" or similar threshold applicable to the specific
representation, warranty, agreement or covenant that SCBC asserts the
Seller has breached), the Seller would not be obligated to make Indemnity
Payments to SCBC for the first four claims for $49,900 each nor the fifth
claim for $25,000, because each of these claims is for Indemnifiable Losses
in an amount less than the $50,000 single-loss deductible and the aggregate
of these five claims (i.e., $224,600) is less than the $225,000 aggregate-
loss deductible; the Seller would be obligated to make an Indemnity Payment
for Indemnifiable Losses of $100 to SCBC in respect of the sixth claim for
$500, even though it is for an amount less than the $50,000 single-loss
deductible, because the sum of the six claims (i.e., $225,100) exceeds the
$225,000 aggregate-loss deductible by this amount; and, thereafter, the
Seller would be obligated to make Indemnity Payments for all claims under
clause (i) of this Section 8.2(a) without regard to the $50,000 single-loss
deductible.
(b) Subject to the limitations set forth in this Section 8.2(b) and
in Section 8.2(c) hereof, and in
49
<PAGE>
accordance with the procedures set forth in Section 8.3 hereof, SCBC shall
indemnify and hold harmless the Seller from and against all Indemnifiable
Losses suffered by the Seller by reason of the inaccuracy or untruthfulness of
a representation or warranty of SCBC or the breach of any covenant or
agreement of SCBC contained in this Agreement. A claim for indemnification
pursuant to this Section 8.2(b) that is not made on or before the Period End
shall be forever barred, notwithstanding any longer period provided in any
otherwise applicable statute of limitations or any other rule of law to the
contrary.
(c) Notwithstanding anything in Section 8.2(a) hereof to the
contrary, the Seller shall not be obligated to indemnify SCBC, the
Association and/or any of the Retained Association Subsidiaries for
Indemnifiable Losses suffered by it or them by reason of the inaccuracy or
untruthfulness of any representation or warranty of the Seller or the
breach of any covenant or agreement of the Seller of which SCBC has actual,
conscious awareness prior to the Effective Time; provided, however, that
the preceding provision of this sentence does not apply to the
Indemnifiable Losses arising from or incurred in connection with
Indemnifiable Losses under Sections 8.2(a)(iv), (v), (vi), and (vii).
Notwithstanding anything in Section 8.2(b) hereof to the contrary, SCBC
shall not be obligated to indemnify the Seller for Indemnifiable Losses
suffered by the Seller by reason of the inaccuracy of a representation or
warranty or the breach of a covenant or an agreement of which the Seller
has actual, conscious awareness prior to the Effective Time. The sole
remedy and recourse for the inaccuracy or untruthfulness of a
representation or warranty or the breach of a covenant or an agreement of
which SCBC or the Seller, as the case may be, has actual, conscious
awareness prior to the Effective Time (except, as provided above, this
provision shall not apply to SCBC's awareness of the Litigation) shall be,
in the case of the Seller, to refuse to waive the condition to Closing set
forth in Section 6.2(a) hereof and to terminate this Agreement under
Section 7.1(b) hereof, and, in the case of SCBC, to refuse to waive the
condition to Closing set forth in Section 6.3(a) hereof and to terminate
this Agreement under Section 7.1(b) hereof.
SECTION 8.3. INDEMNIFICATION PROCEDURES.
(a) With respect to indemnification under clauses (iv), (v) and (vi)
of Section 8.2(a) for the Class Action Litigation, the Homeowners
Litigation and the Bankruptcy Litigation, respectively, the Seller and SCBC
shall execute and deliver at the Closing the Responsibilities Agreement,
pursuant to which the Seller shall assume the defense of each such
Litigation matter that has not been Terminated as of the Closing and SCBC
shall undertake to cooperate in good faith in the defense of each such
Litigation matter, all upon the terms and conditions set forth in the
Responsibilities Agreement;
(b) With respect to claims for indemnification under Section 8.2(a)
hereof (other than clauses (iv), (v) and (vi) thereof) and under Section
8.2(b) hereof:
(i) If any Indemnified Party receives notice of the assertion or
commencement of any Third Party Claim against such Indemnified Party with
respect to which any Indemnifying Party is obligated to provide
indemnification under Section 8.2 (including any claim concerning a Named
Employee with respect to the matters described in Section 8.2(a)(vii)), the
Indemnified Party will deliver to such Indemnifying Party reasonably prompt
written notice thereof, which in no event will be later than 15 calendar
days after receipt of such notice of the assertion or commencement of such
Third Party Claim. Such notice will describe the Third Party Claim in
reasonable detail, will include copies of all materials written in evidence
thereof and will indicate the estimated amount, if reasonably practicable,
of the Indemnifiable Losses that has been or may be sustained by the
50
<PAGE>
Indemnified Party. The Indemnifying Party will have the right to
participate in, or, by giving written notice to the Indemnified Party, to
assume, the defense of any Third Party Claim at such Indemnifying Party's
own expense and by such Indemnifying Party's own counsel (reasonably
satisfactory to the Indemnified Party), and the Indemnified Party will
cooperate in good faith in such defense.
(ii) If, within ten (10) calendar days after the date of delivery
of notice of a Third Party Claim to an Indemnifying Party pursuant to
Section 8.3(b)(i), an Indemnified Party receives written notice from the
Indemnifying Party that the Indemnifying Party has elected to assume the
defense of such Third Party Claim as provided in the last sentence of
Section 8.3(b)(i), the Indemnifying Party will not be liable to indemnify
the Indemnified Party for any legal expenses subsequently incurred by the
Indemnified Party in connection with the defense thereof, notwithstanding
the definition of the term "Adverse Consequences;" provided, however, that
if the Indemnifying Party fails to take reasonable steps necessary to
defend diligently such Third Party Claim within 15 calendar days after the
delivery by the Indemnified Party of written notice that the Indemnified
Party believes the Indemnifying Party has failed to take such steps or if
the Indemnifying Party has not undertaken fully to indemnify the
Indemnified Party in respect of all Indemnifiable Losses relating to the
matter, the Indemnified Party may assume its own defense, and the
Indemnifying Party will be liable for all reasonable costs or expenses paid
or incurred by the Indemnified Party in connection therewith; and, provided
further, that if the Indemnifying Party is also a party or party-in-
interest to such Third Party Claim and the Indemnified Party receives a
written opinion of counsel that, as a result of such status of the
Indemnifying Party, counsel for the Indemnifying Party (the "Indemnifying
Party's Counsel") has, or reasonably will have, a conflict of interest in
representing both the Indemnified Party and the Indemnifying Party with
respect to such Third Party Claim, the Indemnified Party, upon notice to
the Indemnifying Party, may employ separate counsel to represent the
Indemnified Party in such Third Party Claim (the "Indemnified Party's
Counsel"), with the expense of Indemnified Party's Counsel to be
Indemnifiable Losses. In such event, the participation of the Indemnified
Party's Counsel in any Third Party Claim shall not preclude (a) continuing
representation of the Indemnifying Party in such Third Party Claim by the
Indemnifying Party's Counsel, or (b) continuing representation of the
Indemnified Party by the Indemnified Party's Counsel in connection with
matters related to or arising under the Agreement or the other agreements
referenced herein. Without the prior written consent of the Indemnified
Party, the Indemnifying Party will not enter into any settlement of any
Third Party Claim that would lead to Liability or create any financial or
other obligation on the part of the Indemnified Party. If a firm offer is
made to settle a Third Party Claim without leading to Liability or the
creation of a financial or other obligation on the part of the Indemnified
Party and the Indemnifying Party desires to accept and agree to such offer,
the Indemnifying Party will deliver written notice to the Indemnified Party
to such effect. If the Indemnified Party fails to consent to such firm
offer with ten (10) calendar days after the delivery of such notice, the
Indemnified Party may continue to contest or defend such Third Party Claim;
provided, however, the maximum amount of
51
<PAGE>
Indemnifiable Losses for such Third Party Claim may not exceed the amount of
Indemnifiable Losses incurred through the end of such ten (10) calendar day
period, plus the amount of such settlement offer. In the event that (a) the
Indemnifying Party ceases to take reasonable steps to defend any Third Party
Claim after expiration of the fifteen (15) day notice period prescribed in the
first sentence of this clause (ii) of Section 8.3(b), or (b) the Indemnified
Party elects to continue to contest or defend a Third Party Claim as
described in the immediately preceding sentence, the Indemnified Party may
elect to retain the Indemnifying Party's Counsel to continue to contest or
defend such Third Party Claim. The Indemnifying Party, after consulting
with and receiving the advice of its own counsel about this provision,
agrees and consents, and waives all objections and assertions of conflicts
of interest, to the continuing representation of the Indemnified Party by
the Indemnifying Party's Counsel and/or the Indemnified Party's Counsel in
the circumstances and as described in the immediately preceding sentence.
(iii) Any Direct Claim will be asserted by delivery to the
Indemnifying Party of reasonably prompt written notice thereof, which,
except as otherwise specifically provided in Section 8.2(a), in no event
will be later than 30 calendar days after the Indemnified Party becomes
aware of such Direct Claim, and the Indemnifying Party will have a period
of 15 calendar days within which to respond in writing to such Direct
Claim. If the Indemnifying Party does not so respond within such 15
calendar day period, the Indemnifying Party will be deemed to have rejected
such claim, in which event the Indemnified Party will be free to pursue
such remedies as may be available to the Indemnified Party on the terms and
subject to the provisions of this Agreement.
(iv) A failure to give timely notice or to include any specified
information in any notices as provided in Sections 8.3(c)(i), 8.3(c)(ii) or
8.3(c)(iii) will not affect the rights or obligations of any party hereto
except and only to the extent that, as a result of such failure, any party
hereto that was entitled to receive such notice was deprived of its right
to recover any payment under its applicable insurance coverage or was
otherwise damaged as a result of such failure. The Indemnified Party shall
use its best reasonable efforts to cooperate and assist the Indemnifying
Party in defending any Third Party Claim, which shall include, but not be
limited to, the pursuit of all cross-claims and counterclaims associated
therewith (other than any such claim by the Indemnified Party against an
Affiliate thereof) and reasonable access to all records and employees of
the Indemnified Party; provided, however, that all reasonable out-of-pocket
costs and expenses of the Indemnified Party thereby incurred shall be
reimbursed by the Indemnifying Party within ten (10) days of written demand
therefor.
(v) If the amount of any Indemnifiable Losses, at any time
subsequent to the making of an Indemnity Payment or charge against the
single-loss deductible and the aggregate-loss deductible, is reduced by
recovery, settlement or otherwise under or pursuant to any insurance
coverage, other than a recovery, settlement or other reduction from any
Person that is an Affiliate of the Indemnified Party, or pursuant to any
claim, recovery, settlement or payment by or against any Person
52
<PAGE>
that is not an Affiliate of the Indemnified Party, then the amount of such
reduction, less any costs, expenses, premiums or taxes incurred in connection
therewith, will promptly be repaid by the Indemnified Party to the
Indemnifying Party up to the amount of any Indemnity Payment made in
respect of such Indemnifiable Losses, and any amount in excess of such
Indemnity Payment shall be retained by the Indemnified Party, and the
amount of any charge against the single-loss deductible and the aggregate
loss deductible in respect of such Indemnifiable Losses shall be reversed
and the deductibles restored up to the amount of such excess. Upon making
any Indemnity Payment the Indemnifying Party will, to the extent of such
Indemnity Payment and/or the amount of the single-loss deductible and the
aggregate-loss deductible charged against the claim associated with such
Indemnity Payment, be subrogated to all rights of the Indemnified Party
against any third party that is not an Affiliate of the Indemnified Party
in respect of the Indemnifiable Losses to which the Indemnity Payment
relates; provided, however, that (i) the Indemnifying Party shall then be
in compliance with its obligations under this Agreement in respect of such
Indemnifiable Losses, and (ii) until the Indemnified Party recovers full
payment of its Indemnifiable Losses (other than the amount of the single-
loss deductible and the amount of the aggregate-loss deductible charged
against a Direct Claim or Third Party Claim or associated with the
Indemnity Payment), any and all claims of the Indemnifying Party against
such third party on account of said Indemnity Payment will be subrogated
and subordinated in right of payment to the Indemnified Party's rights
against such third party. Without limiting the generality or effect of any
other provision of this Agreement, each such Indemnified Party and
Indemnifying Party will duly execute upon request all instruments
reasonably necessary to evidence and perfect the above-described
subrogation and subordination rights.
(c) If a dispute arises with respect to Section 8.2 of this
Agreement, the parties agree to resolve any such dispute by seeking a fair
and prompt negotiated resolution, but if this is not successful, all
disputes shall be resolved by arbitration pursuant to Section 8.5 of this
Agreement.
SECTION 8.4. INDEMNIFICATION COLLATERAL.
(a) In order to secure the Seller's indemnification obligations under
Section 8.2(a) hereof (the "General Indemnity"), the Seller shall, at the
Closing, grant, transfer and deliver to SCBC, as Collateral Agent,
perfected first liens and security interests ("Indemnification Security
Interests") on and in Eligible Collateral having a General Indemnity Value
in an amount (the "Required General Indemnity Amount") of at least
$1,500,000 (the "General Indemnity Collateral Pool"). In order to further
secure the Seller's indemnification obligations under clause (iv) of
Section 8.2(a) for the Class Action Litigation, but for no other purposes
(the "Litigation Indemnity"), the Seller shall, at the Closing, grant,
transfer and deliver to SCBC, as Collateral Agent, perfected first liens
and security interests ("Litigation Security Interests") on and in Eligible
Collateral having a Litigation Indemnity Value in an amount (the "Required
Litigation Indemnity Amount") of at least $244,000 (the "Litigation
Indemnity Collateral Pool").
(b) The term "General Indemnity Value" means: (i) in the case of
Eligible Excluded Assets, 60% of the Net Book Value on the books of the
Association or the applicable Retained Association Subsidiary as of the
Closing Date minus the aggregate amount of principal repayments received by
the Seller during
53
<PAGE>
the period of time from the Closing Date through the last
day of the calendar month immediately preceding the date upon which the
Indemnification Security Interests are granted in or on the Eligible
Excluded Asset (the "General Indemnity Security Interest Date"); and (ii)
in the case of Other Eligible Collateral, face value. The term "Litigation
Indemnity Value" means (i) in the case of Eligible Excluded Assets, 70% of
the Net Book Value on the books of the Association or the applicable
Retained Association Subsidiary as of the Closing Date, minus, in the case
of Eligible Excluded Assets, until the twelfth (12th) Monthly Adjustment
(as defined below) 50% of the provisions for losses taken by the Seller and
other write-downs in value on the Seller's books at or after the Effective
Time in respect of such Eligible Excluded Assets (and thereafter such
reserves and write-downs shall be disregarded), and minus the aggregate
amount of principal repayments received by the Seller during the period of
time from the Closing Date through the last day of the calendar month
immediately preceding the date upon which the Litigation Security Interests
are granted in or on the Eligible Excluded Asset (the "Litigation Indemnity
Security Interest Date"), and (ii) in the case of Other Eligible
Collateral, face value. After the Closing, the General Indemnity Value and
the Litigation Indemnity Value of the actual collateral from time to time
(the "Collateral") will be reviewed at the end of each calendar month, and
Indemnification Security Interests and/or Litigation Security Interests in
any additional Eligible Collateral necessary to meet each of the Required
General Indemnity Amount and the Required Litigation Indemnity Amount will
be granted, transferred and delivered by the Seller to SCBC, as Collateral
Agent (the "Monthly Adjustment"), within ten (10) business days thereafter.
For purposes of the Monthly Adjustment, the General Indemnity Value and
the Litigation Indemnity Value each will be calculated as of the last day
of that month (rather than the General Indemnity Security Interest Date or
the Litigation Indemnity Security Interest Date, as applicable) and will
also reflect any adjustments required by reason of any principal repayments
received by the Seller in respect of Collateral during such month,
unrepaired damage, destruction or condemnation. The Required General
Indemnity Amount of the General Indemnity Collateral Pool will be reduced
from time to time by the amount of any Indemnifiable Losses paid by the
Seller on indemnification claims under clause (i) of Section 8.2(a),
whether on Direct Claims or Third Party Claims, and a corresponding amount
of the Collateral in the General Indemnity Collateral Pool shall be
immediately released by SCBC, as Collateral Agent, from the Indemnification
Security Interests.
(c) The term "Eligible Collateral" means (i) Excluded Loans and
Excluded Real Estate and JV Interests (collectively, the "Eligible Excluded
Assets"), and (ii) Cash, U.S. government obligations and other security of
similar credit standing and liquidity mutually agreed upon by the Seller
and SCBC (collectively, the "Other Eligible Collateral").
(d) The Seller may from time to time and at any time remove
Collateral from the General Indemnity Collateral Pool or the Litigation
Indemnity Collateral Pool and SCBC, as Collateral Agent, shall release the
Indemnification Security Interests or Litigation Security Interests, as
applicable, on such Collateral, provided that (i) Eligible Collateral
having a General Indemnity Value or a Litigation Indemnity Value, as
applicable, equal to the Collateral to be removed and released shall be
substituted immediately prior to the time of such removal and release, and
(ii) the Seller shall give SCBC at least five (5) business days' prior
notice of its intention to make a removal, release and substitution.
(e) At the Closing (and at the time of the granting of any
Indemnification Security Interests or Litigation Security Interests after
the Closing) the Seller and SCBC will enter into security documents which
shall: (i) be Appropriate for the type of Eligible Collateral involved;
(ii) be in form and substance identical (except for necessary changes) to
those which will be agreed upon prior to the Closing; (iii) provide that
the only obligations secured thereby are the Seller's obligations under the
General Indemnity, in the case of security documents relating to any of the
General Indemnity Collateral Pool, or the Seller's
54
<PAGE>
obligations under the Litigation Indemnity, in the case of security documents
relating to any of the Litigation Indemnity Collateral Pool; (iv) permit all
receipts from the Collateral, including, without limitation, principal,
interest, dividends, rents, royalties, insurance proceeds, condemnation
awards, sale proceeds and the like to continue to be paid to the Seller,
unless an event of default has occurred under the security documents which
relate to such Collateral, except that receipts of principal other than
regular installment payments of principal, insurance proceeds, condemnation
awards and sales proceeds shall be payable to the Seller only if the Required
General Indemnity Amount or Required Litigation Indemnity Amount, as
applicable, of Collateral will remain in the General Indemnity Collateral
Pool or the Litigation Indemnity Collateral Pool, as applicable, after the
payment thereof and after the addition thereto of any new Collateral by the
Seller; (v) provide that any Collateral then remaining in the General
Indemnity Collateral Pool shall be released on the first business day which
follows the Period End; provided, however, if there then exists any
unresolved Direct Claims or Third Party Claims made in accordance with the
requirements of this Agreement, Collateral having a General Indemnity Value
not less than the aggregate amount of such claim(s) shall be retained and
released upon the final resolution of such claim(s) or partially released
as multiple claims are finally resolved; (vi) provide that any Collateral
remaining in the Litigation Indemnity Collateral Pool upon Termination of
the Class Action Litigation shall be released on the 16th day following
such Termination, and (vii) provide, with respect to Collateral in the
General Indemnity Collateral Pool, that the Seller shall not be deemed to
be in default of its obligations while the Seller is disputing its
obligations to indemnify SCBC, the Association and/or the Retained
Association Subsidiaries for any claims under clauses (i), (ii), and (iii)
of Section 8.2(a) of this Agreement in accordance with the dispute
resolution procedures set forth in this Agreement. The term "Appropriate"
shall mean a document satisfactory in form and substance to SCBC and when
used in respect of any Eligible Collateral which is: (A) an Excluded Loan,
shall mean a security agreement, UCC-1 financing statements, a collateral
assignment of the promissory note representing such Excluded Loan, and a
collateral assignment of the related mortgage or deed of trust; (B)
Excluded Real Estate, shall mean a mortgage (or deed of trust), an
assignment of rents and security agreement, and UCC-1 financing statements;
(C) an Excluded JV Interest, shall mean a security agreement, a collateral
assignment of the JV Interest of the Seller, and UCC-1 financing
statements; (D) Cash or U.S. government obligations, shall mean a security
agreement; and (E) subject to one or more prior third party liens or
Security Interests, shall mean Intercreditor Agreements which shall provide
for the subordination of all such prior liens or Security Interests to the
Indemnification Security Interests and/or the Litigation Security Interests
being granted by the Seller to SCBC, as Collateral Agent.
(f) any Collateral which is Cash, a U.S. government obligation, a
note (including a note evidencing an Excluded Loan) or other asset the
possession of which must be delivered to the creditor or an agent in order
to perfect Indemnification Security Interests or Litigation Security
Interests therein shall be held by SCBC as Collateral Agent or, at the
Seller's election and at the Seller's expense, by another collateral escrow
agent, who shall act as the agent and for the benefit of SCBC, the
Association, the Successor and the Retained Association Subsidiaries and
who shall be acceptable to SCBC, pursuant to an escrow agent agreement in
form and substance satisfactory to SCBC.
SECTION 8.5. ARBITRATION
Any controversy or claim arising out of or relating to this Agreement,
or the breach thereof, shall be resolved by arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association at
a site located in the State of North Carolina, and, absent fraud, collusion
or willful misconduct by the arbitrator(s) shown by clear and convincing
evidence (rather than by a preponderance of the evidence), judgment upon
the award rendered by the arbitrator(s) may be entered
55
<PAGE>
in any court having jurisdiction thereof. The arbitrator(s) may award
injunctive relief or any other remedy available from a judge, including
liquidated damages as set forth in Section 7.2(b), the Penalty as provided in
Section 2.4(d), and reimbursement of expenses as provided in Section 8.1, and
shall award costs, expenses and reasonable attorneys' fees to the prevailing
party, but shall not have the power to award punitive or exemplary damages
other than the Penalty. The fees and expenses of the arbitrator(s) shall be
paid by the non-prevailing party (in the event one party prevails on all
matters arbitrated) or by the parties in proportion to the monetary damages
awarded to the other party as compared to the sum of all monetary damages
awarded (in the event neither party prevails on all matters arbitrated). For
example, a party awarded 60% of the sum of damages awarded to the parties
would pay 40% of the fees and expenses of the arbitrator(s). The parties
confirm that by agreeing to this alternate dispute resolution process, they
intend to give up their right to have any dispute decided in a civil court
by a judge or jury.
SECTION 8.6. ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereto, written or oral,
including the Letter of Intent, dated December 15, 1993, as amended, other
than documents referred to herein that are to be executed at or in
connection with the Closing. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the parties hereto, and
their respective successors and permissible assignees. Nothing in this
Agreement, expressed or implied, is intended to confer upon any party,
other than the parties hereto, and their successors, any rights, remedies,
obligations or Liabilities.
SECTION 8.7. ASSIGNMENT
Neither of the parties hereto may assign any of its rights or
obligations under this Agreement to any other Person; provided, however,
that SCBC may assign its rights and obligations to any SCBC Subsidiary
designated by it (herein, the "Designated Subsidiary") upon notice to the
Seller, accompanied by a written assumption agreement executed by the
Designated Subsidiary; provided, further, that notwithstanding such
assignment to a Designated Subsidiary, SCBC shall remain, and jointly and
severally with the Designated Subsidiary be, obligated with regard to all
such obligations assigned. In the event that SCBC shall make such an
assignment, each reference to SCBC herein shall be deemed to be a reference
to both SCBC and the Designated Subsidiary, unless the context of such
reference clearly requires otherwise. Notwithstanding any such assignment,
SCBC shall be entitled to enforce, in its own name and on behalf of the
Designated Subsidiary, its and the Designated Subsidiary's rights
hereunder.
SECTION 8.8. NOTICES
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or
sent by overnight express or by registered or certified mail, postage
prepaid, addressed as follows:
If to the Seller:
Fairfield Communities, Inc.
Post Office Box 3375
Little Rock, Arkansas 72203
Attn: Marcel J. Dumeny
56
<PAGE>
(For Overnight Delivery):
Fairfield Communities, Inc.
2800 Cantrell Road
Little Rock, Arkansas 72202
Attn: Marcel J. Dumeny
With a required copy to:
Jones, Day, Reavis & Pogue
Post Office Box 660623
Dallas, Texas 75226
Attn: Stephen L. Fluckiger
(For Overnight Delivery):
Jones, Day, Reavis & Pogue
2300 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attn: Stephen L. Fluckiger
If to SCBC:
Security Capital Bancorp
Post Office Box 1387
Salisbury, North Carolina 28145-1387
Attn: David B. Jordan, Vice Chairman and
Chief Executive Officer
(For Overnight Delivery):
Security Capital Bancorp
507 West Innes Street
Salisbury, North Carolina 28144
Attn: David B. Jordan, Vice Chairman and
Chief Executive Officer
With a required copy to:
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
Post Office Box 26000
Greensboro, North Carolina 27420-6000
Attn: Robert A. Singer
57
<PAGE>
(For Overnight Delivery):
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
2000 Renaissance Plaza, 230 North Elm Street
Greensboro, North Carolina 27401
Attn: Robert A. Singer
SECTION 8.9. CAPTIONS; HEADINGS
The captions and section headings contained in this Agreement are for
reference purposes only and are not part of this Agreement.
SECTION 8.10. AMENDMENTS
No amendment of any provision of this Agreement shall be valid unless
the same shall be in writing and signed by duly authorized executive
officers of SCBC and the Seller.
SECTION 8.11. SEVERABILITY
Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any
other situation or in any other jurisdiction.
SECTION 8.12. CONSTRUCTION
The Seller and SCBC have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or a question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties hereto and no presumption or burden of proof
shall arise favoring or disfavoring either party by virtue of the
authorship of any of the provisions of this Agreement. Any reference to
any federal, state, local, or foreign statute or law shall be deemed also
to refer to all rules and regulations promulgated thereunder, unless the
context requires otherwise. The word "including" shall mean including
without limitation. The Seller and SCBC intend that each representation,
warranty, covenant and agreement contained herein shall have independent
significance.
SECTION 8.13. INCORPORATION OF EXHIBITS AND APPENDICES
The Exhibits and Appendices identified in this Agreement are
incorporated herein by reference and made a part hereof.
SECTION 8.14. SPECIFIC PERFORMANCE
Each of the Seller and SCBC acknowledges and agrees that the other
party would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached prior to the Effective Time. Accordingly, each of
the parties hereto agrees that the other party shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United
States or any state thereof having
58
<PAGE>
jurisdiction over the parties and the matter, in addition to any other remedy
to which it may be entitled, at law or in equity. This Section 8.14 deals
only with the right to pursue the equitable remedy of specific performance.
The right to seek such remedy of specific performance shall not be deemed to
enlarge or decrease the provisions of Section 7.2(b) hereof, and may be sought
to be enforced in conjunction with, but in the alternative to, a claim under
Section 7.2(b) or may be sought to be enforced independently of a claim under
Section 7.2(b), but in no event shall a party hereto recover liquidated
damages under Section 7.2(b) hereof and seek to enforce specific performance
of this Agreement.
SECTION 8.15. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
SECTION 8.16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of North Carolina applicable to agreements made and
entirely to be performed within such jurisdiction except to the extent
federal law may be applicable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in counterparts by their duly authorized officers and their
corporate seals to be hereunto affixed and attested by their officers
thereunto duly authorized, all as of the day and year first above written.
ATTEST: SECURITY CAPITAL BANCORP
/s/ Bettina S. Jamison By: /s/ David B. Jordan
- - - - - -------------------------- -------------------------------
ASST. SECRETARY DAVID B. JORDAN
VICE CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
(SEAL)
ATTEST: FAIRFIELD COMMUNITIES, INC.
/s/ Marcel J. Dumeny By: /s/ J. W. McConnell
- - - - - -------------------------- -------------------------------
SECRETARY JOHN W. MCCONNELL
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
(SEAL)
<PAGE>
List of Exhibits
----------------
<TABLE>
<CAPTION>
Exhibit Topic First Reference
- - - - - ------- ----- ---------------
<S> <C> <C>
Exhibit A Excluded Loans Article I
Exhibit B Excluded Real Estate and Article I
JV Interests
Exhibit C List of Retained Article I
Association Subsidiaries
Exhibit D Responsibilities Article I
Agreement
Exhibit E License and Services Section 5.9
Agreement
Exhibit F (Not used by agreement
of the parties)
Exhibit G (Not used by agreement
of the parties)
Exhibit H Designated Loans Section 5.11
</TABLE>
<PAGE>
EXHIBITS INTENTIONALLY OMITTED
<PAGE>
APPENDIX II - OPINION OF CAPITAL RESOURCES GROUP, INC.
<PAGE>
[LETTERHEAD OF CAPITAL RESOURCES GROUP, INC.]
July 22, 1994
Board of Directors
Fairfield Communities, Inc.
2800 Cantrell Road
Little Rock, Arkansas 72202
Dear Board Members:
You have requested our opinion as to the fairness from a financial point of
view to Fairfield Communities, Inc. ("Fairfield") of the proposed consideration
to be paid to Fairfield by Security Capital Bancorp ("Security") in connection
with the proposed sale by Fairfield of all the issued and outstanding capital
stock of First Federal Savings and Loan Association of Charlotte ("First
Federal") to Security Bank and Trust Company, a wholly-owned subsidiary of
Security ("Transaction").
Capital Resources Group, Inc. ("Capital Resources") is an investment
banking firm that, as part of our specialization in financial institutions, is
regularly engaged in the financial valuations and analyses of business
enterprises and securities in connection with mergers and acquisitions,
valuations for mutual- to-stock conversions of thrifts, initial and secondary
offerings, divestiture and other corporate purposes. Senior members of Capital
Resources have extensive experience in such matters. We believe that, except for
the fee we will receive for our opinion, we are independent of Fairfield and
First Federal.
FINANCIAL TERMS OF THE OFFER
We understand that, pursuant to a Stock Purchase Agreement dated as of
April 5, 1994 ("Agreement"), and discussions with Fairfield's management and
Fairfield's legal counsel, Security (or a designated subsidiary of Security) has
agreed to acquire from Fairfield all of the issued and outstanding shares of
common stock of First Federal. The purchase price for such shares of First
Federal will equal $40,350,000 plus any earnings adjustment. The level of any
earnings adjustment will be based on First Federal's interim period earnings
from October 1, 1993 to the effective time of the Transaction, as adjusted for
certain extraordinary items (as defined in the Agreement) and tax sharing
payments between First Federal and Fairfield. While the earnings adjustment
could be a negative number, it is our understanding based on discussions with
management of Fairfield, that the earnings adjustment is expected to be positive
but, unless closing is delayed beyond August 1, 1994, will not exceed $1,825,000
pursuant to the Agreement.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
July 22, 1994
Page 2
The purchase price (as defined above) will be comprised of two components
(1) a cash payment ("cash payment amount") to be paid at the effective time of
the Transaction equal to the excess of the purchase price over a deferred
payment amount and (2) a deferred payment amount of $1,387,000 to be paid in one
or more cash payments after the effective time of the Transaction upon
satisfaction of certain conditions relating to three litigation cases and/or
claims which First Federal is currently defending.
Pursuant to the Agreement, Fairfield will also indemnify Security regarding
certain matters, including certain pending claims against First Federal and
other matters incident to the Transaction. The indemnification will be secured
by granting Security security interests in certain "excluded assets" having a
net book value of approximately $2,850,000.
Pursuant to the Agreement, Fairfield may elect to cause Security to pay all
or a portion of the cash payment amount to First Federal as an offset to, and a
credit against, Fairfield's payment for certain "excluded assets" to be
transferred and assigned from First Federal to Fairfield. The "excluded assets"
include loans, real estate and joint venture interests, timeshare and lot
contract receivables and other assets.
It is important to note that our fairness opinion conclusion rendered
herein is based on the cash purchase price to be paid by Security for the stock
of First Federal. The purchase by Fairfield of First Federal's "excluded assets"
does not fall within the scope of our fairness opinion and accordingly we have
not performed an appraisal of such assets.
MATERIALS REVIEWED
In the course of rendering our opinion we have, among other things:
(1) Reviewed the terms of the Agreement and discussed the Agreement
provisions with management of Fairfield and Fairfield's legal counsel;
(2) Reviewed the following financial data of First Federal:
- the audited financial statements of First Federal for the fiscal
years ended December 31, 1989 through December 31, 1993, plus
unaudited financial statements through March 31, 1994,
- the Office of Thrift Supervision quarterly Thrift Financial
Reports covering the period through March 31, 1994, the latest
available period,
- First Federal's latest available gap analysis report,
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
July 22, 1994
Page 3
- other miscellaneous internally-generated management information
reports for recent periods, and
- First Federal's most recent business plan and budget report;
(3) Discussed with executive management of Fairfield and First Federal the
business, operations, recent financial condition and operating results
and future prospects of First Federal;
(4) Compared First Federal's financial condition and operating results to
those of similarly-sized thrift institutions operating in North
Carolina, the Southeast and the U.S.;
(5) Compared First Federal's financial condition and operating performance
to the published financial statements and market price data of
publicly-traded thrifts in general, and publicly traded thrifts in
First Federal's region of the U.S. specifically;
(6) Performed such other financial analyses and investigations as we
deemed necessary, including a comparative financial analysis and
review of the financial terms of other pending and completed
acquisitions of companies we consider to be generally similar to First
Federal; and
(7) Examined First Federal's economic operating environment and the
competitive environment of First Federal's market area.
In arriving at our opinion, we have relied upon the accuracy and
completeness of the information provided to us by the various parties mentioned
above, upon public information and upon the statements and representations in
the Agreement, and have not conducted any independent investigations to verify
any such information or performed any independent appraisal of First Federal's
assets.
This fairness opinion is supported by the detailed information and analysis
contained in the Evaluation and Analysis Report dated April 8, 1994 ("Original
Report"), which has been produced by Capital Resources and delivered to
Fairfield. The Original Report is relied upon for purposes of rendering our
conclusion in this fairness opinion. The Original Report contains a business
description and financial analysis of First Federal, an analysis of current
economic conditions in First Federal's primary market area, and a financial and
market pricing comparison with a selected group of thrift institutions which
completed merger and acquisition transactions or are currently subject to
pending transactions. Such Original Report has been supplemented by a
Supplemental Evaluation and Analysis Report dated July 22, 1994 ("Supplemental
Report"), which contains updated financial and market pricing data.
<PAGE>
CAPITAL RESOURCES GROUP, INC.
Board of Directors
July 22, 1994
Page 4
It is our understanding that since December 15, 1993, the date on which
Fairfield entered into a letter of intent for the proposed sale of First Federal
to Security, in compliance with the terms of the letter of intent, no other
proposals have been solicited by Fairfield, and no unsolicited proposals have
been received by Fairfield, in either case, which provide for an offer price in
excess of that proposed by Security.
OPINION
Based on the foregoing and on our general knowledge of and experience in
the valuation of businesses and securities, we are of the opinion that, as of
July 22, 1994, the cash consideration to be paid by Security under the Agreement
for 100 percent of the issued and outstanding shares of common stock of First
Federal is fair to Fairfield from a financial point of view.
Respectfully submitted,
CAPITAL RESOURCES GROUP, INC.
/s/ David P. Rochester
-----------------------------
David P. Rochester
Chairman and Chief
Executive Officer
/s/ Michael B. Seiler
-----------------------------
Michael B. Seiler
Senior Vice President
<PAGE>
APPENDIX III - ANNUAL REPORT ON FORM 10-K/A (NO. 2) FOR YEAR ENDED
DECEMBER 31, 1993 OF FAIRFIELD COMMUNITIES, INC.
<PAGE>
COMPOSITE COPY
REFLECTING AMENDMENTS
NO. 1 AND NO. 2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A (No. 2)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Number: 1-8096
FAIRFIELD COMMUNITIES, INC.
(Exact name of registrant as specified in its Charter)
Delaware 71-0390438
(State of incorporation) (I.R.S. Employer Identification No.)
2800 Cantrell Road, Little Rock, Arkansas 72202
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code: (501) 664-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $.01 par value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in or information statements incorporated by
reference in Part III of this Form 10-K. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a
court. Yes X No
----- -----
The number of shares of the registrant's Common Stock outstanding as of March
18, 1994 totaled 9,792,601, of which 160,001 shares were held by wholly owned
subsidiaries of the registrant. The aggregate market value of the registrant's
Common Stock held by non-affiliates totaled approximately $42 million at
February 28, 1994.
Documents Incorporated by Reference: None
<PAGE>
INDEX TO
ANNUAL REPORT ON FORM 10-K
PAGE
PART I
Items 1. and 2. Business and Properties. . . . . . . . . . . . . . . . . 3
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 36
Item 4. Submission of Matters to a Vote of Security Holders. . . 36
PART II
Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters. . . . . . . . . . . . . . 36
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . 37
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 37
Item 8. Financial Statements and Supplementary Data. . . . . . . 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . 37
PART III
Item 10. Directors and Executive Officers of the Registrant . . . 37
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 40
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . 44
Item 13. Certain Relationships and Related Transactions . . . . . 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 45
-2-
<PAGE>
PART I
ITEMS 1. and 2. BUSINESS AND PROPERTIES
GENERAL
Fairfield Communities, Inc. was incorporated in Delaware in 1969, and its
principal executive offices are located at 2800 Cantrell Road, Little Rock,
Arkansas. Fairfield and certain of its subsidiaries successfully reorganized
under Chapter 11 of the United States Bankruptcy Code (the "Reorganization"),
pursuant to plans of reorganization confirmed August 14, 1992 (collectively, the
"Plans"). Unless the context requires otherwise, "Fairfield" means Fairfield
Communities, Inc., and is successor and survivor of the mergers pursuant to the
Plans, "Company" means Fairfield Communities, Inc. and its subsidiaries,
"Predecessor Fairfield" means Fairfield prior to the Reorganization and
"Predecessor Company" means Fairfield and its subsidiaries prior to the
Reorganization. Since July 1, 1992, the Company's financial statements have been
prepared as if it were a new reporting entity and a black line separates this
financial information from that of the Predecessor Company since it has not been
prepared on a comparable basis. At December 31, 1993, the Company had
approximately 1100 full-time employees.
The Company develops and markets vacation ownership properties and has sold
over $850 million in vacation ownership in its 27 years of operations, making
Fairfield one of the largest vacation ownership companies in the United States.
Fairfield's Leisure Products group, the Company's primary business, is engaged
in the marketing of fully furnished vacation ownership intervals ("VOIs") at 14
sites from 13 sales offices. Through its Leisure Products operations, the
Company strives to provide consistent, high quality vacation products and
recreational amenities at affordable prices. The Company finances VOIs
internally, through the generation of contracts receivable that produce regular
cash flows as payments are received. Fairfield also operates Fairfield
Acceptance Corporation ("FAC"), a finance company which provides financing to
the Company through periodic purchases of qualifying contracts receivable, and
First Federal Savings and Loan Association of Charlotte ("First Federal").
First Federal is engaged in the origination of single-family residential
mortgage loans and, to a lesser extent, commercial real estate and construction
loans, primarily in the Charlotte, North Carolina market area. As part of the
Company's efforts to reorganize its operations to focus on the marketing and
sales of VOIs, a letter of intent to sell 100% of the outstanding stock of First
Federal was entered into by Fairfield on December 15, 1993. On April 6, 1994,
Fairfield finalized its negotiations and entered into a Stock Purchase
Agreement. The divestiture of First Federal has been accounted for as a sale of
a portion of a segment and, accordingly, the respective assets to be sold and
liabilities to be assumed by the purchaser have been included in "Net
liabilities held for sale" in the Consolidated Balance Sheet at December 31,
1993 (see Note 2 of "Notes to Consolidated Financial Statements").
In 1992, the Company successfully emerged from Chapter 11 reorganization,
and in 1993, its first full year as a reorganized entity, reported net earnings
of $7.2 million. The events that led the Company to file for bankruptcy resulted
from a combination of real estate market conditions, lack of credit availability
and a business strategy under which the Company attempted to diversify its
business to include activities in the development and construction of primarily
residence and retirement communities, and entered into joint ventures unrelated
to its core business. In December 1989, the Company elected to discontinue its
Homes Group operations and its resort amenities operations, located at the
Company largest resort sites.
-3-
<PAGE>
THE VACATION OWNERSHIP CONCEPT
In reorganizing its operations, the Company has dedicated its efforts to
the strategic mission on which its early success was based; the development,
marketing and operation of vacation ownership properties and the sale and
financing of VOIs. Although the Company still offers lot sales and primary and
secondary residences at some of its larger resorts, its primary business focus
will be the VOI market. The Company currently markets its leisure products from
13 sales locations, offering vacation properties at 14 sites in the states of
Arkansas, Arizona, California, Colorado, Florida, Georgia, Missouri, North
Carolina, South Carolina, Tennessee and Virginia. The Company derived 31% of its
1993 revenues from VOI sales.
The VOI product is a concept whereby either fixed week intervals or
undivided fee simple interest are sold in fully furnished vacation homes. A VOI
purchaser becomes a property owner in common with other purchasers in a unit and
is entitled to the exclusive use of the unit and access to the site amenities
for the period purchased. VOI prices range from approximately $4,000 to $16,000
with an average selling price of $8,500. In most cases, the Company also
collects annual fees to cover such costs as utilities, maintenance and
landscaping, which are in turn paid to the entities providing those services.
FAIRSHARE PLUS
The Company's traditional product offering is the fixed week interval, in
which usage and ownership of a particular property is divided into 52 one- week
intervals, with a week or two set aside for annual maintenance and upkeep. In
recent years, the market has evolved in recognition of increased customer desire
for flexibility and variety in vacation ownership products. To meet the more
sophisticated customer demand, Fairfield offers undivided interest products in
which purchasers become tenants in common with their "use" rights dedicated to
FairShare Plus. Customers purchasing this product have increased flexibility in
that they can exercise their use rights at different times during the year and
are not limited to one week as a fixed term for their vacations.
The Company's primary vehicle for meeting customer demand is FairShare
Plus, a vacation system and program that provides the purchaser maximum
flexibility in structuring the length, location, timing and unit size of his
vacation. In this program a customer assigns his use rights granted under the
terms of the purchase contract to a separate trust and is allocated FairShare
Plus points symbolic of their VOI. Points can then be used to reserve vacations
from an available pool of VOIs, based on a published schedule of exchange rates
for various locations.
Customers are granted a wide amount of freedom in using their points,
including the ability to borrow points from future years or, under limited
circumstances, to carry forward unused points to later years. In addition to the
points program and the fixed week exchange program ("FAX"), the Company is
affiliated with a national VOI exchange organization, Resort Condominiums
International ("RCI"), allowing customers of the Company a wealth of other
options for timing and location of their vacations.
FINANCING SERVICES
As part of its business, the Company provides internal financing for VOI
and lot sales at fixed and adjustable interest rates, generating a continual
flow of high quality, medium-term interest-bearing contracts receivable. The
contracts represent one of the Company's most valuable assets because of their
quality and high yields. The contracts generally require monthly payments and
are secured by a first mortgage on the related VOI or lot. Fairfield services
all of the contracts receivable by utilizing an online data processing system
and a pre-authorized checking program, whereby customers have their checking
accounts automatically debited for the monthly payment.
-4-
<PAGE>
Fairfield formed FAC in 1982 to purchase contracts receivable originated by
the Company. Purchased contracts receivable comprise primarily all of FAC's
asset base. FAC uses cash flow from its assets to service its primary credit
facility and to purchase additional contracts receivable from the Company, thus
serving as a low-cost source of funds to Fairfield.
On September 30, 1993, Fairfield Funding Corporation ("FFC"), a newly
created special purpose subsidiary of FAC, completed a private placement of
approximately $82.7 million of 7.6% Notes. These Notes were secured by and
payable from a pool of approximately $99.6 million of vacation ownership and lot
contracts receivable originated by the Company and purchased from FAC by FFC.
The net proceeds from the private placement were used to reduce existing
indebtedness.
SALES AND MARKETING
The Company generally targets family households in the middle income
bracket who prefer outdoor recreational activities such as golf, tennis, and
water-based activities or who enjoy the variety of entertainment offered at
destination locations. The Company uses a number of marketing programs and
techniques to reach its targeted customer, including direct solicitation of
visitors through direct mail and telemarketing, referrals from existing
customers, and both on-site and off-site contact. Commissioned salespersons
staff the Company's 13 sales offices, offering promotions and conducting tours
of facilities at those locations to help generate sales.
Marketing and selling costs are historically a significant component of
total costs in the VOI industry. The Company's operating strategy includes
reducing these costs through a variety of mechanisms, such as decreased reliance
on direct mail marketing and increased use of existing customer referrals and
on-site sales contact. Further reductions in selling costs are expected to be
realized as the Company continues to direct its growth opportunities to
destination locations which have a higher and more consistent stream of
potential customers than the Company's other resort sites.
SITE LOCATION STRATEGY
The Company's resort sites vary in size from several hundred to over 18,000
acres. All locations offer a number of on-site amenities ranging from swimming
pools and tennis courts at all sites to championship golf courses, equestrian
facilities and ski slopes at some of the larger resorts. Under its previous
structure the Company developed and maintained ownership interests in many of
the amenities, but has since passed on many of the minor amenities to the
various property owner associations and has sold some major amenities such as
golf courses, primarily to the existing property owner associations. Customers
continue to enjoy full use of the various amenities and were subject to no
disruption or suspension of access to them during the asset disposition process.
The Company's strategy is directed primarily at developing new properties
near areas with existing vacation attractions. These areas, known as destination
locations, provide a greater tourism draw than traditional resort sites
developed by the Company. The Company operates vacation properties in two
destination locations, Williamsburg, Virginia, and Myrtle Beach, South Carolina
and, during 1993, began construction of a facility at Branson, Missouri, a
burgeoning country music mecca. Sales at the Branson property commenced in June
of 1993. Other destination locations, including Orlando, Florida, are being
evaluated for future projects. In evaluating new locations for growth
opportunities, the Company's management analyzes market and tourism data and
demographics, as well as the quality and diversity of the location's existing
attractions so as to broaden the base of recreational opportunities available to
its customers across the Company's portfolio of properties.
-5-
<PAGE>
SALE OF FIRST FEDERAL
On December 15, 1993, Fairfield entered into a letter of intent to sell
100% of the outstanding stock (the "Sale") of its wholly owned subsidiary, First
Federal, to Security Capital Bancorp ("SCBC"). On April 6, 1994, Fairfield
finalized its negotiations with SCBC and entered into a Stock Purchase
Agreement.
The Stock Purchase Agreement provides for a sales price of $40.4 million,
which will be increased (subject to the limitation hereafter described) to
reflect the consolidated pretax net earnings of First Federal and its
subsidiaries for the period from October 1, 1993 through the closing of the
Sale, or decreased by the consolidated pretax net losses of First Federal and
its subsidiaries during this period, whichever is the case (the "Sales Price").
The increase for pretax earnings of First Federal and its subsidiaries cannot
exceed approximately $1.8 million plus, if the closing of the Sale occurs after
August 1, 1994, in general, the pretax earnings or losses of First Federal and
its subsidiaries from August 1, 1994 through the closing, provided that the
foregoing amounts may be reduced under certain circumstances for reserves taken
or losses (in excess of gains) on Excluded Assets (as defined below) after
September 30, 1993. Up to approximately $1.4 million of the Sales Price is to be
retained by SCBC to securitize Fairfield's obligation to indemnify SCBC against
three existing lawsuits/claims which have been asserted against First Federal
(the "Litigation Indemnity").
As part of the proposed transaction, Fairfield is to purchase for cash (a)
at book value, net of reserves, up to approximately $22.6 million, as of
December 31, 1993, of certain real estate, classified loans, joint venture
interests and other assets owned by First Federal (the "Excluded Association
Assets"), subject to the right of SCBC to elect for First Federal to retain all
or part of such assets, and (b) lot and timeshare contracts receivable and
related assets, which First Federal previously acquired from Fairfield (the
"Contracts Receivable"), having a book value less certain reserves and a
weighted average yield, at December 31, 1993, of approximately $53.3 million and
11.6%, respectively. The Excluded Association Assets and the Contracts
Receivable are collectively referred to as the "Excluded Assets". Fairfield
expects to dispose of certain of the Excluded Association Assets in one or more
transactions, and otherwise to monetize the remaining Excluded Association
Assets, following the closing of the Sale. Management intends to dispose of a
substantial portion of the Excluded Association Assets by December 31, 1994.
Approximately $2.9 million in net book value of the Excluded Association
Assets are to be pledged to SCBC, to provide additional security with respect to
both the Litigation Indemnity and the general indemnities under the Stock
Purchase Agreement. Fairfield has certain rights to substitute collateral in
connection with such pledge, including the right to substitute $0.60 to $0.70 of
cash for every $1.00 of net book value of Excluded Association Assets so
pledged. Reserves taken by Fairfield after the closing on the Excluded
Association Assets securing the Litigation Indemnity may increase the total
Excluded Association Assets required as collateral.
Fairfield expects to utilize (a) the cash portion of the Sales Price to
fund the purchase of the Excluded Association Assets and (b) the remaining cash
portion of the Sales Price, plus proceeds from borrowings under the Company's
revolving credit agreements with The First National Bank of Boston ("FNBB"), to
fund the purchase of the Contracts Receivable. Under the Company's revolving
credit agreements, in general, within applicable loan limits, $0.75 of
additional borrowing availability is created for each $1.00 in outstanding
principal balance of qualifying Contracts Receivable pledged to FNBB.
Management estimates that the Sale will result in a net gain of
approximately $5.5 million after taking into account (i) writedowns related to
the Excluded Assets estimated at approximately $4.0 million, based upon
Fairfield's accelerated method of disposal of these assets subsequent to the
consummation of the Sale, and (ii) anticipated selling expenses, including
professional fees and other direct expenses, of approximately $3.3 million.
-6-
<PAGE>
The Sale is subject to numerous conditions, including the obtaining of
necessary approvals from (i) state and federal regulatory authorities, (ii) FNBB
and (iii) Fairfield's stockholders. There is no assurance that the conditions to
closing will be satisfied or that the various regulatory approvals will be
obtained on terms satisfactory to the parties. Assuming such conditions to
closing are satisfied and the approvals are obtained, the Sale is expected to
close by September 30, 1994.
DISCONTINUED OPERATIONS
In November 1993, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin #93 which expressed the view of the SEC staff
regarding accounting and related disclosures pertaining to discontinued
operations. In the staff's view, the estimates necessary for accounting for a
business as discontinued cannot be developed with sufficient reliability if
projections beyond 12 months from the measurement date are required by the
disposal plan. As the Company had certain assets included in discontinued
operations which had a planned disposal date beyond 12 months, the Company
reviewed its plans of disposal of discontinued operations and determined that
such assets and related liabilities should be reclassified into continuing
operations. Real estate inventories consisting of Fairfield's interest in its
Pointe Alexis development in Tarpon Springs, Florida and other assets consisting
of Fairfield's interest in Sugar Island limited partnership in St. Croix, U. S.
Virgin Islands having net realizable values of $6.4 million and $5 million,
respectively, were reclassified as of December 31, 1993 into continuing
operations. These assets partially collateralize the Company's Senior
Subordinated Secured Notes ("FCI Notes"), which had an outstanding principal
balance of $14.8 million at December 31, 1993, and which were also reclassified
into continuing operations as of December 31, 1993. The FCI Notes are also
collateralized by Fairfield's interest in Harbour Ridge limited partnership
located in Stuart, Florida. The sole sources of repayment for the FCI Notes
consist of the collateral, any proceeds from the sale of the collateral and, as
described below, the shares of common stock of Fairfield reserved as additional
collateral for the FCI Notes. In the event the proceeds from the sale of the
other collateral presently securing the FCI Notes, or the value of any such
collateral not sold, is not sufficient to repay the FCI Notes, Fairfield will
issue shares of common stock, up to a maximum number equal to what a holder of a
$5 million general unsecured claim was entitled to receive on the effective date
of the Plans. The Company is continuing its business plan to dispose of its
remaining resort amenity operations, consisting primarily of resort-based
restaurants, golf courses, and recreation centers.
In March 1994, Fairfield sold the stock of its wholly owned subsidiaries,
Fairfield Green Valley, Inc. and Fairfield Sunrise Village, Inc. (collectively,
the "Arizona Subsidiaries") at its approximate book value. The Arizona
Subsidiaries, with assets totaling $25 million at December 31, 1993, conducted
Fairfield's Arizona home building business. The consideration received by
Fairfield included (i) release of a lien on and transfer to Fairfield of
2,235,294 shares of Fairfield's Common Stock (no book value) owned by the
Arizona Subsidiaries and pledged to their primary lender, a subsidiary of Bank
of America Arizona (the "Bank"), (ii) release of a mortgage in favor of the Bank
on a tract of unimproved property owned by Fairfield, and (iii) release from any
further liability to the Bank. At December 31, 1993, the Arizona Subsidiaries
had loans of $19.9 million outstanding under their revolving credit agreement
with the Bank, bearing interest at rates ranging from 8% to 8.5%. These loans,
which are included in net assets of discontinued operations at December 31,
1993, were paid off in conjunction with the sale of the Arizona Subsidiaries.
-7-
<PAGE>
DEVELOPMENT/REGULATION
In certain of its developments, the Company engages in master planning of
land, home and commercial construction and management of resort and conference
facilities. Many state and local authorities have imposed restrictions and
additional regulations on developers of vacation ownership intervals ("VOIs")
and lots. Although these restrictions have generally increased the cost of
selling VOIs and lots, the Company has not experienced material difficulties in
complying with such regulations or operating within such restrictions. The
Company provides certain purchasers with a "property report" designed to comply
with the disclosure requirements of federal and state laws which contains, among
other things, detailed information about the particular community, the
development and the purchaser's rights and obligations as a VOI or lot owner.
FIRST FEDERAL
First Federal, organized in 1940, is a federally-chartered stock savings
and loan association engaged primarily in the business of attracting deposits
from the general public and using those deposits, together with borrowings and
other funds, to originate, acquire, and service real estate loans. First Federal
markets its deposit and lending services through ten full service and two loan
origination offices in areas in and around Charlotte, North Carolina, a city of
approximately 440,000 persons, with more than 1.3 million persons living within
the greater Charlotte metropolitan statistical area. Through its subsidiaries,
First Federal offers real estate appraisal, development and investment services
and mortgage loan origination services.
First Federal faces competition both in originating loans and in attracting
deposits. Competition in originating real estate loans comes primarily from
other savings associations, commercial banks and mortgage bankers located in
First Federal's market area. First Federal competes for real estate and other
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it originates and the quality of services it provides to
borrowers. First Federal faces substantial competition in attracting deposits
from other savings associations, commercial banks, money market and mutual
funds, credit unions and other investment vehicles. The ability of First Federal
to attract and retain deposits depends on its ability to provide investment
opportunities that satisfy the requirements of investors as to rate of return,
liquidity, risk and other factors.
Selected condensed consolidated financial information for First Federal is
summarized as follows (In thousands):
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,| June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> |<C> <C>
Net interest income $9,721 $6,921 | $6,397 $10,861
Provision for loan losses 125 378 | 4 5,034
------ ------ | ------ -------
Net interest income after |
provision for loan losses 9,596 6,543 | 6,393 5,827
Other expenses and income, net 5,496 3,550 | 3,603 6,879
------ ------ | ------ ------
Earnings (loss) before |
provision for income taxes 4,100 2,993 | 2,790 (1,052)
Provision for income taxes 1,218 1,305 | 1,012 1,398
------ ------ | ------ ------
Net earnings (loss) $2,882 $1,688 | $1,778 $(2,450)
====== ====== | ====== =======
</TABLE>
-8-
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 14,205 $ 36,086
Loans receivable, net 208,575 239,528
Investment and mortgage-backed
securities 76,708 51,756
Real estate owned, net 15,322 20,846
Other assets 15,905 15,671
-------- --------
$330,715 $363,887
======== ========
LIABILITIES AND EQUITY
Savings deposits $276,672 $298,640
Advances from Federal Home
Loan Bank, net 20,907 35,127
Other liabilities 4,603 4,469
Equity 28,533 25,651
-------- --------
$330,715 $363,887
======== ========
</TABLE>
OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,| June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> |<C> <C>
Average yield earned on all |
interest-earning assets (2) 7.15% 8.20% | 9.90% 10.30%
|
Average rate paid on all |
interest-bearing liabilities(2) 4.16% 4.21% | 6.36% 7.67%
|
Average interest rate spread(2) 2.99% 3.99% | 3.54% 2.63%
|
Net yield on average interest- |
earning assets (2) 3.05% 4.06% | 3.48% 2.67%
|
Ratio of average interest- |
earning assets to average |
interest-bearing liabilities 101.21% 101.55% | 99.08% 100.58%
|
Average equity to average |
assets ratio 7.77% 6.78% | 5.14% 5.10%
|
Nonperforming assets at end |
of period (In millions)(1) $25.2 $ 34.7 | $30.0 $25.7
|
Ratio of nonperforming assets |
at end of period to total assets 7.6% 9.5% | 7.7% 6.2%
|
Return on average assets (2) .83% .92% | .89% (.57)%
|
Return on average |
stockholder's equity (2) 10.62% 13.52% | 17.41% (11.09)%
- - - - - ---------------------------------
<FN>
(1) Includes nonaccrual loans, restructured loans and real estate acquired
in settlement of loans.
(2) Annualized for the six months ended December 31, 1992 and June 30, 1992.
</TABLE>
-9-
<PAGE>
TRANSACTIONS WITH FAIRFIELD
First Federal has purchased $175.8 million of contracts receivable from
Fairfield since June 1, 1989. At December 31, 1993, contracts receivable with a
principal balance of $51.4 million were outstanding, net of allowance for loan
losses. These contracts receivable had a weighted average interest yield of
11.6% at December 31, 1993, excluding a .5% annual servicing fee paid to
Fairfield. VOI and lot contracts receivable, net of allowance for loan losses,
comprised approximately 16% of the total assets of First Federal at December 31,
1993.
Fairfield and First Federal have entered into a Remarketing Agreement
whereby Fairfield uses its best efforts to remarket VOIs and lots underlying
cancelled First Federal contracts receivable and replaces those contracts with
new contracts generated by the remarketing efforts. Pursuant to the Remarketing
Agreement, Fairfield receives for its remarketing efforts up to 40% of cash
sales and all down payments up to 50% of the gross sales price of the remarketed
inventory. During 1993, Fairfield remarketed, at amounts approximating book
value, $1.2 million of VOIs and lots underlying First Federal's cancelled
contracts receivable. At December 31, 1993, the balance of unremarketed
cancelled contracts receivable, including accrued interest thereon, was $3.7
million (the "Defaulted Contract Account").
Fairfield and First Federal have also entered into a Tax Sharing Agreement
which provides that First Federal may retain up to 50% of amounts owed
thereunder to reduce the Defaulted Contract Account. During 1993, First Federal
paid $.5 million to Fairfield and applied $.5 million to the Defaulted Contract
Account in accordance with the Tax Sharing Agreement. Upon reduction of the
Defaulted Contract Account to zero and compliance with certain other financial
covenants, Fairfield will be entitled to receive all cash proceeds generated
from the remarketing effort and all cash payments to which it is entitled under
the Tax Sharing Agreement.
Pursuant to a Voting and Disposition Rights/Dividend Agreement, as amended
(the "Prenuptial Agreement"), with the Office of Thrift Supervision ("OTS"),
Fairfield agreed that the OTS may take over and/or dispose of First Federal,
without compensation to Fairfield, subject to certain rights of notice and
opportunities to cure, if either (a) Fairfield fails to honor its obligation to
remarket certain delinquent contracts receivable or (b) First Federal's
regulatory capital on the basis of generally accepted accounting principles
("GAAP") at any time falls below 2% of First Federal's assets. The Prenuptial
Agreement also provides for substantial restrictions on First Federal's ability
to pay dividends.
In addition to the above agreements, First Federal and the OTS entered into
a revised Supervisory Agreement pursuant to which First Federal agreed, except
for certain enumerated transactions, that neither First Federal nor any of its
subsidiaries would enter into any transaction with Fairfield or any of its
subsidiaries, including additional purchases of contracts receivable, without
the prior written approval of the Regional Director of the OTS.
LENDING ACTIVITIES
Single-family residential mortgage loans originated by First Federal bear
interest at fixed or adjustable rates. At December 31, 1993, First Federal had a
total single-family residential mortgage loan portfolio of $115.2 million or 35%
of its total assets. Approximately 24% of the portfolio were in adjustable rate
mortgages and approximately 76% were in fixed rate mortgages.
Construction loans originated by First Federal generally are adjustable
rate loans used to finance the construction of single- family residential homes
and, in some cases, acquisition of land and its subsequent development for
residential or commercial use. First Federal's lending policy provides that the
maximum term for commercial construction loans and residential construction
loans are 36 months and 24 months, respectively.
-10-
<PAGE>
Loan proceeds are disbursed incrementally based on an agreed upon
completion percentage. At December 31, 1993, First Federal had a total
construction loan portfolio of $8.1 million or 2% of its total assets. Of this
amount, $5.6 million mature in one year, with the remaining amount maturing
after one year but within five years.
First Federal's commercial real estate loans are permanent loans secured by
real estate such as shopping centers, office and apartment buildings, hotels and
motels and warehouses. Loans of this type bear fixed or adjustable rates of
interest. At December 31, 1993, First Federal had a total commercial loan
portfolio of $25.8 million or 8% of its total assets, which included $1.2
million of loan participations purchased from other financial institutions. The
projects financed by the participation loans are located outside of First
Federal's normal trade area.
First Federal receives loan origination fees or discount points for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loans that are charged to the borrower at closing. First Federal's loan
origination fees are generally one percent on conventional residential mortgages
and commercial real estate loans. Discount points range from zero to three
percent on all loans. Loan origination and commitment fees are volatile sources
of income. Such fees vary with the volume and type of loans and commitments made
and with competitive conditions in the mortgage markets, which in turn respond
to the demand for and the availability of money. Savings associations
historically experience a decrease in loan fee income during periods of
unusually high interest rates due to the resulting lack of demand for mortgage
loans.
LOAN PORTFOLIO
The following table shows First Federal's loan distribution indicated (In
thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate:
Construction $ 8,074 $ 8,379 $ 15,908 $ 19,803 $ 39,856
Mortgage 141,043 149,780 166,102 166,494 178,527
Contracts receivable purchased
from Fairfield:
Vacation ownership 44,749 61,029 80,219 100,405 102,973
Lots 7,798 11,885 17,395 24,364 30,816
Consumer and other 9,780 10,236 11,576 12,709 11,019
------- ------- ------- ------- -------
211,444 241,309 291,200 323,775 363,191
Add (less):
Loans in process (2,510) (2,140) (4,084) (4,232) (6,903)
Accounting premium (discount) 3,039 4,607 (2,403) (2,838) (3,396)
Allowance for loan losses (3,398) (4,248) (7,978) (5,927) (2,828)
-------- -------- -------- ------- -------
$208,575 $239,528 $276,735 $310,778 $350,064
======== ======== ======== ======== ========
</TABLE>
-11-
<PAGE>
LOAN LOSS EXPERIENCE
First Federal establishes valuation allowances for anticipated losses on
real estate loans when management determines that a significant and permanent
decline in the value of the real estate collateral has occurred, and the value
of the collateral is less than the amount of the unpaid principal balance of the
related loan plus estimated costs of acquisition and sale. The allowance for
loan losses is maintained at a level considered adequate to absorb potential
losses in the loan portfolio. The provisions for loan losses are based on
periodic analyses of the loan portfolio by management. In this process,
management considers numerous factors, including, but not limited to, current
economic conditions, loan portfolio composition, prior loss experience, and
independent appraisals.
Risk associated with First Federal's loan portfolio is, to a substantial
extent, dependent upon the economy and real estate market in Charlotte, North
Carolina. A significant economic downturn in the Charlotte market could result
in increased portfolio risk. First Federal's ownership of contracts receivables
has provided increased geographical diversification.
The following table summarizes First Federal's loan loss experience for
each of the periods indicated (Dollars in thousands):
<TABLE>
<CAPTION>
Six Months | Six Months
Year Ended Ended | Ended
December 31, December 31, | June 30,
1993 1992 | 1992
---- ---- | ----
<S> <C> <C> | <C>
Beginning balance $4,248 $5,678 | $7,978
Charge-offs |
Real estate: |
Construction (717) (718) | (900)
Mortgage (178) (1,000) | (871)
Consumer and other (80) (90) | (633)
------- ------- | ------
(975) (1,808) | (2,404)
Recoveries - - | 100
------- ------- | -------
Net charge-offs (975) (1,808) | (2,304)
Additions charged to |
operations (1) 125 378 | 4
------ ------- | -------
Ending balance $3,398 $ 4,248 | $ 5,678
====== ======= | =======
Ratio of net charge-offs |
to average loans |
outstanding .44% 1.38%(4) | 1.66%(4)
<CAPTION>
Seven Months
Ended
Year Ended December 31, December 31,
-------------------------
1991 1990 1989
---- ---- ----
<S> <C> <C> <C>
Beginning balance $5,927 $2,828 $2,424
Charge-offs
Real estate:
Construction (219) - -
Mortgage (2,588)(2) (50) (6)
Consumer and other (205) (4) (2)
------- ------ ------
(3,012) (54) (8)
Recoveries 29 - -
------- ------ -------
Net charge-offs (2,983) (54) (8)
------- ------ -------
Additions charged to
operations (1) 5,034(2) 3,153(3) 412
------- ------ -------
Ending balance $7,978 $ 5,927 $2,828
======= ======= =======
Ratio of net charge-offs
to average loans
outstanding .95% .02% .004%(4)
- - - - - ----------------------------------------
<FN>
(1) The amount charged to operations and the related balance in the allowance
for loan losses is based upon periodic evaluations of the loan portfolio
by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan
portfolio composition, prior loan loss experience, and management's
estimation of future potential losses.
(2) During 1991, First Federal increased its allowance for loan losses due
primarily to the general deterioration of its commercial real estate
portfolio, which reflected the current economic conditions for commercial
real estate throughout many areas where First Federal conducted its
business. A substantial portion of First Federal's current commercial
real estate portfolio existed at June 1, 1989 (date of acquisition by
Fairfield). Since that date, First Federal has significantly
deemphasized commercial real estate lending.
(3) As a result of Fairfield's Reorganization and the rejection of its
repurchase obligation, First Federal provided a general valuation
allowance of $2.9 million for contracts receivable purchased from
Fairfield.
(4) Annualized.
</TABLE>
-12-
<PAGE>
NONPERFORMING ASSETS
Total nonperforming assets (including nonaccrual and restructured
loans and real estate acquired in settlement of loans) at December 31,
1993 amounted to $25.2 million or 7.6% of total assets. Of such
amount, nonaccrual loans (over 90 days past due), restructured loans
and real estate acquired in settlement of loans ("REO") amounted to
$4.6 million, $5.5 million and $15.1 million, respectively. Included
in REO is $1.6 million of contracts receivable which are currently
greater than 90 days delinquent and $2.8 million of VOIs and lots
underlying cancelled contracts receivable. First Federal has reduced
the carrying value of this REO by an allowance totaling $1.8 million
which represents amounts applied in accordance with the Tax Sharing
Agreement.
DEPOSITS AND OTHER SOURCES OF FUNDS
Deposit accounts have traditionally been a principal source of
First Federal's funds for use in lending and for other general
business purposes. Deposits have traditionally been a relatively
stable, low cost source of funds. First Federal attracts both short-
term and long-term deposits from the general public by offering
regular passbook accounts, checking accounts, various money market
accounts, fixed interest rate certificates with varying maturities,
negotiated rate certificates of deposit in minimum amounts of $100,000
and individual retirement accounts. At December 31, 1993, First
Federal held $276.7 million of deposits bearing a weighted average
interest rate of 4.6%. Over the past few years, First Federal has
experienced a decrease in its amount of deposits due to depositors
seeking higher-yielding alternative income producing products
including equity investments.
In addition to deposits, First Federal derives funds from loan
repayments, loan sales, cash flows generated from operations
(including interest credited to deposit accounts) and Federal Home
Loan Bank ("FHLB") advances. At December 31, 1993, First Federal had
$20.9 million in FHLB advances outstanding with a weighted average
interest rate of 5.18%. FHLB advances are secured by stock in the
FHLB owned by First Federal, loans and mortgage-backed securities.
CAPITAL REQUIREMENTS
Under the "prompt corrective action" provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a
savings association is deemed to be "well capitalized", if it has
a total Risk-based Capital ratio of 10% or greater, a Tier 1 Risk-
based Capital ratio of 6% or greater (Tier 1 Capital is defined as
Core Capital), a Leverage ratio of 5% or greater and is not subject to
any order to meet and maintain a specific capital level. At
December 31, 1993, First Federal had a total Risk-based Capital ratio
of 14.00%, and a Tier 1 Risk-based Capital ratio and a Leverage ratio
of 8.35%.
-13-
<PAGE>
FIRST FEDERAL - ADDITIONAL INFORMATION
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
The following tables present the monthly average condensed
consolidated balance sheets of First Federal for each of the periods
indicated. The tables also present the interest earned or paid on each
major category of interest-earning assets and interest-bearing liabilities
and the average yield/rate (Dollars in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1993 December 31, 1992
------------------------ -----------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(1) (4) (1) (4) (2)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (3) $221,251 $18,999 8.59% $263,358 $11,629 8.83%
Taxable investment
securities 37,105 1,777 4.79 20,041 721 7.20
Mortgage-backed
securities 28,713 735 2.56 36,806 1,185 6.44
Interest-bearing
deposits with other
banks 25,819 970 3.76 14,530 272 3.74
Other 6,170 345 5.59 5,911 167 5.65
------ ------ ------- ------
Total interest-earning
assets 319,058 22,826 7.15 340,646 13,974 8.20
Noninterest-earning assets:
Cash and due from banks 4,963 3,753
Premises and equipment, net 3,416 3,462
Other assets 25,894 25,315
Less allowance for loan
losses (4,107) (5,312)
------- -------
$349,224 $367,864
======== ========
<CAPTION>
| Six Months Ended Year Ended
| June 30, 1992 December 31, 1991
|---------------------- ----------------------
|Average Yield/ Average Yield/
|Balance Interest Rate Balance Interest Rate
|------- -------- ---- ------- -------- -----
| (1) (2) (1)
<S> |<C> <C> <C> <C> <C> <C>
ASSETS |
Interest-earning assets: |
Loans (3) |$276,823 $14,999 10.84% $312,600 $34,265 10.96%
Taxable investment securities| 14,273 467 6.54 7,532 550 7.30
Mortgage-backed securities | 44,630 1,983 8.89 50,669 4,654 9.19
Interest-bearing |
deposits with other banks | 26,286 558 4.25 30,585 2,017 6.59
Other | 5,724 193 6.74 5,425 401 7.39
|-------- ------- ----- -------- ------- -----
Total interest-earning assets| 367,736 18,200 9.90 406,811 41,887 10.30
|
Noninterest-earning assets: |
Cash and due from banks | 4,560 6,246
Premises and equipment, net | 3,558 2,858
Other assets | 28,730 23,320
Less allowance for loan |
losses | (7,226) (6,392)
| ------- -------
|$397,358 $432,843
| ======== ========
</TABLE>
-14-
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
(continued)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1993 December 31, 1992
---------------------- -----------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(1) (4) (1) (4) (2)
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Savings deposits $ 72,192 $ 2,102 2.91% $ 68,867 $1,110 3.22%
Other time deposits 214,082 9,507 4.44 234,684 5,165 4.40
Advances from Federal
Home Loan Bank 28,984 1,496 5.16 31,899 778 4.88
-------- ------ -------- ------
Total interest-bearing
liabilities 315,258 13,105 4.16 335,450 7,053 4.21
Noninterest-bearing
liabilities 6,822 7,462
Stockholder's equity 27,144 24,952
-------- --------
$349,224 $367,864
======== ========
------- ------
Net interest earnings $ 9,721 $6,921
======= ======
Net yield on interest-
earning assets 3.05% 4.06%
<CAPTION>
| Six Months Ended Year Ended
| December 31, 1992 December 31, 1991
| ------------------------ -------------------------
| Average Yield/ Average Yield/
| Balance Interest Rate Balance Interest Rate
| ------- -------- ------ ------- -------- -----
| (1) (2) (1)
<S> |<C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCK- |
HOLDER'S EQUITY |
|
Interest-bearing |
liabilities: |
Savings deposits |$ 65,922 $ 1,309 3.97% $ 56,901 $ 2,930 5.15%
Other time deposits | 253,796 8,532 6.72 279,898 22,216 7.94
Advances from Federal |
Home Loan Bank | 51,417 1,962 7.63 67,670 5,880 8.69
|-------- ------- --------- --------
Total interest-bearing|
liabilities | 371,135 11,803 6.36 404,469 31,026 7.67
|
Noninterest-bearing |
liabilities | 5,798 6,286
Stockholder's equity | 20,425 22,088
|-------- --------
|$397,358 $432,843
|======== ========
| ------- -------
Net interest earnings | $ 6,397 $10,861
| ======= =======
Net yield on interest-|
earning assets | 3.48% 2.67%
- - - - - -----------------------------
<FN>
(1) The information to compute daily average balances was not readily
available, therefore monthly average balances which are representative of
First Federal's operations are presented.
(2) Annualized
(3) For the purpose of these computations, nonaccruing loans are included in
the monthly average loans outstanding.
(4) Interest earned and interest paid includes the amortization of the Fresh
Start Reporting premiums as follows: Year Ended December 31, 1993 - (i)
Loans - $1.6 million, (ii) Mortgage-backed securities - $1.1 million, (iii)
Other time deposits - $1.9 million and (iv) Advances from Federal Home Loan
Bank - $.2 million; Six months ended December 31, 1992 (i) Loans - $1.1
million, (ii) Mortgage-backed securities - $.2 million, (iii) Other time
deposits - $1.8 million and (iv) Advances from Federal Home Loan Bank - $.2
million.
</TABLE>
-15-
<PAGE>
The following table sets forth, for the periods indicated, a summary of the
changes in interest earned and interest paid resulting from changes in volume,
changes in rates and in periods (In thousands):
- - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Six Months
Ended vs. Ended
December 31, 1993 December 31, 1992
---------------------- ---------------------
Increase (Decrease) Due to (1)
Volume Rate Period Net
------ ----- ------ ---
<S> <C> <C> <C> <C>
Interest earned on (2):
Loans $(3,631) $ (628) $11,629 $7,370
Taxable investment securities 933 (598) 721 1,056
Mortgage-backed securities (437) (1,198) 1,185 (450)
Interest-bearing deposits
with other banks 424 2 272 698
Other 14 (3) 167 178
------- -------- ------- ------
$(2,697) $(2,425) $13,974 $8,852
======= ======= ======= ======
Interest paid on (2):
Savings deposits $ 104 $ (222) $ 1,110 $ 992
Other time deposits (914) 91 5,165 4,342
Advances from Federal
Home Loan Bank, net (147) 87 778 718
------- ------- ------ ------
$ (957) $ (44) $ 7,053 $6,052
======= ======= ======= ======
<CAPTION>
Six Months Six Months
Ended vs. Ended
December 31, 1992 June 30, 1992
------------------ ----------------
Increase (Decrease) Due to (1)
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest earned on (2):
Loans $ (702) $(2,668) $(3,370)
Taxable investment securities 204 50 254
Mortgage-backed securities (311) (487) (798)
Interest-bearing deposits
with other banks (226) (60) (286)
Other 6 (32) (26)
------- ------- --------
$(1,029) $(3,197) $(4,226)
======= ======= =======
Interest paid on (2):
Savings deposits $ 56 $ (255) $ (199)
Other time deposits (602) (2,765) (3,367)
Advances from Federal
Home Loan Bank, net (607) (577) (1,184)
------- ------- -------
$(1,153) $(3,597) $(4,750)
======= ======= =======
<CAPTION>
| Six Months
| Ended vs. Year Ended
| June 30, 1992 December 31, 1991
| ------------- -----------------
| Increase (Decrease) Due to (1)
| Volume Rate Period Net
| ------ ---- ------ -----
<S> | <C> <C> <C> <C>
Interest earned on (2): |
Loans | $(1,940) $ (193) $(17,133)$(19,266)
Taxable investment securities | 224 (32) (275) (83)
Mortgage-backed securities | (270) (74) (2,327) (2,671)
Interest-bearing deposits |
with other banks | (128) (322) (1,009) (1,459)
Other | 11 (18) (201) (208)
| -------- ------ -------- -------
| $(2,103) $ (639) $(20,945)$(23,687)
| ======== ====== ======== ========
Interest paid on (2): |
Savings deposits | $ 210 $ (366) $ (1,465)$ (1,621)
Other time deposits | (976) (1,600) (11,108) (13,684)
Advances from Federal |
Home Loan Bank, net | (649) (329) (2,940) (3,918)
| ------- -------- -------- -------
| $(1,415) $(2,295) $(15,513)$(19,223)
| ======= ======= ======== ========
- - - - - ---------------------------
<FN>
(1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(2) Interest earned on and interest paid on includes the amortization of
the Fresh Start Reporting premiums as follows:
Year ended December 31, 1993 - (i) Loans - $1.6 million, (ii) Mortgage
-backed securities - $1.1 million, (iii) Other time deposits - $1.9
million and (iv) Advances from Federal Home Loan Bank - $.2 million;
Six months ended December 31, 1992 - (i) Loans - $1.1 million, (ii)
Mortgage-backed securities - $.2 million, (iii) Other time deposits -
$1.8 million and (iv) Advances from Federal Loan Bank - $.2 million.
</TABLE>
-16-
<PAGE>
RESIDENTIAL LENDING
First Federal's fixed rate mortgage loans and adjustable rate mortgage
loans ("ARMS") are secured by homes (structures consisting of one to four
dwelling units), with terms depending upon loan type, loan-to-value ("LTV")
ratio, and term. In underwriting residential real estate loans, First
Federal evaluates both the borrower's ability and willingness to make monthly
payments and the value of the property securing the loan. Under First
Federal's established lending policy, nonconforming loan requests up to
$300,000 must be approved by a loan committee which consist of officers and
other management personnel of First Federal. Residential loans in excess of
$300,000 and any loans aggregating $500,000 or more to a borrower or group of
related borrowers must be approved by First Federal's Board of Directors.
First Federal's mortgage lending activities are subject to
nondiscriminatory underwriting standards which comply with OTS regulations
and the Community Reinvestment Act of 1977. Property valuations by approved
appraisers are required, and all appraisals must meet regulatory guidelines.
Detailed loan applications are obtained to determine the borrower's ability
to repay, and the more significant items on these applications are verified
through the use of credit reports and confirmations.
First Federal's policy is to obtain title insurance policies on first and
second mortgage real estate loans. Borrowers must also obtain hazard
insurance prior to closing and, when applicable, flood insurance. In
addition to each monthly payment of principal and interest, borrowers may be
required to advance funds for items such as real estate taxes, hazard
insurance premiums and private mortgage insurance ("PMI") premiums. These
payments (excluding principal and interest) are deposited into a mortgage
escrow account from which First Federal makes disbursements as taxes and
premiums become due.
Under current regulations of the OTS, a real estate loan may not exceed
the lower of (i) the sales price or (ii) 95% of the appraised value of the
secured property at the time of origination. With respect to home loans
originated or refinanced in excess of 90% of the appraised value of the
secured property, the portion of the unpaid balance that exceeds 80% of the
property's value must be insured or guaranteed by a mortgage insurance
company qualified by the Federal Home Loan Mortgage Corporation ("FHLMC").
OTS regulations also require specific Board of Directors' approval for all
loans secured by real estate, which are not home loans and which, at the time
of origination, are in excess of 90% of the appraised value of the secured
property. First Federal currently requires Board approval for all real
estate loans which are not home loans and which are in excess of 80% of the
appraised value of the secured property, unless there is a third party take-
out commitment in which case the approval threshold is 85% of appraised
value.
First Federal originates conventional mortgage loans for up to 95% of the
appraised value (or purchase price, if lower) of the secured property. First
Federal requires that PMI be purchased if the LTV ratio exceeds 80%. Under
FHA and VA insured or guaranteed lending programs, First Federal will lend up
to the applicable maximums as established by the respective agencies. First
Federal will lend up to 80% of the appraised value for owner-occupied
refinance loans. For second mortgage loans, the aggregate of both the first
and second mortgage loans cannot exceed 80%. In some cases, First Federal
self-insures one-to-four family residential loans that exceed 80% LTV but do
not exceed 90% LTV. In many cases, First Federal collects additional fees
and charges a higher interest rate to compensate for the added risk.
At December 31, 1993, First Federal held a portfolio of $27.6 million of
ARMs. First Federal generally originates ARMs for retention in its portfolio
because such loans reduce earnings sensitivity to interest rate fluctuations.
Interest rates charged in connection with ARMs generally are adjustable at
one-year intervals, with maximum interest rate adjustments of 2% in any one
year and maximum increases of 6% over the life of the loan. The base
interest rate of an ARM is based upon the U.S. Treasury Bill Index adjusted
to constant maturity, plus a margin which is determined at the time of
application and remains constant for the life of the loan.
-17-
<PAGE>
At December 31, 1993, First Federal held a portfolio of $87.6 million of
fixed-rate residential mortgage loans. Substantially all single-family
fixed-rate mortgage loans originated by First Federal in recent years have
been made in conformity with the standard underwriting criteria published by
the Federal National Mortgage Association ("FNMA") and the FHLMC. During
1993, First Federal sold $48.4 million of fixed rate residential loans to the
FHLMC at amounts which approximated book value. First Federal will continue
to sell loans to the FHLMC based on its liquidity and loan portfolio needs.
COMMERCIAL REAL ESTATE LENDING
First Federal's commercial real estate loans consist of permanent loans
secured by shopping centers, office and apartment buildings, hotels and
motels, and warehouses. All commercial real estate loans are subject to an
independent, authorized appraisal and First Federal's policies provide that
the loan amount may not exceed 80% of the appraised value of the property.
All commercial loans are approved by a loan committee. Loans greater than
$300,000, and any loans aggregating $500,000 or more to a borrower or group
of related borrowers, must be approved by First Federal's Board of Directors.
At December 31, 1993, First Federal held a portfolio of $25.8 million in
commercial real estate loans, most of which bear interest at adjustable
rates. At December 31, 1993, First Federal's commercial real estate
portfolio included $1.2 million of loan participations purchased from other
financial institutions. The projects financed by the participation loans are
located outside of First Federal's normal trade area.
NONACCRUAL AND RESTRUCTURED LOANS
The following table summarizes First Federal's nonaccrual and
restructured loans at the dates indicated (In thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1993 1992 | 1991 1990 1989
---- ---- | ---- ---- ----
<S> <C> <C> | <C> <C> <C>
Nonaccrual loans (1) $ 4,614 $ 7,411 | $3,829 $ 4,289 $ 4,885
Restructured loans (2) 5,547 7,530 | 3,733 5,964 6,007
------- ------- | ------ ------- -------
Total (3) (4) $10,161 $14,941 | $7,562 $10,253 $10,892
======= ======= | ====== ======= =======
- - - - - ------------------------------
<FN>
(1) Interest is not accrued on loans when principal or interest is in
default for 90 days or more or if other circumstance exist
which indicate a significant deterioration in the financial condition of
of the borrower, unless the loans are well secured and in the process
of being collected.
(2) Excludes loans accounted for on a nonaccrual basis.
(3) First Federal currently has no commitment to lend additional funds
with respect to any of its nonperforming loans.
(4) First Federal recorded $.5 million in interest income for the year
ended December 31, 1993 related to these loans, whereas $1.1 million
would have been recognized under the original terms of the agreements.
</TABLE>
At December 31, 1993, First Federal's two largest restructured loans
consisted of the following: (i) a $1.9 million loan secured by a 121 unit
apartment complex in Columbia, South Carolina, (ii) a $1.6 million loan
secured by a hotel in Charlotte, North Carolina. These two loans were
current as to payment of principal and interest at December 31, 1993.
-18-
<PAGE>
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
At December 31, 1993, real estate acquired in settlement of loans totaled
$15.1 million. Included in this total are the following:
First Federal holds a retail shopping complex in Cornelius, North
Carolina with a book value of $2.5 million. First Federal has hired a
property management firm to continue the leasing of the complex while the
property is offered for sale.
First Federal holds an 11% participation interest with a book value of
$2.1 million in a hotel in West Hollywood, California. The lead lender is
handling the efforts to sell the property and settle pending litigation.
First Federal holds a 40% participation interest with a book value of $1
million in a 49 unit suite hotel in San Francisco, California. A hotel
management company is in place and the hotel is being actively marketed for
sale.
First Federal holds two office buildings in Columbia, South Carolina with
a book value of $1 million. A property management firm is in place and the
property is listed with a real estate broker.
First Federal holds eight office condominium units (book value $2.2
million), which represent 38% of a medical office condominium project located
in Charlotte, North Carolina. A property management firm is in place and
seven of the units are leased and are being offered for sale.
Included in REO is $1.6 million of VOI and lot contracts receivable
greater than 90 days delinquent, since these contracts receivable meet the
in-substance foreclosure criteria. In addition, First Federal has acquired
$2.8 million of VOIs and lots located at various Fairfield resort sites due
to contracts receivable which have cancelled. First Federal has reduced the
carrying value of this REO by an allowance totaling $1.8 million which
represents amounts applied in accordance with the Tax Sharing Agreement.
Under the Remarketing Agreement, Fairfield has agreed to use its best efforts
to remarket VOIs and lots underlying cancelled First Federal contracts
receivable and replace those with new contracts generated by the remarketing
efforts. During 1993, Fairfield remarketed, at amounts approximating book
value, $1.2 million of VOIs and lots underlying First Federal's cancelled
contracts receivable.
-19-
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the indicated categories of loans. The dollar
amounts of the allowance applicable to each category and the ratio of loans
in each category to total loans at the dates indicated are as follows
(Dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992 | December 31, 1991
Amount Ratio Amount Ratio | Amount Ratio
------ ----- ------ ------| ------ -----
<S> <C> <C> <C> <C> | <C> <C>
Real estate: |
Construction $ 250 3.8% $ 160 3.6%| $ 333 5.5%
Mortgage 417 66.7 420 62.0 | 502 57.0
Contracts receivable |
purchased from |
Fairfield (1) 1,150 24.9 2,919 30.2 | 2,869 33.5
Consumer and |
other 46 4.6 56 4.2 | 7 4.0
Unallocated 1,535 N/A 693 N/A | 4,267 N/A
------- ----- ------ ------| ------ -----
$3,398 100.0% $4,248 100.0%| $7,978 100.0%
====== ===== ====== ======| ====== ======
<CAPTION>
December 31, 1990 December 31, 1989
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real estate:
Construction $ 426 6.2% $ 319 11.0%
Mortgage 1,451 51.4 1,447 49.2
Contracts receivable
purchased from
Fairfield (1) 2,859 38.5 - 36.8
Consumer and other 50 3.9 51 3.0
Unallocated 1,141 N/A 1,011 N/A
------ ---- ------ -----
$5,927 100.0% $2,828 100.0%
====== ===== ====== ======
- - - - - ------------------------------
<FN>
(1) Prior to 1990, Fairfield maintained an allowance for loan losses on
contracts receivable sold to First Federal. As a result of Fairfield's
Reorganization and the rejection of its repurchase obligation, First
Federal provided, during 1990, a general valuation allowance for
contracts receivable purchased from Fairfield.
</TABLE>
-20-
<PAGE>
INVESTMENT ACTIVITIES
The following table sets forth the book value of investment securities
at the dates indicated (In thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1993 1992 | 1991
---- ---- | ----
<S> <C> <C> | <C>
U.S. Treasury and other |
U.S. Government agencies |
and corporations $50,766 $18,847 | $ 9,893
Other 518 600 | 996
------- -------- | -------
$51,284 $19,447 | $10,889
======= ======= | ========
</TABLE>
The following table sets forth the maturities of investment securities
at December 31, 1993 and the weighted average yields of such securities
(calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security) (Dollars in thousands):
<TABLE>
<CAPTION>
Maturing
----------------------------------------
Within After One But
One Year Within Five Years
-------- ------------------
Amount Yield Amount Yield
------ ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Govern-
ment agencies and
corporations $500 5.38% $35,605 4.81%
Other - -
----- -------
$500 $35,605
===== =======
<CAPTION>
Maturing
-------------------------------------------
After Five But After
Within Ten Years Ten Years
---------------- ---------
Amount Yield Amount Yield
------- ------ ------- -----
<S> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Govern-
ment agencies and
corporations $8,295 5.13% $6,366 5.74%
- 518 4.57
------ ------
$8,295 $6,884
====== ======
</TABLE>
DEPOSITS AND OTHER SOURCES OF FUNDS
The average monthly amount of deposits and rates paid on such deposits
is summarized for the periods indicated (Dollars in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31,
1993 1992
---- ----
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Savings deposits $ 72,192 2.91% $ 68,867 3.22%
Time deposits 214,082 4.44 234,684 5.91
-------- --------
$286,274 $303,551
======== ========
<CAPTION>
| Six Months Ended Year Ended
| June 30, December 31,
| 1992 1991
| ---------------- -----------------
| Amount Rate Amount Rate
| ------ ---- ------- -----
<S> | <C> <C> <C> <C>
Savings deposits | $ 65,922 3.97% $ 56,901 5.15%
Time deposits | 253,796 6.72 279,898 7.94
| -------- ---------
| $319,718 $ 336,799
| ======== =========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more, outstanding
at December 31, 1993 are summarized as follows (In thousands):
<TABLE>
<S> <C>
3 months or less $13,998
Over 3 through 6 months 8,914
Over 6 through 12 months 7,021
Over 12 months 5,748
-------
$35,681
=======
</TABLE>
-21-
<PAGE>
The variety of deposit accounts offered by First Federal has allowed
it to be competitive in obtaining funds and has allowed it to respond with
flexibility (by paying rates of interest more closely approximating market
rates of interest) to reduce, although not eliminate, the threat of
disintermediation (the flow of funds away from depository institutions such as
savings associations into direct investment vehicles such as government and
corporate securities). The ability of First Federal to attract and maintain
deposits, and its cost of funds, has been and will continue to be significantly
affected by money market conditions.
The dollar amounts and percentages of First Federal's noncertificate
savings deposits and term certificates of deposits, by interest rate and
contractual maturity, as of December 31, 1993, are as follows (Dollars in
thousands):
<TABLE>
<CAPTION>
Amount Percent
-------- ---------
<S> <C> <C>
Noncertificate
accounts:
Super-NOW
accounts $ 1,630 .59%
Interest-free
NOW accounts 2,934 1.06
Money market
accounts 40,359 14.59
Regular NOW
accounts 13,968 5.05
Savings accounts 13,853 5.00
-------- -----
72,744 26.29
-------- -----
<CAPTION>
Contractual Maturity of CD's by Year
-----------------------------------------------
1999
1994 1995 1996 1997 1998 and after
---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Term certificate
accounts:
3.00% to 3.99% 61,688 22.30 $ 61,379 $ 309 $ - $ - $ - $ -
4.00% to 4.99% 62,679 22.65 39,942 20,637 1,723 90 287 -
5.00% to 5.99% 30,669 11.09 14,370 4,529 2,329 3,841 5,600 -
6.00% to 6.99% 11,834 4.28 6,461 1,009 930 3,434 - -
7.00% to 7.99% 4,730 1.71 1,052 1,940 1,282 369 87 -
8.00% to 8.99% 13,745 4.97 5,693 855 970 1,723 3,653 851
9.00% to 9.99% 10,693 3.86 9,244 48 727 - 538 136
10.00 to 10.99% 6,070 2.19 5,497 475 - - - 98
------- ----- -------- ------ ----- ----- ----- ------
202,108 73.05 $143,638 $29,802 $7,961 $9,457$10,165 $1,085
------- ----- ======== ======= ====== ====== ====== ======
Fresh start
valuation
premium 1,820 .66
------- -----
Total savings
deposits $276,672 100.00%
======== ======
</TABLE>
-22-
<PAGE>
SHORT-TERM BORROWINGS
Another source of First Federal's funds includes advances from the
FHLB. As a member of the FHLB, First Federal is required to own capital stock
in the FHLB and is authorized to apply for advances from the FHLB. Advances
are made pursuant to several different credit programs. Each credit program
has its own interest rate and range of maturities. The FHLB prescribes the
acceptable uses of advances pursuant to each program as well as limitations
on the size of advances. The following table summarizes First Federal's
advances from Federal Home Loan Bank for each of the periods indicated (Dollars
in thousands):
<TABLE>
<CAPTION>
Weighted Maximum Average Weighted
Average Amount Amount Average
Balance Interest Outstanding Outstanding Interest Rate
at End at End at any During the During the
Period Ended of Period of Period Month's End Period Period
------------ --------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December
31, 1993 $10,000 5.59% $18,500 $12,958 5.84%
Six Months Ended
December 31, 1992 $22,500 6.34% $24,500 $19,833 6.30%
- - - - - -------------------------------------------------------------------------------
Six Months Ended
June 30, 1992 $31,500 6.88% $38,000 $34,883 7.32%
Year Ended December
31, 1991 $42,000 8.05% $57,000 $51,375 8.76%
</TABLE>
-23-
<PAGE>
REGULATION AND SUPERVISION
GENERAL REGULATION OF FIRST FEDERAL
In 1989, and again in 1991, legislation was enacted that substantially
restructured the regulation and deposit insurance arrangements of savings
associations. First, FIRREA, enacted in 1989, abolished the Federal Home
Loan Bank Board ("FHLBB") and established the OTS, whose Director assumed
certain of the chartering, regulation, examination and supervision duties of
the FHLBB, including the regulation, examination and supervision of federally
chartered savings associations such as First Federal. Second, on December
19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law which required the federal bank and savings
association regulators to take "prompt corrective action" with respect to
depository institutions that fall below specified capital levels. FDICIA
also restricted the activities of undercapitalized savings associations and
generally required any undercapitalized depository institution to submit a
capital restoration plan that includes a guarantee by any holding company of
such an association with respect to certain aspects of the plan.
As a federally chartered savings association, First Federal is a member
of the FHLB System, which is overseen by the Federal Housing Finance Board.
First Federal's deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"). In addition, First Federal, to some extent, is subject
to regulation by the Federal Reserve Board ("FRB"). Federally chartered
savings associations may not enter into certain transactions unless certain
regulatory tests are met or prior governmental approval is obtained, and such
associations must file certain reports with, and comply with the regulatory
requirements of, the foregoing governmental agencies.
The Director of the OTS, acting through regional directors ("Regional
Directors"), is charged with enforcing compliance with all applicable laws
and regulations. OTS conducts routine and specialized examinations of
federally chartered savings associations such as First Federal. In general,
all rules, regulations and policies of the OTS governing the safe and sound
operations of savings associations are to be no less stringent than those
applicable to national banks.
Savings associations are required by OTS regulation to pay a general
assessment to the OTS to fund its operations based upon the association's
total assets (including consolidated subsidiaries) as reported in its
quarterly thrift financial reports. An additional premium is charged for
associations designated as troubled institutions. First Federal's OTS
assessment aggregated approximately $.1 million for each of fiscal year 1993
and fiscal year 1992.
DEPOSIT INSURANCE
The SAIF is the federal deposit insurance fund that insures savings
association deposits up to $100,000 per depositor. The insurance obligations
of the SAIF are backed by the full faith and credit of the United States.
Another insurance fund, the Bank Insurance Fund ("BIF"), provides similar
insurance coverage for bank depositors. While the FDIC administers both SAIF
and BIF, by statute the funds are treated separately. Their reserves are
administered separately and are not to be commingled, and savings
associations insured by one fund may not be required to contribute to the
other. The separateness of the insurance funds was continued and, in fact,
reinforced by the FDICIA.
A moratorium on transfers from SAIF to BIF, and vice-versa, is imposed
with certain exceptions until August 9, 1994. A savings association is
allowed to convert to a bank charter during the moratorium period only if
membership in the SAIF is maintained, unless the conversion is effected by a
failed or failing association with the approval of the FDIC. In the event of
any fund conversion, the savings
-24-
<PAGE>
association involved must pay association involved must pay an exit fee to the
fund it is leaving and an entrance fee to the fund it is entering. Until
December 31, 1996, the Secretary of the Treasury and the FDIC will determine
jointly the exit fee payable for leaving SAIF.
SAIF insurance assessments on deposits range from .23% to .31% of
deposits based on a savings association's capital strength and supervisory
factors designed to account for risks attributable to different categories
and concentrations of assets and liabilities. These rates may be raised by
the FDIC as it deems appropriate to maintain the fund's reserves at
statutorily mandated levels. First Federal's deposit insurance premiums
totaled $.8 million for the year ended December 31, 1993 compared to $.7
million for the year ended December 31, 1992. The BIF insurance assessment
on deposits varies according to the same factors and at the same rates as the
SAIF assessments. The FDIC has authority to increase such premiums as it
deems necessary to maintain BIF's reserves at statutorily designated levels.
The FDIC may terminate the deposit insurance of any savings association,
if among other things, the FDIC determines, after notice and hearing, that
the savings association has engaged or is engaging in unsafe and unsound
practices; is in an unsafe or unsound condition to continue operations; or
has violated any applicable law, regulation, order or any condition imposed
in writing by the FDIC in connection with the granting of any application or
other request or written agreement entered into with the savings association.
If deposit insurance is terminated, the deposits of the savings association
at that time, less subsequent withdrawals, continue to be insured for a
period from six months to two years, as determined by the FDIC.
CAPITAL REQUIREMENTS
On September 29, 1992, the OTS, together with the other federal banking
regulatory agencies, adopted rules to implement the "prompt corrective
action" provisions of FDICIA. Under the new rules, which were effective
December 19, 1992, a savings association is deemed to be: (i) "well
capitalized", if it has a total Risk-based Capital ratio of 10% or greater, a
Tier 1 Risk-based Capital ratio of 6% or greater (Tier 1 Capital is defined
as Core Capital), a Leverage ratio of 5% or greater and is not subject to any
order to meet and maintain a specific capital level; (ii) "adequately
capitalized", if it has a total Risk-based Capital ratio of 8% or greater, a
Tier 1 Risk-based Capital ratio of 4% or greater and a Leverage ratio of 4%
or greater (or, if it is MACRO 1 rated, 3% or greater) and does not meet the
definition of a "well capitalized" savings association; (iii)
"undercapitalized", if it has a total Risk-based Capital ratio under 8%, and
a Tier 1 Risk-based Capital ratio under 4% and a Leverage ratio under 4% (or
3% if it is MACRO 1 rated); (iv) "significantly undercapitalized" if it has a
total Risk-based Capital ratio under 6%, a Tier 1 Risk-based Capital ratio
under 3% or a Leverage ratio under 3%; and (v) "critically undercapitalized",
if it has a ratio of Tangible Capital to total assets equal to or less than
2%.
Tier 1 Capital is Tangible Capital plus qualifying supervisory goodwill
(which is being phased-out over time until December 31, 1994) and other
qualifying intangible assets that meet a three-part test of separability,
cash flow and marketability. First Federal does not have supervisory
goodwill or other qualifying intangible assets and, therefore, its Tier 1
Capital equals its Tangible Capital.
At December 31, 1993, First Federal had Risk-based Capital of $27.6
million and a Risk-based Capital ratio of 14%, or $11.8 million in excess of
the required total Risk-based Capital. At December 31, 1993, First Federal
had both Tangible Capital and Core Capital of $27.2 million, and a Tier 1
Risk-based Capital ratio and a Leverage ratio of 8.35% of adjusted total
assets, representing Tangible Capital of $22.3 million and Core Capital of
$14.2 million in excess of required amounts. First Federal's required
capital levels are Tangible Capital of $4.9 million (1.5% of adjusted total
assets) and Core Capital of $13.0 million (4.0% of adjusted total assets).
-25-
<PAGE>
Under current regulations, at least half of the Risk-based Capital
requirement must be met with Tier 1 Capital, while the remainder may be met
with supplementary or Tier 2 Capital. Tier 2 Capital includes general loss
reserves, cumulative perpetual preferred stock (if the association has the
option to defer dividends), hybrid debt-equity instruments (such as perpetual
debt) and qualifying subordinated debt. Total risk-weighted assets of a
savings association are determined by assigning a risk weight to each asset
of the savings association. In addition to risk weighting all assets on
First Federal's balance sheet, certain off-balance sheet risks, such as
potential obligations under letters of credit or recourse agreements, are
assigned an on-balance sheet credit equivalent amount. The risk weight of an
asset is expressed in terms of a percentage. Multiplying the value of an
asset by its risk weight produces its risk-weighted value, and the sum of
such risk-weighted values represents a savings association's total risk-
weighted assets.
The Risk-based Capital regulations require the inclusion of 100% of the
value of mortgage loans sold with recourse ("recourse servicing") for
purposes of calculating risk-weighted assets, unless the capital charge would
exceed the contractual maximum amount of the recourse provided; in which
case, the savings association is only required to hold dollar for dollar
capital against the contractual maximum amount of recourse, net of any
recourse liability account established. The assets are then to be included
in the appropriate risk-weighted category based on the requirements of the
regulation for mortgage loans. At December 31, 1993, First Federal had
approximately $17.3 million of recourse servicing and had purchased special
risk insurance against this recourse obligation related to $12.6 million of
sold loans.
The OTS has proposed an interest-rate-risk component in addition to the
current credit-risk component of the Risk-based Capital calculation. The OTS
proposal may require capital to be maintained to protect a savings
association from losses due to changes in interest rates in addition to
current Risk-based Capital requirements or may replace part of the current
Risk-based Capital requirements. In the alternative, the interest-rate-risk
component may be added to a savings association's Tier 1 Capital requirement.
The amount of the interest-risk component would equal 50% of the estimated
decline in the market value of portfolio equity after an immediate 200 basis
point increase or decrease (whichever yields a larger decline) in market
interest rates. Under the proposal, "market value of portfolio equity" would
be defined as the net present value of future cash flows from assets,
liabilities and off-balance sheet items. Adoption of the OTS proposal in its
current form could result in an increase in First Federal's regulatory
capital requirements. The other financial institution regulatory agencies
have jointly proposed an interest-rate-risk rule that provides an alternative
interest-rate-risk calculation to that proposed by the OTS. It is uncertain
whether the OTS will retain its own version of the rule or conform its rule
to the jointly proposed rule. Regardless, either version of the rule could
result in an increase in First Federal's regulatory capital requirements. If
the OTS rule had been adopted and in place December 31, 1993, there would
have been no effect on First Federal's Tier 1 Capital.
Beginning July 1, 1990, savings associations were required to deduct
from their Core Capital a percentage of the aggregate amount of investments
and extensions of credit to subsidiaries that engage in activities not
permissible for national banks, which percentage increases on an accelerating
basis over a period ending July 1, 1994, by which time all such loans and
investments will be deducted from capital. Exceptions are made if the
subsidiary is a mortgage banking company, an insured depository institution,
or, unless the FDIC determines otherwise in the interest of safety and
soundness, if the subsidiary engages in nonpermissible activities only as an
agent, rather than as a principal. At December 31, 1993, First Federal had
$3.9 million or 1.2% of its assets invested in and loaned to subsidiaries
which may be deemed to be engaged in activities not permissible for national
banks and otherwise not permitted by FIRREA. Management believes that First
Federal will be able to reduce or dispose of these investments within the
guidelines provided in FIRREA without adversely affecting operations.
-26-
<PAGE>
IMPLICATIONS OF FAILURE TO COMPLY WITH CAPITAL REQUIREMENTS
FIRREA provides that a savings association that does not meet applicable
minimum capital requirements, and is thus a "troubled institution" under the
statutory definition, is subject to liability growth restrictions and may not
accept funds obtained directly or indirectly by or through any deposit
broker. A troubled institution also is prohibited from soliciting deposits
by offering rates of interest on deposits that are significantly higher than
the prevailing rates on deposits offered by other insured financial
institutions of the same type. FDICIA similarly restricts the ability of
depository institutions to accept brokered deposits and extends some of those
limitations to savings associations that do not significantly exceed minimum
capital requirements.
The Director of the OTS also may establish, on an association-by-
association basis, individualized minimum capital requirements ("IMCRs") that
could exceed the general requirements discussed above. IMCRs could be based
upon a number of factors relating to a savings association, including, but
not limited to, the fact that the savings association is receiving special
supervisory attention or has losses resulting in capital inadequacy, poor
liquidity or cash flow, rapid growth, inadequate underwriting policies and
procedures, a record of operational losses, portfolio weakness, business
relationships with affiliates or exposure to interest rate, credit or
prepayment risk. As a result of Fairfield's now completed Chapter 11
reorganization, First Federal entered into a Supervisory Agreement in 1990,
subsequently revised, pursuant to which First Federal agreed, except for
certain enumerated transactions, that neither First Federal nor any of its
subsidiaries would enter into any transactions with Fairfield or any of its
subsidiaries without the prior written approval of the Regional Director.
FDICIA CAPITAL REQUIREMENTS AND RESTRICTIONS
FDICIA added a new section to the Federal Deposit Insurance Act that
became effective December 19, 1992 and is intended to resolve problem
associations at the least possible long-term cost to the deposit insurance
funds. With certain exceptions, a savings association will be prohibited
from making capital distributions or paying management fees if the payment of
such distributions or fees will cause the savings association to become
undercapitalized. Furthermore, undercapitalized savings associations will be
required to file capital restoration plans with the appropriate federal
regulator. Pursuant to FDICIA, undercapitalized savings associations also
will be subject to restrictions on growth, acquisitions, branching and
engaging in new lines of business unless they have an approved capital plan
that permits otherwise. The OTS also may, among other things, require an
undercapitalized savings association to issue shares or obligations, which
could be voting stock, to recapitalize the savings association or, under
certain circumstances, to divest itself of any subsidiary.
Critically undercapitalized savings associations may be subject to more
extensive control and supervision and the OTS may prohibit any critically
undercapitalized savings association from, among other things, entering into
any material transaction not in the ordinary course of business, amending its
charter or bylaws, or engaging in certain transactions with affiliates. In
addition, critically undercapitalized savings associations generally will be
prohibited from making payments of principal or interest on outstanding
subordinated debt. Within 90 days of a savings association becoming
critically undercapitalized, the OTS must appoint a receiver or conservator
unless certain findings are made with respect to the prospect for the savings
association's continued operation.
ENFORCEMENT POWERS
The OTS and, under certain circumstances, the FDIC have substantial
enforcement authority with respect to savings associations for violation of
laws or regulations, engaging in unsafe and unsound practices, or failure to
comply with applicable capital requirements. Such enforcement powers include
-27-
<PAGE>
authority to bring actions against all "institution-affiliated parties,"
which includes directors, officers, employees or controlling
stockholders; stockholders who participate in the conduct of the affairs of the
association; and any attorneys, appraisers and accountants who knowingly or
recklessly participate in any violation of law or regulation, breach of
fiduciary duty or unsafe or unsound practice which is likely to cause more
than minimal financial loss or have a significant adverse effect on the
savings association. The OTS' enforcement authority includes, among other
things, the ability to assess substantial civil money penalties; to terminate
or suspend insurance of the savings association's accounts; to initiate
injunctive actions and to issue a broad range of prohibition, removal or
cease-and-desist orders.
EQUITY RISK INVESTMENTS
OTS regulations limit the amount and nature of investments that a
savings association and its subsidiaries, on a consolidated basis, may make
in equity securities, real estate, service corporations, land loans, and non-
residential construction loans with loan-to-value ratios greater than 80%.
The regulation limits further the amount an insured savings association may
invest without OTS approval in any one real estate project, to an amount
equal to the savings association's aggregate loans-to-one borrower limitation
and requires insured savings associations to post incremental regulatory
capital of up to 10% of all equity risk investments. Land loans and non-
residential construction loans with loan-to-value ratios greater than 80%
that were made or legally committed to on or before February 27, 1987 are
"grandfathered".
The regulations generally provide that: (i) savings associations that
meet their regulatory capital requirements and have Tangible Capital of at
least 6% of total liabilities may invest up to three times their Tangible
Capital in equity risk investments without Regional Director approval, and
(ii) savings associations that meet their regulatory capital requirements but
have Tangible Capital of less than 6% of total liabilities may invest only up
to the greater of (a) 3% of such savings association's assets, or (b) two and
one-half times Tangible Capital, without Regional Director approval. All
affected associations must notify their Regional Director when equity risk
investments exceed 20% of assets. At December 31, 1993, First Federal's
Tangible Capital amounted to $27.2 million or 9% of its total liabilities and
its equity risk investments aggregated $2.2 million.
QUALIFIED THRIFT INVESTMENTS
The Home Owners' Loan Act, as amended ("HOLA"), mandates that a savings
association maintain a minimum percentage of its assets in housing finance
and related activities. Pursuant to FDICIA, a qualified thrift lender
("QTL") is any savings association that has qualified thrift investments
equal to or exceeding 65% of the savings association's total tangible assets,
on an average basis, in nine out of every twelve months. More specifically,
savings associations are required to maintain 65% of their "portfolio assets"
in "qualified thrift investments," including not less than 45% in loans
related to residential real property and manufactured housing, home equity
loans and mortgage-backed securities, and up to 20% in certain other loans,
including loans on churches, schools, nursing homes and hospitals, and
consumer loans (up to 10% of portfolio assets). FDICIA also increased from
10% to 20% the amount of liquid assets that may be deducted from portfolio
assets in calculating the QTL percentage.
The regulatory approval whereby Fairfield acquired First Federal
provides that VOI contracts receivable transferred by Fairfield to First
Federal constitute qualified thrift investments, provided that the amount of
such investments that qualify as related to domestic residential real estate
will be based on an appraisal acceptable to the Regional Director of the
OTS's Southeast Region, which will form a basis for determining the
relationship that the realizable value of the security property bears to the
principal amount of the contract receivable that such property secures.
First Federal is not currently undertaking appraisal of the underlying
collateral related to the respective VOI contracts receivable.
-28-
<PAGE>
At December 31, 1993, First Federal's total qualified thrift
investments, exclusive of VOI contracts receivable as domestic residential
real estate loans for which a determination of qualification has not been
made, as a percentage of total tangible assets was 69.5%, which exceeded the
minimum of 65% required by FDICIA.
Failure to meet the QTL test will require conversion to a bank charter
by noncomplying savings associations or the immediate imposition of
restrictions on the payment of dividends, commencement of new activities,
establishment of branches and access to FHLB advances. In addition, after
three years, outstanding FHLB advances must be repaid and the savings
association must divest itself of all activities and investments not
permissible for both national banks and savings associations. Any holding
company for a savings association that fails the QTL test and does not
requalify (which is only allowed once) within one year must register as a
bank holding company and have its activities substantially curtailed.
SAFETY AND SOUNDNESS MEASURES
As required by FDICIA, the OTS, together with the other Federal banking
agencies, adopted uniform regulations, effective March 19, 1993, prescribing
standards for extensions of credit either secured by real estate or made for
the purpose of financing the construction of improvements on real estate.
The OTS regulations require each savings association to establish and
maintain written internal real estate lending standards consistent with safe
and sound banking practices and appropriate to the size of the savings
association and the nature and scope of its real estate lending activities.
Such standards also must be consistent with OTS guidelines which establish
permissible loan to value ratios for various types of real estate loans,
ranging from 50% for raw land up to 95% for home equity mortgages. Mandatory
ratios were not established because of concerns that absolute ratios would
constrict the availability of credit and reduce lending flexibility for
programs such as the Community Reinvestment Act of 1977 (the "CRA"). FDICIA-
mandated standards relating to operations and management's asset quality,
earnings and valuation; and employment contracts and compensation
arrangements have not yet been adopted by the OTS.
LENDING LIMITS
The aggregate amount of loans and other extensions of credit that First
Federal may make to any one borrower, including related entities, is subject
to the lending limits applicable to national banks. In general, national
banks may lend to any one borrower an amount not in excess of 15% of their
capital on an unsecured basis. An additional amount, up to 10% of capital,
may be loaned if fully secured by readily marketable collateral. In
addition, a savings association is permitted to lend up to $500,000 to one
borrower regardless of capital; and, upon receipt of a written order of the
OTS, up to the lesser of 30% of capital or $30 million to develop domestic
residential housing units provided, however, that, among other conditions,
the savings association is in compliance with the fully phased-in capital
standards under HOLA and that such loans do not, in the aggregate, exceed
150% of the savings association's capital. The aggregate amount of loans
secured by nonresidential real estate also is limited to 400% of a savings
associations's capital. The OCC has proposed revisions to its lending limit
regulation applicable to national banks that would, among other things,
change the definition of "unimpaired capital and surplus" to comport with and
be based upon quarterly Call Report figures; update the definition of "loans
and extensions of credit" to account for several previously unaddressed
credit arrangements; consolidate the rule's limitations, exceptions and
exclusions; clarify the circumstances under which certain loans will be
deemed secured; amend the "direct benefits" and the "common enterprise" tests
of the attribution rules; and devise a method of dealing with nonconforming
loans. First Federal does not expect that adoption of the proposed
amendments to the OCC's regulations will have a material impact on its
compliance with or calculation of the lending limit.
-29-
<PAGE>
At December 31, 1993, the aggregate amount of loans and other extensions
of credit that First Federal was permitted to make to one borrower and the
aggregate amount of its loans that was permitted to be secured by
nonresidential real estate totaled $4.3 million and $114.1 million,
respectively. The largest aggregate amount of loans to one borrower at
December 31, 1993 totaled $2.1 million, and the aggregate amount of
nonresidential real estate loans at such date totaled $25.8 million.
CLASSIFICATION OF ASSETS
Under existing regulations, examiners (subject to the approval of First
Federal's Regional Director) have authority to classify any assets of First
Federal as "Substandard", "Doubtful" or "Loss". Assets that do not yet
warrant adverse classification but nonetheless possess credit or other
deficiencies or potential weaknesses deserving management's close attention
are classified as Special Mention; assets that the examiners determine may
sustain a loss if current deficiencies are not corrected are classified as
Substandard; assets exhibiting such weakness as to make collection or
liquidation in full highly questionable and improbable are classified as
Doubtful; and assets considered uncollectible are classified as Loss.
Under OTS regulations, with respect to assets classified as Substandard
or Doubtful, if the examiner concludes that the existing aggregate valuation
allowances established by the association are inadequate, the examiner will
determine the need for, and extent of, any increase necessary in the insured
savings association's general allowance for loan losses, subject to review by
the Regional Director. For the portion of assets classified as Loss, savings
associations are required either to establish specific allowances for losses
of 100% of the amount classified or to charge off such amount. The OTS has
revised its regulations to require that "fair value" be used to value all
foreclosed assets.
The OTS regulations also require savings associations to classify their
own assets and to establish prudent general allowances for loan losses. The
Regional Director is responsible for determining the appropriateness of the
classifications established by the savings association. The regulations also
require savings associations to establish liabilities for off-balance sheet
items when loss becomes probable and estimable.
INVESTMENT AND LOAN PORTFOLIO ACCOUNTING POLICIES
The OTS has established guidelines that require depository institutions
to establish prudent policies and strategies with respect to the selection of
securities dealers and securities transactions. These guidelines require the
Board of Directors of any savings association to adopt a written portfolio
policy and strategy outlining the steps management will take to achieve any
stated goals. Furthermore, to prevent savings associations from manipulating
the recognition of gains and losses on securities transactions, the
guidelines require savings associations to distinguish between securities
held for investment and those held for sale or trading. Securities bought
and held for investment must be reported at their amortized cost. Securities
held for sale must be reported at the lower of cost or market value with
unrealized losses (and recoveries of unrealized losses) recognized in current
income. Securities bought for trading purposes must be reported at current
market value, with unrealized gains and losses recognized in current income.
The investment portfolio accounting policies described in the guidelines are
also applicable to the loan portfolio.
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan", which amends both SFAS No. 5 "Accounting for
Contingencies," and SFAS No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings," and is effective for fiscal years beginning
after December 15, 1994. SFAS No. 114 requires that an impaired or
restructured loan be measured at the present value of its expected future
cash flows discounted at the effective interest rate of the loan.
-30-
<PAGE>
SFAS No.114 also permits a creditor to recognize the fair value of the
collateral of an impaired collateral-dependent loan as an alternative to
discounting expected future cash flows and to recognize an observable market, if
one exists, as an alternative to the discounting method. First Federal does not
anticipate that the implementation of SFAS No. 114 will have a material impact
on its consolidated financial statements.
OTHER RESTRICTIONS
Several regulatory restrictions generally applicable to banks apply to
all savings associations, including restrictions on loans to affiliates and
loans to insiders by a savings association. The commercial real estate
lending authority of a federal association, specifically the authority to
make nonresidential real property loans, is limited to 400% of such
association's capital.
Savings associations also must notify the Director of OTS of the
proposed addition of any individual to the Board of Directors or the
employment of any individual as a senior executive officer of any savings
association or holding company thereof that has been chartered or undergone a
change in control within two years or that is failing its capital requirement
or otherwise is a troubled institution. Such notice must be provided to the
OTS at least 30 days before such addition or employment becomes effective;
the Director of the OTS may disapprove a change within the 30 day period
after receipt of such notice. First Federal has been designated in "troubled
condition". In addition, Fairfield is deemed to have undergone a change in
control as a result of stock issued in connection with the Reorganization.
Consequently Fairfield and First Federal are both subject to the 30 day
prenotification requirement. Substantial civil and criminal penalties can be
assessed against insured depository institutions for violations of law or for
engaging in unsafe or unsound banking practices. See "Implications of
Failure to Comply With Capital Requirements."
The CRA is presently in the process of amendment by the Congress and
financial institution regulators. At this time, it is unclear what effect,
if any, the amendments may have on First Federal's CRA rating or CRA related
expenses.
FHLB SYSTEM
The FHFB, which, as noted above, oversees the operations of the FHLB
System with respect to the FHLBs, is an independent agency in the executive
branch. Its primary mission is to assist the FHLBs in the promotion of
housing. In addition, the FHFB is responsible for insuring that the FHLBs
are adequately capitalized, able to raise funds in the capital markets, and
operate in a safe and sound manner. FIRREA also established new restrictions
on the availability of advances, the principal impact of which will be to
limit the use of advances to finance housing.
The FHFB also is charged with establishing regulatory standards for
community investment or service for members seeking advances from FHLBs. The
FHFB has promulgated community support requirements, which limit the
availability of long-term FHLB advances to associations that do not file
acceptable community support action plans with the FHFB and satisfy the goals
stated in the plan within a stated period of time. The regulations also
establish CRA-related criteria with respect to the availability of long-term
advances.
As a member of the FHLB System, First Federal is required to purchase
and hold stock in the FHLB of Atlanta in an amount equal to at least 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts and
similar obligations as of the close of each calendar year, or 1/20th of its
FHLB advances, whichever is greater. At December 31, 1993, First Federal was
in compliance with this requirement, holding stock in the FHLB of Atlanta in
the amount of $6.3 million at such date.
-31-
<PAGE>
The FHLBs are funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. FHLBs make loans (i.e.,
advances) to members in accordance with policies and procedures established
by the FHFB and the FHLBs. Advances must be secured, in an amount deemed
sufficient by the FHLB, by the following types of assets: fully disbursed,
whole first mortgages on improved residential property, or securities
representing such interest; securities issued, insured or guaranteed by the
United States government or any agency thereof; deposits of a FHLB; or other
real estate-related collateral acceptable to the FHLB with a readily
ascertainable value in which the FHLB can perfect a security interest.
Advances secured by "other real estate-related" collateral, however, may not
exceed 30% of a member's capital. Furthermore, long-term advances may only
be made for the purpose of funding residential housing. Savings associations
that fail the QTL test will be subject to further limitations upon their
access to advances.
Prior to the enactment of FIRREA, VOI contracts did not qualify as
collateral for FHLB advances. Until guidance is received from the FHFB and
the FHLB, there can be no assurance as to whether VOI contracts will be
deemed to qualify either as "first mortgages" or as "other real estate-
related" collateral acceptable to the FHLB. If VOI contracts are determined
by the FHFB and FHLB not to qualify either as "first mortgages" or "other
real estate-related" collateral for FHLB advances, management of First
Federal (to the extent additional FHLB advances are sought) would be required
to secure FHLB advances with other assets of First Federal which have been
accepted as collateral for FHLB advances, as discussed below. To the extent
that qualifying collateral is not reasonably available, First Federal would
be required to seek other sources of funds such as deposits, which have
historically been First Federal's principal source of funds.
During the years ended December 31, 1993 and 1992, First Federal
received $.3 million and $.4 million, respectively, of dividends from the
FHLB of Atlanta. Pursuant to FIRREA, a significant portion of the retained
earnings of the FHLBs has been appropriated and is required to be transferred
by the FHLBs to the Resolution Funding Corporation ("REFCORP"), which is the
government entity established by FIRREA to raise funds to resolve troubled
savings association cases. This appropriation, used to fund the principal
and a portion of the interest on REFCORP bonds and certain low-income housing
programs, substantially reduces the amount of dividends the FHLBs will be
able to pay to members in the future. Moreover, there can be no assurance
that this will not result in a reduction in the value of FHLB stock.
LIQUIDITY AND DEPOSIT RESERVES
All savings associations are required to maintain liquid assets equal to
a certain percentage of net withdrawable savings and current borrowings
(borrowings payable in one year or less). The liquidity requirement may vary
from time to time depending upon economic conditions and savings flows of
these associations. At the present time, the required liquid asset ratio is
5%. Liquid assets for purposes of this ratio include short-term assets
(e.g., cash, certain time deposits, corporate obligations and United States
Treasury, state and federal agency obligations with a remaining term to
maturity of five years or less). In addition, FHLB members are required to
maintain certain levels of short-term liquid assets. Short-term liquid
assets currently must constitute at least 1% of net withdrawable savings and
current borrowings. Penalties may be imposed upon savings associations for
violations of liquidity requirements. In 1993, First Federal's liquid assets
averaged in excess of 5% of net withdrawable savings and current borrowings,
and its short-term liquid assets averaged in excess of 1% of net withdrawable
savings and current borrowings.
FRB regulations require savings associations to maintain reserves
against their transaction accounts (primarily NOW accounts, Super NOW
accounts and regular checking accounts) and certain non-personal time
deposits. The FRB regulations generally require that reserves of 3% must be
maintained against
-32-
<PAGE>
aggregate transaction accounts up to $46.8 million (subject to adjustment by the
FRB), and an additional reserve of $1.404 million plus 10% (subject to
adjustment by the FRB between 8% and 14%) against that portion of aggregate
transaction accounts in excess of such amount. The balances maintained to meet
the reserve requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS.
Savings associations also have authority to borrow from a Federal
Reserve Bank, but the FRB's regulations require a savings association to
exhaust all FHLB sources before this borrowing source is used.
HOLDING COMPANY REGULATIONS
As a savings and loan holding company ("SLHC") within the meaning of
HOLA, Fairfield is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. The HOLA prohibits a
SLHC, directly or indirectly, from (i) acquiring control (as defined) of
another savings association (or holding company thereof) without prior OTS
approval, (ii) acquiring more than 5% of the voting shares of another savings
association (or holding company thereof) that is not a subsidiary, or (iii)
acquiring, through merger, consolidation or purchase of assets, another
savings association or savings and loan holding company without prior OTS
approval.
A SLHC may not acquire as a separate subsidiary a savings association
that has principal offices outside of the state where the principal offices
of its subsidiary association are located, except (i) in the case of certain
emergency acquisitions approved by the FDIC, (ii) if the holding company
controlled (as defined) such savings association as of March 5, 1987, or
(iii) when the state laws of the state where a savings association which is
to be acquired is located specifically authorize such an acquisition.
Federal statutes and regulations contain a number of provisions that
affect the acquisition of SLHCs such as Fairfield. These provisions include
the SLHC provisions of the HOLA and regulations thereunder, which govern
acquisitions by companies, and the Change in Bank Control Act of 1978, as
amended, and regulations thereunder, which govern acquisitions by
individuals. The effects of these provisions may be to deter potential
purchasers from acquiring significant positions in Fairfield's stock.
No director or officer of a SLHC or person owning or controlling more
than 10% of such holding company's voting shares may, except with prior
approval of the OTS, acquire control of any savings association which is not
a subsidiary of such holding company. These restrictions are in addition to
requirements of the Depository Institution Management Interlocks Act and
regulations promulgated pursuant thereto, which generally prohibit directors
and officers of a financial institution or financial institution holding
company from also serving as a director or officer of an unaffiliated
financial institution or financial institution holding company that is very
large or is located in the same geographic area.
FIRREA amended the Bank Holding Company Act of 1956 to provide bank
holding companies with the general authority to acquire savings associations.
Such acquisitions previously were permitted only in connection with
supervisory transactions.
ACTIVITIES
Fairfield is a unitary SLHC. There are generally no restrictions on the
activities of a unitary SLHC provided that (i) the SLHC controls only one
savings association and such association meets the QTL test, or (ii) the SLHC
controls more than one savings association, provided that the additional
savings associations were acquired by means of a FSLIC- or FDIC- assisted
transaction and each subsidiary association meets the QTL test. In addition,
in connection with Fairfield's acquisition of First Federal, Fairfield is
required to submit its annual debt budget to the OTS for approval.
-33-
<PAGE>
TRANSACTIONS WITH AFFILIATES
HOLA subjects certain transactions between any subsidiary savings
association of a SLHC, such as First Federal, and any affiliates of such
savings association, to Sections 23A and 23B of the Federal Reserve Act, as
amended ("FRA"), in the same manner and to the same extent as if each such
savings association were a member bank of the Federal Reserve System. Three
additional rules apply to savings associations, which reflect the fact that
affiliates of savings associations can engage in a far greater range of
activities than affiliates of banks and, thus, can expose the savings
associations to greater risk. First, a savings association may not make any
loan or extension of credit to an affiliate unless that affiliate is engaged
only in activities permissible for bank holding companies. Second, a savings
associations may not purchase or invest in securities issued by an affiliate
(other than securities of a subsidiary). Third, the OTS may for reasons of
safety and soundness impose more stringent restrictions on savings
associations, but may not exempt transactions from or otherwise abridge
Sections 23A or 23B. In addition, the OTS has adopted a regulation that
prohibits a savings association or any subsidiary thereof from extending
credit to an affiliate that engages in any activity not permissible to a
federal savings association.
In 1991, the OTS adopted a regulation defining and clarifying the
applicability to savings associations of Sections 23A and 23B. The rule
requires all savings associations to keep detailed records of affiliate
transactions. Savings associations that have been the subject of a change of
control within the preceding two years, that have composite ratings of 4 or
5, that do not meet all their capital requirements or that are otherwise
subject to supervisory controls or concerns may be required to provide the
OTS 30 days notice prior to entering into any non-exempt transaction with an
affiliate.
Generally, Sections 23A and 23B of the FRA and the OTS affiliate
transaction regulations impose both quantitative and qualitative restrictions
on "covered transactions" among financial institutions and their affiliates.
"Covered transactions" between a savings association or its subsidiaries and
any one affiliate are limited by Section 23A to 10% of the bank's capital
stock and surplus. "Covered transactions" among an association or its
subsidiaries and all affiliates, which are limited to 20% of the savings
association's capital stock and surplus include (i) purchasing or investing
in securities issued by an affiliate, (ii) lending or extending credit to or
guaranteeing credit of an affiliate, (iii) purchasing assets from an
affiliate, and (iv) accepting securities issued by an affiliate as collateral
for a loan or extension of credit.
Qualitative restrictions on affiliate transactions are applied by
Section 23B to a broader range of transactions than are covered by Section
23A. Such transactions must be either on terms that are substantially the
same, or at least as favorable to the savings association or its subsidiary,
as those prevailing at the time for comparable transactions with other
nonaffiliated companies or, in the absence of comparable transactions, on
terms that in good faith would be offered to nonaffiliated companies. In
addition, each loan or extension of credit to an affiliate by a savings
association must be secured by collateral with market value ranging from 100%
to 130% (depending on the type of collateral) of the amount of credit
extended. The purchase of low-quality assets from an affiliate is
prohibited.
Exceptions to the provisions of Sections 23A and 23B may be granted only
by the FRB, either on an individual basis or by regulation. Exceptions
granted by the FRB must be consistent with prior public policy and with
appropriate safety and soundness considerations.
RESTRICTIONS ON DIVIDENDS
Under HOLA, a subsidiary savings association of a SLHC must give the OTS
at least 30 days advance notice of any proposed declaration of a dividend to
the holding company. Pursuant to the Prenuptial Agreement with the FSLIC,
Fairfield agreed not to accept or cause First Federal to pay
-34-
<PAGE>
dividends in an amount (i) that would cause First Federal's regulatory capital
to fall below regulatory minimums, (ii) exceeding 100% of First Federal's
cumulative net income for the prior eight quarters, less cumulative dividends
paid during such period, without the prior written approval of the Regional
Director, if First Federal's net capital exceeds the fully phased-in
requirement; provided, however, that if a dividend would cause First Federal's
net capital to fall below its fully phased-in capital requirement, such dividend
may not cause First Federal's net capital to fall below such requirement by an
amount exceeding 50% of First Federal's cumulative net income for the prior
eight quarters, less cumulative dividends paid during such period, without the
prior written approval of the Regional Director; and (iii) exceeding 50% of
First Federal's cumulative net income for the prior eight quarters, less
cumulative dividends paid during such period, without the prior written
approval of the Regional Director, if regulatory capital exceeds the minimum
capital requirement but is less than the fully phased-in requirement.
Fairfield agreed under the Prenuptial Agreement, as amended on September 14,
1992 in connection with confirmation of the Plans, that the FSLIC may vote
and/or dispose of the First Federal shares owned by Fairfield, without
compensation, subject to certain rights of notice and opportunities to cure,
if First Federal's Regulatory Capital Trigger, which is defined as (a) the
time at which Fairfield fails to honor certain obligations under the
Remarketing Agreement entered into with First Federal or (b) First Federal's
regulatory capital, on the basis of GAAP, at any time falls below 2% of First
Federal's assets.
OTS regulations also impose limitations upon all capital distributions
by savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another association
in a cash-out merger and other distributions or charges against capital. The
regulations establish three tiers of savings associations. After prior
notice, but without approval of the OTS, a savings association that exceeds
its fully phased-in capital requirement could make capital distributions
during the calendar year up to 100% of its current net income plus the amount
that would reduce its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirement) to one-half of its surplus capital ratio
at the beginning of the calendar year. Any additional capital distributions
would require prior regulatory approval. A savings association that meets
its regulatory capital requirement, but not its fully phased-in capital
requirement, could make capital distributions of between 25% and 75% of
current earnings without prior OTS approval. A savings association that does
not meet its regulatory capital requirement could not make any capital
distributions without prior OTS approval.
-35-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Reference is made to NOTE 9 - STOCKHOLDERS' EQUITY and NOTE 14 -
CONTINGENCIES of "Notes to Consolidated Statements".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the
fourth quarter of 1993.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a listing of the executive officers of Fairfield, none
of whom has a family relationship with directors or other executive officers:
John W. McConnell, age 52, President and Chief Executive
Officer since 1991; President and Chief Operating Officer from
1990 to 1991; Senior Vice-President and Chief Financial Officer
from 1986 to 1990.
Morris E. Meacham, age 55, Executive Vice President since
1990; Senior Vice President and Chief Operating Officer of Leisure
Products Group from 1986 to 1990. Effective January 1, 1994, Mr.
Meacham entered into a new Employment Agreement as Vice President
of Special Projects.
Marcel J. Dumeny, age 43, Senior Vice President and General
Counsel since 1989; Senior Vice President/Law and Development from
1987 to 1989.
Clay G. Gring, Sr., age 62, Senior Vice President/Leisure
Products Group since September 1991. Self-employed from 1984 to
September 1991 specializing in the development and management of
real estate properties, including resort communities and
hospitality related properties.
Robert W. Howeth, age 46, Senior Vice President and
Treasurer since October 1992; Senior Vice President/Planning and
Administration from 1990 to October 1992; Vice President and
Treasurer from 1988 to 1990.
Joe T. Gunter, age 52, Senior Vice President, General
Counsel/Leisure Products Group since 1989; Senior Vice President
and Special Counsel from 1984 to 1989.
Robert T. Waugh, age 63, President of First Federal Savings
and Loan Association of Charlotte, a wholly owned subsidiary of
Fairfield, since 1972.
William G. Sell, age 40, Vice President/Controller and Chief
Accounting Officer since 1988.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Pursuant to the Plans, all of the outstanding Common Stock of
Predecessor Fairfield was cancelled effective September 1, 1992. As of
March 18, 1994, the outstanding number of shares of Fairfield's Common
Stock totaled 9,792,601, of which 160,001 shares were held by wholly
owned subsidiaries. In accordance with the Plans,
-36-
<PAGE>
Fairfield will issue additional shares as the remaining unsecured
claims are resolved. The ultimate amount of allowed unsecured claims
and the timing of the resolution of claims is largely within the
control of the Bankruptcy Court. However, based upon available
information, Fairfield presently estimates that approximately
10,908,706 shares of Common Stock will be issued and outstanding,
including shares held by wholly owned subsidiaries. Additionally,
588,235 shares have been reserved, but not issued, for the benefit of
the holders of the FCI Notes.
On November 4, 1993, Fairfield's Common Stock commenced "regular
way" trading on the NASDAQ National Market System under the trading
symbol FFCI. For the period November 4, 1993 through December 31,
1993, the high and low closing bid prices were $4-5/8 and $2-3/4,
respectively. As of February 28, 1994, there were approximately 4,100
stockholders of the Common Stock.
During the last two fiscal years Fairfield did not pay any
dividends and is prohibited from paying any dividends under the terms
of its financing arrangements, except for dividends payable in shares
of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 6 appears on page F-2 of this
report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by Item 7 appears on pages F-3 through F-10
of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by Item 8 appears on pages F-12 through F-46
of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) IDENTIFICATION OF DIRECTORS
The current Board of Directors of Fairfield began serving during
September 1992. Messrs. John W. McConnell and J. Steven Wilson were
directors of Predecessor Fairfield and served in such capacities since
March 1990.
Russell A. Belinsky, age 33, Senior Vice President and Principal
of Chanin and Company and Senior Vice President and Principal of GTC
Capital Partners since 1990. From 1986 to 1990, Mr. Belinsky was an
associate at the law firm of Skadden, Arps, Slate, Meagher & Flom.
-37-
<PAGE>
Ernest D. Bennett, III, age 41, partner at the law firm of
Taylor, Philbin, Pigue, Marchetti and Bennett since June 1992. From
1989 to May 1992, Mr. Bennett served as General Counsel at Robert
Orr/Sysco Food Services Company. From 1980 to 1989, Mr. Bennett was a
partner at the law firm of Camp and Bennett.
Daryl J. Butcher, age 54, Vice President, Real Estate of WLD
Enterprises, Inc., a trust management company, since June 1993. From
1981 to May 1993, Mr. Butcher was President of Butcher Real Estate,
Inc., a real estate company developing commercial and industrial
properties in the Baltimore-Washington D.C. area.
Philip L. Herrington, age 41, President of Herrington, Inc., a
private investment and business advisory firm, since July 1986;
Chairman and Chief Executive Officer of Health Care Training
Corporation since 1989; President and Chief Operating Officer of
Destin Guardian Corporation, a real estate development company, since
1989.
John W. McConnell, age 52, President and Chief Executive Officer
of Fairfield since 1991; President and Chief Operating Officer from
1990 to 1991; Senior Vice-President and Chief Financial Officer from
1986 to 1990.
William C. Scott, age 57, President and Director of Summitt Care
Corporation, Inc., a developer and operator of retirement and
convalescent centers, since 1985. Director of Pacific Southwest, Inc.,
a holding company.
J. Steven Wilson, age 50, Chairman and Chief Executive Officer of
Wickes Lumber Company since 1991; Chairman and President of Wilson
Financial Corporation, a holding company, since 1980; Chairman,
President and Chief Executive Office of Riverside Group, Inc., an
insurance company, since 1985; Chairman, President and Chief Executive
Officer of The Atlantic Group, Inc., a health food distribution
company, since 1986.
During 1993, there were eight meetings of the Board of Directors, three
meetings of the Audit Committee and one meeting of the Compensation Committee.
Each director attended at least 75% of the meetings of the Board of Directors
and Board Committees on which they served.
The Audit Committee recommends to the Board of Directors a firm to serve
as the independent public accountants for the Company and monitors the
performance of such firm; reviews and approves the scope of the annual audit
and quarterly reviews and evaluates with the independent public accountants
the Company's annual audit and annual consolidated financial statements;
reviews with management the status of internal accounting controls; and
evaluates all public financial reporting documents of the Company. Messrs.
Philip L. Herrington (Chairman), Russell A. Belinsky and Ernest D. Bennett, III
currently are members of the Audit Committee.
The Compensation Committee reviews the administration of Fairfield's
employee benefit plans and makes recommendations to the Board of Directors
with respect to the Company's compensation policies. Messrs. William C. Scott
(Chairman), Daryl J. Butcher and J. Steven Wilson currently are members of the
Compensation Committee.
Fairfield has no standing nominating or similar committee. The Board of
Directors will consider stockholder recommendations which are submitted in
writing and addressed to the attention of the Secretary of Fairfield. Any
recommendation should include the name and address of the stockholder making
the recommendation and the number of shares owned by said stockholder, the
candidate's name and address, a summary of the candidate's educational
background and business or professional experience
-38-
<PAGE>
during the past five years, the names of any corporations of which the
candidate is or has been a director, and any other information the
proposing stockholder considers relevant in evaluating the candidate's
qualifications. The recommendation also should indicate the candidate's
willingness to serve if nominated and selected.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
In accordance with Regulation S-K Item 401(b), Instruction
3, the information required by Item 10(b) concerning Fairfield's
executive officers is furnished in a separate item captioned
EXECUTIVE OFFICERS OF THE REGISTRANT in Part I above.
(c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires Fairfield's
directors and executive officers, and persons who own more than
10% of its Common Stock, to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations
to furnish Fairfield with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms
received by it with respect to the year ended December 31, 1993,
and written representations from certain reporting persons,
Fairfield believes that all filing requirements have been complied
with as they apply to its directors, executive officers and
persons who own more than 10% of the Common Stock, except that (i)
a Form 3 initial statement and one Form 4 were filed late with
respect to the ownership and disposition of Predecessor
Fairfield's Common Stock by Mr. Robert T. Waugh, President of
First Federal Savings and Loan Association of Charlotte, a wholly
owned subsidiary of Fairfield and (ii) a Form 3 initial statement
of beneficial ownership was filed late by Mr. William C. Scott
with regard to his appointment as a director of Fairfield.
-39-
<PAGE>
ITEM 11. EXECUTIVE COMPERSATION
The following table summarizes the compensation paid, or to be paid, to
Fairfield's Chief Executive Officer and each of the other four most highly
compensated executive officers (collectively, the "named executive officers")
for each of the last three years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Other
Annual
Name and Compen-
Principal sation
Position Year Salary ($) Bonus ($) ($)
- - - - - -------- ---- ---------- --------- -------
<S> <C> <C> <C> <C>
John W. McConnell 1993 275,000 185,625 -
President and 1992 250,005 - -
Chief Executive 1991 219,800 16,485 -
Officer
Morris E. Meacham 1993 200,000 72,051 -
Executive Vice 1992 207,217 - -
President (1) 1991 194,800 14,610 -
Marcel J. Dumeny 1993 175,000 67,411 -
Senior Vice 1992 164,842 - -
President, 1991 149,800 11,235 -
General Counsel
and Secretary
Robert W. Howeth 1993 164,800 49,440 -
Senior Vice 1992 172,768 - -
President, Chief 1991 164,800 12,360 -
Financial Officer and
Treasurer
Clayton G. Gring, Sr. 1993 150,000 30,000 -
Senior Vice 1992 155,769 10,000 -
President (2) 1991 34,615 - -
<CAPTION>
Long Term Compensation
----------------------------------
Awards Payouts
----------------------------------
Securities
Restricted Underlying All Other
Name and Stock Options/ LTIP Compen-
Principal Award(s) SARS Payouts sation
Position ($) (#) ($) ($)(3)
- - - - - -------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C>
John W. McConnell - - - 22,679
President and - 150,000 - 3,239
Chief Executive - - - -
Officer
Morris E. Meacham - - - 13,589
Executive Vice - 100,000 - 2,174
President(1) - - - -
Marcel J. Dumeny - - - 11,982
Senior Vice - 100,000 - 594
President, - - - -
General Counsel
and Secretary
Robert W. Howeth - 100,000 - 10,064
Senior Vice - - - -
President, Chief - - - -
Financial Officer and
Treasurer
Clayton G. Gring, Sr. - 100,000 - 17,516
Senior Vice - - - -
President (2) - - - -
- - - - - ---------------------------
<FN>
(1) Effective January 1, 1994, Mr. Meacham entered into a new Employment
Agreement as Vice President of Special Projects.
(2) Mr. Gring was employed by Fairfield on September 23, 1991.
(3) In 1993, includes (a) contributions to the Company's profit sharing
plan (Mr. McConnell - $10,513; Mr. Meacham - $10,513; Mr. Dumeny
- $10,513; Mr. Howeth - $8,579 and Mr. Gring - $6,307), (b)
allocated benefits under the Company's Excess Benefit Plan
(Mr. McConnell - $7,225; Mr. Meacham - $719 and Mr. Dumeny
- $334) and (c) dollar amounts of premiums paid on life
insurance policies for the benefit of the named executives
officers' respective designated beneficiaries (Mr. McConnell -
$4,941; Mr. Meacham - $2,357; Mr. Dumeny - $1,135; Mr. Howeth -
$1,485 and Mr. Gring - $11,209). In 1992, represents premiums
paid on life insurance policies for the benefit of the named
executive officers' respective designated beneficiaries.
</TABLE>
-40-
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during 1993 to the named executive officers. No grants of SARs were
made to named executive officers during 1993.
<TABLE>
<CAPTION>
Number of
Securities % of Total
Underlying Options
Options Granted to Exercise
Granted Employees Price Expiration
Name (1) in 1993 ($/Sh)(2) Date
- - - - - ---- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Robert W. Howeth 100,000 23.8 3.00 9/28/2003
Clayton G. Gring, Sr. 100,000 23.8 3.00 9/28/2003
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Apreciation
for Option Term (3)
---------------------
Name 5% ($) 10% ($)
- - - - - ---- ------ -------
<S> <C> <C>
Robert W. Howeth 188,000 477,000
Clayton G. Gring, Sr. 188,000 477,000
<FN>
(1) Represents stock purchase warrants granted on September 29, 1993. The
warrants become exercisable in five equal annual installments beginning
one year after the date of grant.
(2) The exercise price was not less than the fair market value of
Fairfield's Common Stock on the date of grant.
(3) As required by rules of the SEC, potential values stated are based on
the prescribed assumption that the Common Stock will appreciate in
value from the date of grant to the end of the option term (10 years
from the date of grant) at annualized rates of 5% and 10% (total
appreciation of 63% and 159%), respectively, and therefore are not
intended to forecast possible future appreciation, if any, in the
price of the Common Stock.
</TABLE>
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table sets forth certain information concerning the number
of unexercised options at December 31, 1993. There were no options exercised
by any named executive officer during 1993.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities in-the-Money
Underlying Unexercised Options Options
at Year End at Year End ($) (1)
----------- -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- - - - - ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John W. McConnell 75,000 75,000 112,500 112,500
Morris E. Meacham 50,000 50,000 75,000 75,000
Marcel J. Dumeny 50,000 50,000 75,000 75,000
Robert W. Howeth - 100,000 - 150,000
Clayton G. Gring, Sr. - 100,000 - 150,000
<FN>
(1) The dollar amounts shown represent the amount by which the
product of the number of shares purchasable upon the exercise
of the related options and the December 31, 1993 closing market
price of $4.50 per share exceeds the aggregate purchase price
payable upon such exercise.
</TABLE>
-41-
<PAGE>
EMPLOYMENT ARRANGEMENTS
Pursuant to the Plans, Fairfield entered into employment agreements (the
"Agreements"), effective September 1, 1992 (the "Effective Date"), with John
W. McConnell, Morris E. Meacham and Marcel J. Dumeny (the "Executives"). The
Agreements are for three year terms and provide for annual base salaries to
Messrs. John W. McConnell, Morris E. Meacham and Marcel J. Dumeny of $275,000,
$200,000 and $175,000, respectively. The Agreements also provided for the
payment of incentive bonuses on August 31, 1993 (the "Anniversay Date"), subject
to certain conditions, which were fulfilled, equal to a certain percentage of
each Executive's base salary (37.5% for Mr. McConnell and 25% for Messrs.
Meacham and Dumeny), plus such additional amounts as established in the
discretion of the Board based upon certain performance criteria. For each
year following the Anniversary Date, bonuses will be paid to the Executives at
the discretion of the Board. If during the term of the Agreements, an
Executive is terminated (i) for any reason other than "for cause" (as defined
in the Agreement), death, disability or (ii) at the Executive's option due
to "Constructive Discharge" (as defined in the Agreement), then such Executive
shall receive termination pay, subject to the limitations of Section 280G of
the Internal Revenue Code, equal to 1.5 times his highest annualized salary
prior to termination. No termination pay is required by Fairfield if any
Executive's employment is terminated "for cause" or as a result of death or
disability or voluntarily by the Executive. During 1993, the Board of Directors
determined that (i) consideration of salary increases and incentive compensation
programs would be on a calendar year basis beginning in 1994 and (ii) minimum
bonuses under the Agreements would not be applicable during the second year
term of the Agreements.
Effective January 1, 1994, Mr. Meacham entered into a new employment
agreement ("New Agreement") as Vice President of Special Projects. The
New Agreement which replaces the prior employment agreement is for a three
year term and provides for an annual base salary of $120,000. The New
Agreement also provides for payment of annual incentive bonuses upon such
terms as the Board of Directors may deem appropriate. If during the term
of the New Agreement, Mr. Meacham is terminated (i) for any reason other
than "for cause" (as defined in the New Agreement), death, disability or (ii)
at his option due to "Constructive Discharge" (as defined in the New Agreement),
then such termination pay shall be equal to, subject to the limitations of
Section 280G of the Internal Revenue Code, (a) $300,000, if the termination
date occurs at any time during the period from January 1, 1994 through
December 30, 1994, (b) $240,000, if the termination date occurs at any time
during the period from December 31, 1994 through December 30, 1995,
(c) $180,000, if the termination date occurs at any time during the period
from December 31, 1995 through December 31, 1996, and (d) $120,000, if the
termination date occurs at any time from and after December 31, 1996. No
termination pay is required if Mr. Meacham is terminated "for cause" or as
a result of death or disability or voluntarily by Mr. Meacham, except
that Mr. Meacham may elect to terminate his employment effective December 31,
1996 and receive $120,000, to partially compensate him for his willingness to
terminate his prior employment contract and enter into the New Agreement, on
more favorable terms to Fairfield.
-42-
<PAGE>
COMPENSATION OF DIRECTORS
Fairfield has a policy of compensating only outside directors for the
attendance at meetings of the Board of Directors and meetings of Board
Committees. During 1993, directors received $1,500 for each in-person Board
of Directors meeting, $1,000 for each in-person committee meeting and 50% of
those respective amounts for each telephonic Board of Directors or Board
Committee meeting in which they participated, plus an annual retainer fee of
$30,000 payable in equal monthly installments. For 1993, compensation payments
to directors totaled $242,500. Fairfield also reimburses directors for travel
and out-of-pocket expenses incurred in connection with attendance at the
meetings.
Fairfield's First Amended and Restated Warrant Plan (the "1992 Plan")
provides for the grant of nonqualified stock warrants to certain key employees
and directors to purchase up to 1,000,000 shares of Common Stock. Warrants
under the 1992 Plan are to be granted at prices not less than the fair market
value of such shares on the date of grant and may be exercisable for periods
of up to 10 years from the date of grant. During 1993, warrants were granted
to outside directors to purchase a total of 5,000 shares each of Common Stock.
These warrants were granted effective October 1, 1993 at an exercise price of
$3.00 per share, and become exercisable as to 20% of the shares subject thereto
on each of the first through fifth anniversaries from the date of grant.
-43-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of March 18, 1994
with respect to any person known by Fairfield to be the beneficial owner of
more than 5% of Fairfield's Common Stock.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (3)
- - - - - ------------------ -------------------- ----------
<S> <C> <C>
Physicians Insurance Company
of Ohio
13515 Yarmouth Drive, NW 1,678,726 (1) 17.1
Pickerington, Ohio 43147
Magten Asset Management Corp.
33 East 21st Street 1,597,462 (2) 16.3
New York, New York 10010
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of March 18, 1994
with respect to the beneficial ownership of Fairfield's Common Stock by its
directors, named executive officers and by all directors and officers as a
group. Each individual named has sole investment and voting power with
respect to his shares of Common Stock.
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership Class (3)
- - - - - ----------------------- -------------------- -----------
<S> <C> <C>
Russell A. Belinsky 4,000 *
J. Steven Wilson 361 *
John W. McConnell 128,000 (4) 1.3
Morris E. Meacham 50,000 (4) *
Marcel J. Dumeny 86,000 (4) *
Robert W. Howeth 20,000 *
Clayton G. Gring, Sr. 24 *
All Directors and Executive
Officers as a Group 291,885 3.0
- - - - - ------------------
<FN>
(1) A report on Schedule 13D has been filed with the SEC by Physicians
Insurance Company of Ohio ("PICO") indicating that PICO has sole
voting and dispositive power over 1,184,000 shares and further has
the right to acquire another 494,726 shares within 60 days. The
foregoing information has been included in reliance upon, and
without independent verification of, the disclosures contained in
the above-referenced report on Schedule 13D.
(2) A report on Schedule 13G has been filed with the SEC by Magten Asset
Management Corp. indicating sole voting and dispositive power over
1,250,955 shares and shared voting and sole dispositive power over
346,507 shares. The foregoing information has included in
reliance upon, and without independent verification of, the
disclosures contained in the above-referenced report on Schedule
13G.
-44-
<PAGE>
(3) Based on 9,807,600 of shares outstanding as of March 18, 1994,
which excludes 160,001 shares held by wholly owned subsidiaries of
Fairfield, and includes 175,000 shares, which represent shares that
the named executive officers have the right to acquire (through
the exercise of warrants) within sixty days. The total amount of
Common Stock to be issued after resolution of all claims under the
Plans will differ from the amount of Common Stock outstanding
at March 18, 1994. Consequently, the ownership interest of
existing shareholders will be diluted (see Note 9 of "Notes to
Consolidated Financial Statements").
(4) Includes 75,000, 50,000 and 50,000 shares, respectively, for Messrs.
McConnell, Meacham and Dumeny, which represent shares the named
executives have the right to acquire (through the excercise of
warrants) within sixty days. Under the Rules of the SEC,
such shares are considered to be beneficially owned. For the
purpose of calculating percentage ownership, such shares were also
considered to be outstanding.
* Beneficial ownership represents less than 1% of the outstanding shares.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1987, Fairfield sold to First Pioneer Partners, Ltd., a Florida
limited partnership ("First Pioneer"), certain parcels of real property
located at its development in Melbourne, Florida and, in connection with
this sale, First Pioneer issued a 10-3/4% Promissory Note to a
wholly-owned subsidiary of Fairfield in the amount of $1.2 million
(this note was subsequently sold to Fairfield's wholly-owned insurance
subsidiary). A wholly owned subsidiary of Wilson Financial
Corporation is a general partner of First Pioneer. Mr. J. Steven Wilson,
a director, is Chairman and President of Wilson Financial Corporation.
During 1993, First Pioneer conveyed the collateral to Fairfield's
insurance subsidiary in lieu of foreclosure. The outstanding
principal balance at time of conveyance was approximately $350,000.
During 1993, Fairfield paid fees and expenses totaling $107,000 to
GTC Capital Partners, as financial advisors to Predecessor Fairfield's
Official Unsecured Bondholders' Committee during the Reorganization.
Mr. Russell A. Belinsky, a director, is a Senior Vice President and
Principal of GTC Capital Partners.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) The following consolidated financial statements of
Fairfield Communities, Inc. and subsidiaries appear on page F-12
through F-39 of this report:
Consolidated Balance Sheets - December 31, 1993 and 1992
Consolidated Statements of Operations - Year Ended
December 31, 1993, Six Months Ended December 31, 1992,
Six Months Ended June 30, 1992 and Year Ended December
31, 1991
Consolidated Statements of Stockholders' Equity (Deficit)
- Year Ended December 31, 1993, Six Months Ended
December 31, 1992, Six Months Year Ended December 31,
1991
Consolidated Statements of Cash Flows - Year Ended
December 31, 1993, Six Months Ended December 31, 1992,
Six Months Ended June 30, 1992 and Year Ended December
31, 1991
Notes to Consolidated Financial Statements - December
31, 1993
-45-
<PAGE>
(a)(2) The following financial statements schedules appear on
pages F- 40 through F-43 of this report:
FINANCIAL STATEMENT SCHEDULES
Schedule III - Condensed Financial Information
of Registrant
Schedule VIII - Valuation and Qualifying Accounts
Schedule X - Supplementary Income Statement Information
Financial statement schedules not included herein have
been omitted because they are not applicable or
the required information is shown in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits required by this item are listed on the
Exhibit Index appearing on pages E-1 through E-4 of this
report.
(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER
On December 21, 1993, a Current Report on Form 8-K was filed
in which Fairfield announced it had entered into a letter
of intent for the sale of First Federal Savings and Loan
Association of Charlotte, North Carolina.
On November 3, 1993, a Current Report on Form 8-K was
filed disclosing the Stock Purchase Agreement for the sale of
Fairfield Green Valley, Inc. and Fairfield Sunrise Village, Inc.
On October 1, 1993, a Current Report on Form 8-K was
filed disclosing the completion of three new financing
transactions.
(c) EXHIBITS
The Exhibit Index appears on pages E-1 through E-4 of
this report.
(d) FINANCIAL STATEMENTS SCHEDULES
Following are the schedules as referenced in the
INDEX TO FINANCIAL STATEMENTS included in Item 14(a) above.
-46-
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned duly authorized.
FAIRFIELD COMMUNITIES, INC.
Date: March 22, 1994 By /s/ J.W. McConnell
--------------------------------------
J.W. McConnell, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities on the dates indicated:
Date: March 22, 1994 By /s/ Russell A. Belinsky
---------------------------------------
Russell A. Belinsky, Director
Date: March 22, 1994 By /s/ Ernest D. Bennett, III
---------------------------------------
Ernest D. Bennett, III, Director
Date: March 22, 1994 By /s/ Daryl J. Butcher
-----------------------------------------
Daryl J. Butcher, Director
Date: March 22, 1994 By /s/ Philip L. Herrington
-----------------------------------------
Philip L. Herrington, Director
Date: March 22, 1994 By /s/ William C. Scott
------------------------------------------
William C. Scott, Director
Date: March 22, 1994 By /s/ J. Steven Wilson
------------------------------------------
J. Steven Wilson, Director
Date: March 22, 1994 By /s/ J. W. McConnell
------------------------------------------
J. W. McConnell, Director, President
and Chief Executive Officer
Date: March 22, 1994 By /s/ Robert W. Howeth
------------------------------------------
Robert W. Howeth, Senior Vice President,
Chief Financial Officer and Treasurer
Date: March 22, 1994 By /s/ William G. Sell
-------------------------------------------
William G. Sell, Vice President/Controller
(Chief Accounting Officer)
-47-
<PAGE>
SIGNATURE
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.
FAIRFIELD COMMUNITIES, INC.
Date: August 9, 1994 /s/ William G. Sell
------------------ ----------------------------
William G. Sell, Vice President/
Controller (Chief Accounting
Officer)
-48-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
Page
----
SELECTED FINANCIAL DATA F-2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors F-11
Consolidated Balance Sheets - December 31, 1993 and 1992 F-12
Consolidated Statements of Operations - Year Ended December 31,
1993,Six Months Ended December 31, 1992, Six Months Ended June 30,
1992 and Year Ended December 31, 1991 F-13
Consolidated Statements of Stockholders' Equity (Deficit) - Year
Ended December 31, 1993, Six Months Ended December 31, 1992, Six
Months Ended June 30, 1992 and Year Ended December 31, 1991 F-14
Consolidated Statements of Cash Flows - Year Ended December 31, 1993,
Six Months Ended December 31, 1992, Six Months Ended June 30, 1992
and Year Ended December 31, 1991 F-15
Notes to Consolidated Financial Statements - December 31, 1993 F-17
Financial Statement Schedules:
Schedule III - Condensed Financial Information of Registrant F-40
Schedule VIII - Valuation and Qualifying Accounts F-42
Schedule X - Supplementary Income Statement Information F-43
All other financial statement schedules have been omitted because they are
not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
F-1
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Six Months | Six Months
Year Ended Ended | Ended Year Ended December 31,
December 31, December 31, | June 30, -------------------------------------
1993 1992 | 1992 1991 1990 1989(1)
---- ---- | ---- ---- ---- ----
<S> <C> <C> | <C> <C> <C> <C>
OPERATING DATA |
Revenues: |
Vacation ownership, net $ 34,332 $15,255 | $ 13,558 $ 34,098 $ 75,859 $ 99,510
Homes and lots, net 12,073 5,010 | 4,513 14,226 26,136 41,287
Property management 10,876 5,145 | 4,756 8,056 10,123 11,085
Interest 39,894 23,927 | 28,728 65,502 71,163 58,944
Other 12,553 4,598 | 8,106 10,395 15,491 29,498
-------- ------- | -------- ------- -------- --------
$109,728 $53,935 | $ 59,661 $132,277 $198,772 $240,324
======== ======= | ======== ======== ======== ========
Earnings (loss): |
Continuing operations $ 7,170 $ 1,249 | $(13,284) $(32,780) $(61,703) $ (1,807)
Discontinued operations - - | (6,538) (2,494) (26,756) (22,962)
Extraordinary credit (2) - - | 125,895 - - -
-------- ------- | -------- --------- --------- --------
Net earnings (loss) $ 7,170 $ 1,249 | $106,073 $ (35,274) $(88,459) $(24,769)
======== ======= | ======== ========= ========= ========
EARNINGS PER SHARE |
Primary: |
Earnings from continuing |
operations $.65 $.11 | * * * *
==== ==== |
Net earnings $.65 $.11 | * * * *
==== ==== |
Fully diluted: |
Earnings from continuing |
operations $.61 $.11 | * * * *
==== ==== |
Net earnings $.61 $.11 | * * * *
==== ==== |
<FN>
* Per share data not meaningful due to reorganization.
</TABLE>
BALANCE SHEET DATA
<TABLE>
December 31,
-------------------------------------------------
1993 1992 | 1991 1990 1989
---- ---- | ---- ---- ----
<S> <C> <C> | <C> <C> <C>
Loans receivable, net $165,575 $378,037 | $450,031 $495,478 $533,002
Total assets 254,583 586,700 | 685,468 755,134 817,855
Total financing arrangements 127,351 180,812 | 96,081 117,024 295,537
Liabilities subject to |
reorganization proceedings - - | 218,808 229,477 -
Stockholders' equity |
(deficit) 47,148 36,962 | (38,322) (3,227) 85,003
- - - - - -----------------------
<FN>
(1) Includes operations of First Federal Savings and Loan Association of
Charlotte ("First Federal") from June 1, 1989.
(2) Gain on discharge of debt.
</TABLE>
Note: Effective June 30, 1992, the Company implemented "Fresh Start Reporting"
in connection with confirmation of the plans of reorganization. No dividends
have been paid during the previous five years. See Notes 9 and 14 of "Notes to
Consolidated Financial Statements" for discussion of the Company's
reorganization and contingencies.
F-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS BY SEGMENT
The Company has implemented, as of June 30, 1992, the recommended
accounting for entities emerging from reorganization set forth in Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" issued by the American Institute of Certified Public
Accountants ("Fresh Start Reporting"). Accordingly, the Company's assets and
liabilities were adjusted to reflect their estimated fair values and the
accumulated retained deficit was eliminated. Since July 1, 1992, the
Company's financial statements have been prepared as if it were a new
reporting entity and a black line separates this financial information from
that of the Company prior to reorganization ("Predecessor Company"), since it
has not been prepared on a comparable basis.
Following is a general discussion of revenues, expenses and operating
income of continuing operations by business segment. Segment information is
also described in Note 17 of "Notes to Consolidated Financial Statements".
LEISURE PRODUCTS
Under Fresh Start Reporting, the fair value of the assets and liabilities
related to the Company's Leisure Products segment approximated their
historical value at June 30, 1992. Accordingly, the results of operations for
the six months ended December 31, 1992 have been combined with that of the
Predecessor Company for the six months ended June 30, 1992 (subsequently
referred to as "Combined 1992") and, for purposes of management's discussion
of results of continuing operations, will be compared to the results of
operations for the year ended December 31, 1993 and the results of operations
of the Predecessor Company for the year ended December 31, 1991.
VACATION OWNERSHIP
Gross vacation ownership interval ("VOI") revenues totaled $35.3 million
and $26.7 million for the year ended December 31, 1993 and Combined 1992,
respectively. During 1993, the Company experienced sales increases at its
destination locations in Williamsburg, Virginia and at Branson, Missouri, the
Company's newest destination location which began sales efforts in June 1993.
Net VOI revenues totaled $34.3 million and $28.8 million for the same
respective periods. The increase in gross revenues was offset by a $3 million
net increase in deferred revenue related to the percentage of completion
method of accounting. Under this method, the portion of revenues attributable
to cost incurred as compared to total estimated construction costs and selling
expenses, is recognized in the period of sale. The remaining revenue is
deferred and recognized as remaining costs are incurred. Net sales decreased
in Combined 1992, as compared to 1991, due to (i) the Company matching VOI
sales activity with existing inventory levels and (ii) the lack of available
financing to support sales and marketing until the Company emerged from
reorganization.
Cost of sales, as a percentage of net revenues, was 29% for the year
ended December 31, 1993, 25% for Combined 1992 and 26.9% for the year ended
December 31, 1991. Included in VOI revenues and cost of sales for 1993 is
$2.6 million and $2.1 million, respectively, related to the Company's new
Leisure Plan programs which, as a percentage of related revenues, are higher
than the Company's traditional VOI products. The Company anticipates these
new programs will make the Company's products more attractive to its customers
and thereby increase overall sales volume. The cost of sales percentage of
net VOI revenues for 1993, excluding the effect of the Leisure Plan programs,
was 24.8%.
F-3
<PAGE>
Selling expenses for both VOI and lot sales, as a percentage of related
revenues, were 49.4%, 51.6%, and 51.4%, for 1993, Combined 1992, and 1991,
respectively. The decrease in 1993 is primarily attributable to efficiencies
experienced at the Company's destination locations. The Company's operating
strategy includes reducing these costs through a variety of mechanisms, such
as decreased reliance on direct mail marketing and increased use of existing
property owner referrals and offsite sales contacts. Further efficiencies are
expected to be realized as the Company continues to direct its growth
opportunities to destination locations which have a higher and more consistent
stream of potential customers generated by the existing attractions.
HOMES AND LOTS
In 1993, sales of homes and lots were concentrated primarily at the
Company's development located at Fairfield Glade, Tennessee. Home revenues at
Fairfield Glade totaled $4.4 million for 1993, which represented 93% of
consolidated home revenues. Net lot sales totaled $7.4 million in 1993, $3.3
million in Combined 1992 and $4.1 million in 1991. Net lot sales for 1993
include $5.4 million at Fairfield Glade as compared to $1.8 million in
Combined 1992 and $1.7 million in 1991. The Company anticipates that future
sales of homes and lots will continue to be concentrated at Fairfield Glade.
Cost of lots sold, as a percentage of related revenues, improved to 20.9%
for 1993, as compared to 28.9% and 35% for Combined 1992 and 1991,
respectively. These improvements are reflective of the lower acquisition and
development costs at the Fairfield Glade development.
INTEREST INCOME
Interest income totaled $17.1 million, $20.5 million and $23.6 million
for 1993, Combined 1992 and 1991, respectively. These decreases are
primarily attributable to lower average balances of outstanding contracts
receivable ($115.8 million for 1993, $140.1 million for Combined 1992 and
$158.7 million for 1991). Interest income is expected to continue to decline
in tandem with outstanding receivable balances, as a result of anticipated
principal payments exceeding origination of new receivables.
GENERAL AND ADMINISTRATIVE
General and administrative expenses totaled $9.8 million for 1993, $13.1
million for Combined 1992 and $16.4 million in 1991. This improvement has
resulted from management's continued emphasis on cost reductions, the
curtailment of certain operations and the restructuring of resort site
management.
OTHER
Other revenues for the year ended December 31, 1993 include (i) cash
distributions totaling $2 million related to the Company's 35% partnership
interest in Harbour Ridge, Ltd., (ii) $.5 million related to the recovery by
Fairfield Acceptance Corporation ("FAC") of a previously written-off note
receivable and (iii) $.5 million related to the recovery of certain
professional fees previously expensed. There were no similar revenues for
Combined 1992 or 1991.
Also included in other revenues and other expenses for 1993 are bulk
asset sales and related cost of sales totaling $1.7 million and $1.2 million,
respectively. Other revenues and other expenses for Combined 1992 include $7
million and $6.5 million, respectively, related to bulk asset sales and
related cost of sales. For 1991, bulk asset sales and related cost of sales
totaled $2.4 million and $2.1 million, respectively.
F-4
<PAGE>
SALE OF FIRST FEDERAL
On December 15, 1993, Fairfield Communities, Inc. ("Fairfield") entered
into a letter of intent to sell 100% of the outstanding stock (the "Sale") of
its wholly owned subsidiary, First Federal Savings and Loan Association of
Charlotte ("First Federal"), to Security Capital Bancorp ("SCBC"). On April
6, 1994, Fairfield finalized its negotiations with SCBC and entered into a
Stock Purchase Agreement.
The Stock Purchase Agreement provides for a sales price of $40.4 million,
which will be increased (subject to the limitation hereafter described) to
reflect the consolidated pretax net earnings of First Federal and its
subsidiaries for the period from October 1, 1993 through the closing of the
Sale, or decreased by the consolidated pretax net losses of First Federal and
its subsidiaries during this period, whichever is the case (the "Sales
Price"). The increase for pretax earnings of First Federal and its
subsidiaries cannot exceed approximately $1.8 million plus, if the closing of
the Sale occurs after August 1, 1994, in general, the pretax earnings or
losses of First Federal and its subsidiaries from August 1, 1994 through the
closing, provided that the foregoing amounts may be reduced under certain
circumstances for reserves taken or losses (in excess of gains) on Excluded
Assets (as defined below) after September 30, 1993. Up to approximately $1.4
million of the Sales Price is to be retained by SCBC to securitize Fairfield's
obligation to indemnify SCBC against three existing lawsuits/claims which have
been asserted against First Federal (the "Litigation Indemnity").
As part of the proposed transaction, Fairfield is to purchase for cash
(a) at book value, net of reserves, up to approximately $22.6 million, as of
December 31, 1993, of certain real estate, classified loans, joint venture
interests and other assets owned by First Federal (the "Excluded Association
Assets"), subject to the right of SCBC to elect for First Federal to retain
all or part of such assets, and (b) lot and timeshare contracts receivable and
related assets, which First Federal previously acquired from Fairfield (the
"Contracts Receivable"), having a book value less certain reserves and a
weighted average yield, at December 31, 1993, of approximately $53.3 million
and 11.6%, respectively. The Excluded Association Assets and the Contracts
Receivable are collectively referred to as the "Excluded Assets". Fairfield
expects to dispose of certain of the Excluded Association Assets in one or
more transactions, and otherwise to monetize the remaining Excluded
Association Assets, following the closing of the Sale. Management intends to
dispose of a substantial portion of the Excluded Association Assets by
December 31, 1994.
Approximately $2.9 million in net book value of the Excluded Association
Assets are to be pledged to SCBC, to provide additional security with respect
to both the Litigation Indemnity and the general indemnities under the
Agreement. Fairfield has certain rights to substitute collateral in
connection with such pledge, including the right to substitute $0.60 to $0.70
of cash for every $1.00 of net book value of Excluded Association Assets so
pledged. Reserves taken by Fairfield after the closing on the Excluded
Association Assets securing the Litigation Indemnity may increase the total
Excluded Association Assets required as collateral.
Fairfield expects to utilize (a) the cash portion of the Sales Price to
fund the purchase of the Excluded Association Assets and (b) the remaining
cash portion of the Sales Price, plus proceeds from borrowings under the
Company's revolving credit agreements with The First National Bank of Boston
("FNBB"), to fund the purchase of the Contracts Receivable. Under the
Company's revolving credit agreements, in general, within applicable loan
limits, $0.75 of additional borrowing availability is created for each $1.00
in outstanding principal balance of qualifying Contracts Receivable pledged to
FNBB.
Management estimates that the Sale will result in a net gain of
approximately $5.5 million after taking into account (i) writedowns related to
the Excluded Assets estimated at approximately $4.0 million, based upon
Fairfield's accelerated method of disposal of these assets subsequent to the
F-5
<PAGE>
consummation of the Sale, and (ii) anticipated selling expenses, including
professional fees and other direct expenses, of approximately $3.3 million.
The Sale is subject to numerous conditions, including the obtaining of
necessary approvals from (i) state and federal regulatory authorities, (ii)
FNBB and (iii) Fairfield's stockholders. There is no assurance that the
conditions to closing will be satisfied or that the various regulatory
approvals will be obtained on terms satisfactory to the parties. Assuming
such conditions to closing are satisfied and the approvals are obtained, the
Sale is expected to close by September 30, 1994.
Fairfield had previously classified the First Federal segment as a
discontinued operation. As a result of the retention of a significant amount
of assets of First Federal, the consolidated financial statements have been
revised to reflect the Sale as a disposal of a portion of a segment rather
than a discontinued operation. As a result of this change, the consolidated
statements of operations and cash flows include the operations and cash flows
of First Federal. Accordingly, the assets to be sold and liabilities to be
assumed by the purchaser have been included in "Net liabilities held for sale"
in the Consolidated Balance Sheet at December 31, 1993 (see Note 11 of "Notes
to Consolidated Financial Statements"). Pro forma financial information as if
the Sale had occurred as of January 1, 1993 is as follows:
Revenues - $91 million; earnings from continuing operations before gain of the
Sale - $6.1 million; earnings per share from continuing operations before gain
on the Sale (primary) - $.55; earnings per share from continuing operations
before gain on Sale (fully diluted) - $.52.
The following discussion of First Federal's historical results of
operations excludes the amortization of Fresh Start Reporting adjustments and
combines the operations for the six months ended December 31, 1992 with the
operations for the six months ended June 30, 1992 (subsequently referred to as
"Combined 1992"), in order that the twelve month periods for 1993, 1992, and
1991 may be compared (Dollars in thousands):
<TABLE>
<CAPTION>
Combined
-----------------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Interest income as reported $22,826 $32,174 $41,887
Interest expense as reported 13,105 18,856 31,026
Fresh start amortization, net 584 (761) -
------- ------- -------
Net interest income, as adjusted $10,305 $12,557 $10,861
======= ======= =======
Net yield on interest-earning assets 3.32% 3.59% 2.67%
Average yield on interest-earning assets 8.21% 9.58% 10.30%
Effect of change in yield on interest
income $(3,195) $(2,739)
Average amount of interest-earning assets $310,807 $349,265 $406,811
Effect of change in amount on interest
income $(4,731) $(5,699)
Average rate on interest-bearing
liabilities 4.87% 5.95% 7.67%
Effect of change in rate on interest
expense $(3,200) $(5,845)
Average amount of interest-bearing $312,450 $350,878 $404,469
Effect of change in amount on interest $(2,474) $(4,289)
</TABLE>
As compared to Combined 1992, average interest-earning assets decreased
$38.5 million in 1993. The reduction in interest-earning assets is reflective
of a $29.2 million decrease in mortgage loans receivable and a $22.1 million
decrease in contracts receivable which was partially offset by a $12.6 million
increase in interest-bearing deposits with other banks and investment and
mortgage-backed securities. In 1993, mortgage loans have been affected by
significant increases in prepayments associated with a decrease in prevailing
mortgage rates and First Federal's current policy of selling
F-6
<PAGE>
most of its new originations. Due to current market rates, borrowers may
continue to refinance existing loans which would result in increased
levels of prepayments. Contracts receivable have decreased due to collections
with no additional purchases of contracts receivable from Fairfield. Interest-
bearing liabilities decreased in 1993 by $38.4 million due to decreases in
certificates of deposit totaling $31.0 million and in advances from the
Federal Home Loan Bank totaling $12.6 million, which were partially offset by
a $5.2 million increase in noncertificate accounts.
Interest-earning assets decreased $57.5 million in Combined 1992 as
compared to 1991 which is attributable primarily to (i) a $20.0 million
decrease in mortgage loans receivable (ii) a $26.2 million decrease in
contracts receivable and (iii) a $10.2 million decrease in interest-bearing
deposits with other banks. Interest-bearing liabilities decreased $53.6
million due to decreases in certificates of deposit totaling $37.5 million and
advances from the Federal Home Loan Bank totaling $26.2 million, which were
partially offset by a $10.1 million increase in noncertificate accounts.
During 1993 and 1992, First Federal strived to manage its interest rate
spread between interest-earning assets and interest-bearing liabilities.
During these periods of excess liquidity and unattractive rates on its
investment alternatives, First Federal lowered its rates paid on savings
deposits. As a result of this decrease in rates, including those of short and
long-term certificates of deposits, the amounts of interest-bearing
liabilities decreased as depositors sought higher yielding income producing
products, including equity investments.
First Federal's income from non-interest sources totaled $3 million, $1.8
million, and $2.7 million for 1993, Combined 1992 and 1991, respectively.
Service charges on deposit accounts totaled $.7 million for each period.
Included in income from non-interest sources for 1993, Combined 1992 and 1991
are gains totaling $.5 million, $.4 million and $.7 million, respectively,
related to the sale of $48.4 million, $47 million and $18.6 million,
respectively, of first mortgage loans to the Federal Home Loan Mortgage
Corporation. Other operating and administrative expenses, consisting
primarily of employee compensation and office and branch expenses, totaled
$8.5 million, $8.3 million, and $9.6 million for 1993, Combined 1992 and 1991,
respectively.
INTEREST EXPENSE
First Federal's interest expense of $13.1 million, $18.9 million and $31
million for 1993, Combined 1992 and 1991, respectively, is considered a
component of First Federal's operating profit, therefore the following
comparisons relate to the interest expense of the Company, exclusive of First
Federal (see Note 11 of "Notes to Consolidated Financial Statements").
Interest expense totaled $11.8 million, $16.9 million, and $21 million
for 1993, Combined 1992 and 1991, respectively. This downward trend is
primarily attributable to reductions in the average outstanding balances of
interest-bearing debt ($135.0 million for 1993, $151.6 million for Combined
1992 and $160.5 million for 1991), resulting primarily from asset sales and
the conveyance of collateral in lieu of foreclosure. In addition, interest
expense included fees totaling $.6 million and $1.4 million in Combined 1992
and 1991, respectively, related to the Predecessor Company's reorganization
credit facility.
PROVISION FOR INCOME TAXES
As of June 30, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
issued by the Financial Accounting Standards Board. In accordance with SFAS
109, a deferred tax asset or liability is recognized based on the estimated
future tax effects attributable to temporary differences and carryforwards.
The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for the amount of any tax
F-7
<PAGE>
benefits that, based on available evidence, are not expected to be realized.
The adoption of SFAS 109 had no material impact on the Company's results of
operations or financial position.
Fresh Start Reporting requires the Company to report federal income tax
expense on income before utilization of pre-confirmation net operating loss
carryforwards and recognition of the benefit of pre-confirmation deductible
temporary differences. Benefits realized from the utilization of pre-
confirmation net operating loss carryforwards and recognition of pre-
confirmation deductible temporary differences are recorded as reductions of
the valuation allowance and as direct additions to paid-in capital. For the
year ended December 31, 1993, the Company recorded benefits from the
utilization of pre-confirmation tax attributes totaling $3 million.
At December 31, 1993, the Company had net operating loss carryforwards
totaling $37 million which reflects the amount available to offset taxable
income in future periods based on the Company's current assessment of the
limitations imposed by Internal Revenue Code Section 382. Should the Company
undergo an ownership change as defined in Section 382 within a specified
period after confirmation of the Plans, the pre-confirmation net operating
loss carryforwards would be eliminated. Available carryovers expire in the
years 2005 through 2007 if not utilized.
At December 31, 1993, the Company had a total deferred tax liability of
$5.3 million. In addition, the Company had deferred tax assets totaling $33.6
million, which were offset by a valuation allowance of $33.6 million. This
valuation allowance is attributable to the uncertainty of realization of pre-
confirmation net operating loss carryforwards and pre-confirmation deductible
temporary differences.
Variances between the statutory tax provision of the Predecessor Company
for the six months ended June 30, 1992 and the year ended December 31, 1991
relate primarily to the gain on the discharge of debt and reorganization
expenses in 1992, and to income tax benefits relating to the Predecessor
Company's operating losses not recorded in 1991, as there was no assurance
that such benefits could be realized.
FINANCIAL CONDITION
Total consolidated assets of the Company decreased $332.1 million from
December 31, 1992 to December 31, 1993. This decrease is primarily
attributable to (i) the assets of First Federal to be sold ($278.9 million)
included in "Net liabilities held for sale" in the Consolidated Balance Sheet
at December 31, 1993 (see Note 11 of "Notes to Consolidated Financial
Statements") and (ii) a $42.9 million decrease in loans receivable resulting
primarily from principal payments exceeding originations of new receivables
net of sales. The fluctuations in cash and financing arrangements reflect the
restructuring of the Company's debt in September 1993. In addition, the
increase in other assets reflects certain restricted cash accounts, including
the reinvestment account, which must be maintained in accordance with the
restructured debt agreements (see "Liquidity and Capital Resources").
IMPACT OF INFLATION
Although inflation has slowed in recent years, it remains a factor the
Company considers. In general, to the extent permitted by competition, the
Company passes increased costs on through increased sales prices. The value
of a land parcel is determined by factors such as location, zoning, topography
and, perhaps most importantly, plans for its ultimate use. As some of these
factors change, sometimes as a result of the Company's own actions, the value
of the land may increase or decrease independently of inflationary pressures.
Management believes that capitalizing interest on land during development
reasonably provides for increases in land value due to inflation. Due to the
F-8
<PAGE>
Company's relatively high turnover rate in VOIs, building supplies and
consumable goods inventories, historical costs closely approximate current
costs. Property and equipment acquired in prior years will generally be
replaced at higher costs. These new assets will result in additional
depreciation charges, but, in many cases, there are also operating
efficiencies. The Company considers these matters in pricing its products and
services.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of the Company decreased $56.4 million in 1993
which included (i) $25.2 million related to the Leisure Products Segment, (ii)
$21.9 million at First Federal, and (iii) $14.2 million related to cash
included in net liabilities held for sale at December 31, 1993. These
decreases were offset by increases in cash totaling $4.9 million related to
corporate activities.
LEISURE PRODUCTS
During 1993, the Leisure Products Segment generated $76.8 million of cash
from principal collections on loans receivable (including $20.6 million
related to contracts receivable held by First Federal) which was partially
offset by $36.2 million of loan originations. Using available cash and
proceeds from the restructuring of the Company's debt as described below, the
outstanding balances of financing arrangements were reduced by $35 million and
restricted cash accounts totaling $9.3 million were established relating to
Fairfield Funding Corporation's private placement as described below. In
addition, the Leisure Products Segment's cash decreased due to decreases in
other liabilities of $9.1 million, which was partially offset by decreases in
real estate inventories of $2.5 million.
On September 28, 1993, Fairfield and certain of its subsidiaries entered
into the Amended and Restated Revolving Credit Agreement (the "FCI Agreement")
with FNBB. The FCI Agreement provides for revolving loans of up to $25
million (including up to $7 million for letters of credit), bearing interest
at FNBB's base rate plus 1.5%. The FCI Agreement also provides for an annual
facility fee of 1% of the total commitment. The revolving loans mature on
September 28, 1996, if not extended in accordance with the terms of the
agreement. The FCI Agreement is collateralized by substantially all of the
borrowers' loans receivable and real estate inventories with Fairfield
Acceptance Corporation ("FAC") being a guarantor pursuant to the FCI
Agreement. At December 31, 1993, Fairfield had outstanding borrowings under
the FCI Agreement totaling $7.9 million, additional borrowing availability of
10.9 million, and outstanding letters of credit totaling $2.6 million.
On September 28, 1993, FAC entered into the Third Amended and Restated
Revolving Credit Agreement (the "FAC Agreement") with FNBB. The FAC Agreement
provides for revolving loans of up to $35 million (including up to $1 million
for letters of credit), bearing interest at FNBB's base rate plus .75%. The
FAC Agreement also provides for an annual facility fee of 1% of the total
commitment amount. The revolving loans mature on September 28, 1996, if not
extended in accordance with the terms of the agreement. The FAC Agreement is
collateralized by certain loans receivable with Fairfield being a guarantor
pursuant to the FAC Agreement. At December 31, 1993, FAC had outstanding
borrowings under the FAC Agreement totaling $4.3 million and additional
borrowing availability of $.1 million.
On September 30, 1993, Fairfield Funding Corporation ("FFC"), a wholly
owned subsidiary of FAC, completed a private placement of $82.7 million of
7.6% Notes (the "FFC Notes") with seven institutional investors. The FFC
Notes were secured by and payable from a pool of $99.6 million of contracts
receivable purchased from FAC pursuant to the Receivables Purchase Agreement
(the "Agreement") among Fairfield as originator, FAC, as seller and FFC, as
purchaser. Net proceeds were applied to reduce existing indebtedness, which
included repayment of $54.3 million under FAC's
F-9
<PAGE>
previous revolving credit agreement and $12.8 million, including interest, of
FAC's subordinated debt.
The Agreement provides for the principal amounts collected from the
contracts receivable pool to be reinvested into additional contracts
receivable limited monthly to (i) the availability of eligible contracts as
defined in the Agreement and (ii) the amounts accumulated in the reinvestment
account. The excess of funds held in the reinvestment account over $6 million
is to be used to redeem the FFC Notes. At December 31, 1993, the excess
amount in the reinvestment account of $1.1 million is reflected as a reduction
in the outstanding principal balance of the FFC Notes. The reinvestment
period expires March 31, 1995.
The Company expects to finance its future cash needs from (i) proceeds
from asset sales, (ii) operating cash flows, (iii) contract payments generated
from its contracts receivable portfolio, (iv) borrowings under the revolving
credit facilities and in the short-term, the securitization of additional
eligible contracts receivable during the reinvestment period provided by the
FFC Notes, as described above, and (v) other financings that it may obtain in
the future.
FIRST FEDERAL
Cash flows from First Federal are currently restricted as to use by First
Federal and are generally not available to fund any of the Company's other
operations. In 1993, principal collections from the contracts receivable
included in assets of continuing operations totaled $20.6 million. Once these
assets are acquired by Fairfield, the related cash flow will be that of the
Company. The following cash flow data reflects the total cash flow from First
Federal's operations.
Cash from operations of First Federal totaled $9.4 million. Cash
provided by First Federal's investing activities totaled $2.8 million,
resulting primarily from $48.9 million in proceeds from the sale of loans to
third parties which was partially offset by loan originations exceeding loan
collections by $20 million. These transactions were further offset by net
increases in investment and mortgage-backed securities of $26 million. Cash
used in First Federal's financing activities totaled $34.1 million, resulting
primarily from net repayments of advances from the Federal Home Loan Bank of
$14 million and a $20.1 million net decrease in savings deposits. Except for
previously approved agreements, First Federal may not enter into transactions
with or make cash distributions to Fairfield without prior written approval of
the Office of Thrift Supervision. In accordance with the terms of its Tax
Sharing Agreement, First Federal made payments to Fairfield totaling $.5
million for the year ended December 31, 1993.
DISCONTINUED OPERATIONS
In March 1994, Fairfield sold the stock of its wholly owned subsidiaries,
Fairfield Green Valley, Inc. and Fairfield Sunrise Village, Inc.
(collectively, the "Arizona Subsidiaries") at its approximate book value. The
Arizona Subsidiaries, with assets totaling $25 million at December 31, 1993,
conducted Fairfield's Arizona home building business. The consideration
received by Fairfield included (i) release of a lien on and transfer to
Fairfield of 2,235,294 shares of Fairfield's Common Stock (no book value)
owned by the Arizona Subsidiaries and pledged to their primary lender, a
subsidiary of Bank of America Arizona (the "Bank"), (ii) release of a mortgage
in favor of the Bank on a tract of unimproved property owned by Fairfield, and
(iii) release from any further liability to the Bank. At December 31, 1993,
the Arizona Subsidiaries had loans of $19.9 million outstanding under their
revolving credit agreement with the Bank, bearing interest at rates ranging
from 8% to 8.5%. These loans, which were included in net assets of
discontinued operations at December 31, 1993, were paid off in conjunction
with the sale of the Arizona Subsidiaries.
F-10
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Fairfield Communities, Inc.
We have audited the accompanying consolidated balance sheets of Fairfield
Communities, Inc. and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1993, six months ended December 31,
1992, six months ended June 30, 1992 and year ended December 31, 1991. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
had previously classified its subsidiary, First Federal Savings and Loan of
Charlotte ("First Federal"), as a discontinued operation. As a result of the
retention of a significant amount of assets of First Federal, the consolidated
financial statements have been revised to reflect the sale of First Federal as
the sale of a portion of a segment of a business.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fairfield
Communities, Inc. and subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1993, six months ended December 31, 1992, six months ended
June 30, 1992 and year ended December 31, 1991, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG
Little Rock, Arkansas
July 29, 1994
F-11
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,475 $ 60,921
Loans receivable, net 165,575 378,037
Real estate inventories 34,607 51,504
Investment and mortgage-backed securities - 51,756
Property and equipment, net 7,527 11,999
Net assets of discontinued operations 8,471 2,288
Other assets 33,928 30,195
-------- --------
$254,583 $586,700
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Financing arrangements $127,351 $180,812
Savings deposits - 298,640
Deferred revenue 20,599 20,052
Net liabilities held for sale 23,293 -
Other liabilities 36,192 50,234
-------- --------
207,435 549,738
-------- --------
Stockholders' Equity:
Common stock, $.01 par value,
25,000,000 shares authorized, 9,565,035
shares issued and outstanding in 1993
and 1,424,830 in 1992 120 120
Paid-in capital 38,609 35,593
Retained earnings 8,419 1,249
-------- --------
47,148 36,962
-------- --------
$254,583 $586,700
======== ========
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
|Predecessor Company
|---------------------
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,|June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> |<C> <C>
REVENUES |
Vacation ownership, net $ 34,332 $15,255 |$ 13,558 $ 34,098
Homes and lots, net 12,073 5,010 | 4,513 14,226
Property management 10,876 5,145 | 4,756 8,056
Interest 39,894 23,927 | 28,728 65,502
Other 12,553 4,598 | 8,106 10,395
-------- ------- |-------- -------
109,728 53,935 | 59,661 132,277
-------- ------- |-------- -------
EXPENSES |
Vacation ownership 9,942 3,705 | 3,485 9,170
Homes and lots 5,212 3,283 | 2,908 10,811
Provision for loan losses 3,586 1,631 | 1,170 9,401
Selling 21,850 9,612 | 8,425 21,373
Property management 11,057 4,893 | 4,710 8,655
General and administrative 18,267 10,436 | 11,026 24,990
Interest 24,927 15,423 | 20,357 52,047
Other 4,560 3,045 | 6,700 8,623
-------- ------- | ------- --------
99,401 52,028 | 58,781 145,070
-------- ------- | ------- ---------
Earnings (loss) from continuing operations |
before reorganization expenses 10,327 1,907 | 880 (12,793)
Reorganization expenses - - | (14,010) (19,884)
-------- -------- |-------- --------
Earnings (loss) from continuing |
operations before provision |
for income taxes 10,327 1,907 | (13,130) (32,677)
Provision for income taxes 3,157 658 | 154 103
-------- ------- |--------- -------
Earnings (loss) from |
continuing operations $ 7,170 $ 1,249 | (13,284) (32,780)
Loss from discontinued operations - - | (6,538) (2,494)
Extraordinary gain - |
discharge of debt - - | 125,895 -
-------- -------- | --------- -------
Net earnings (loss) $ 7,170 $ 1,249 | $106,073 $(35,274)
======== ======== | ======== ========
|
EARNINGS PER SHARE |
Primary: |
Earnings from |
continuing operations $.65 $.11 | * *
==== ==== |
Net earnings $.65 $.11 | * *
==== ==== |
Fully diluted: |
Earnings from |
continuing operations $.61 $.11 | * *
==== ==== |
Net earnings $.61 $.11 | * *
==== ====
<FN>
*Per share amounts are neither comparable nor meaningful due to reorganization.
See notes to consolidated financial statements.
</TABLE>
F-13
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Common Paid-In Earnings
Stock Capital (Deficit) Total
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1990 $ 1,090 $ 66,482 $ (70,799) $ (3,227)
Net loss - - (35,274) (35,274)
Other (1) 180 - 179
------- -------- --------- --------
Balance, December 31, 1991 1,089 66,662 (106,073) (38,322)
Net earnings - - 106,073 106,073
Cancellation of Predecessor
Fairfield Common Stock (1,088) (66,753) - (67,841)
Issuance of Fairfield
Common Stock 120 24,521 - 24,641
Fresh start valuation
adjustment - 10,798 - 10,798
Other (1) 91 - 90
------ ------- -------- --------
Balance, June 30, 1992 120 35,319 - 35,439
Net earnings - - 1,249 1,249
Utilization of pre-confirmation
income tax attributes - 274 - 274
------ ------- -------- --------
Balance, December 31, 1992 120 35,593 1,249 36,962
Net earnings - - 7,170 7,170
Utilization of pre-confirmation
income tax attributes - 3,016 - 3,016
------ ------- -------- --------
Balance, December 31, 1993 $ 120 $38,609 $ 8,419 $ 47,148
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
| Predecessor Company
|--------------------
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,|June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> |<C> <C>
OPERATING ACTIVITIES: |
Earnings (loss) from continuing |
operations $ 7,170 $ 1,249 |$(13,284) $(32,780)
Adjustments to reconcile net |
earnings (loss) to net cash |
provided by continuing |
operations: |
Depreciation 1,453 1,049 | 1,028 2,881
Amortization of premiums and |
valuation discounts 484 (1,128) | 430 1,186
Provision for loan losses 3,586 1,631 | 1,170 9,401
(Earnings) loss from |
unconsolidated affiliates (1,996) 17 | (44) (318)
Changes in operating assets |
and liabilities, net: |
Restricted cash accounts (9,278) 742 | 123 346
Other (1,416) 4,354 | 22,788 31,729
-------- ------ | ------- -------
Net cash provided by |
operating activities 3 7,914 | 12,211 12,445
-------- ------ | ------- -------
INVESTING ACTIVITIES: |
Net purchases of property |
and equipment (1,095) (88) | (884) (1,405)
Principal collections on loans 131,543 68,318 | 62,215 95,551
Loans originated or acquired (131,598) (59,522) | (49,156) (88,890)
Proceeds from sales of loans |
and mortgage-backed securities |
to third parties 48,922 27,664 | 19,723 29,738
Purchases of investment and |
mortgage-backed securities (59,655) (4,842) | (9,497) (13,218)
Payments from maturing investment |
and mortgage-backed securities 33,637 12,525 | 11,585 8,598
Net cash received from |
unconsolidated affiliates 2,572 1,838 | 1,210 3,575
Cash transferred to net |
liabilities held for sale (14,205) - | - -
Net investment activities of |
discontinued operations 2,540 (823) | (2,283) (8,998)
-------- ------ | ------- -------
Net cash provided by |
investing activities 12,661 45,070 | 32,913 24,951
-------- ------- ------- -------
</TABLE>
F-15
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
|Predecessor Company
|--------------------
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31,December 31,| June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> | <C> <C>
FINANCING ACTIVITIES: |
Proceeds from financing |
arrangements 138,297 21,664 | 69,185 184,062
Repayments of financing |
arrangements (187,331) (42,062) |(105,439) (207,160)
Net increase (decrease) |
in demand, savings and |
money market accounts 5,252 2,015 | 5,989 (1,884)
Proceeds from sales of |
certificates of deposit 15,481 10,857 | 17,221 46,701
Payments for maturing |
certificates of deposit (40,809) (28,123) | (34,773) (57,174)
-------- -------- |-------- --------
Net cash used in financing |
activities (69,110) (35,649) | (47,817) (35,455)
-------- -------- |-------- --------
Net increase (decrease) in cash |
and cash equivalents (56,446) 17,335 | (2,693) 1,941
Cash and cash equivalents, |
beginning of period 60,921 43,586 | 46,279 44,338
-------- -------- |-------- -------
Cash and cash equivalents, |
end of period $ 4,475 $ 60,921 |$ 43,586 $ 46,279
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Fairfield
Communities, Inc. and its subsidiaries. Significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts in the
consolidated financial statements of prior years have been reclassified to
conform to the 1993 presentation.
FRESH START REPORTING
In 1990, Fairfield Communities, Inc. and twelve wholly owned
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code. On August 14, 1992, the Bankruptcy Court
confirmed the Seventh Amended and Restated Joint Plans of Reorganization and
the Second Amended and Restated Joint Plans of Reorganization (collectively,
the "Plans").
Unless the context requires otherwise, "Fairfield" means Fairfield
Communities, Inc., and is successor and survivor of the mergers pursuant to
the Plans, "Company" means Fairfield Communities, Inc. and its subsidiaries,
"Predecessor Fairfield" means Fairfield prior to the reorganization and
"Predecessor Company" means Fairfield and its subsidiaries prior to the
reorganization.
The Company has implemented, as of June 30, 1992, the recommended
accounting for entities emerging from reorganization set forth in Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7") issued by the American Institute of Certified
Public Accountants ("Fresh Start Reporting"). Accordingly, the Company's
assets and liabilities were adjusted to reflect their estimated fair values
and the accumulated retained deficit was eliminated. Accordingly, since July
1, 1992, the Company's financial statements have been prepared as if it were a
new reporting entity and a black line separates this financial information
from that of the Predecessor Company since it has not been prepared on a
comparable basis.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated primarily by
the straight-line method based on the estimated useful lives of the assets,
ranging from 10 years to 30 years for buildings and from 2 to 6 years for
machinery, fixtures and equipment. Additions and improvements are capitalized
while maintenance and repairs are expensed as incurred. Asset and accumulated
depreciation accounts are relieved for dispositions with resulting gains or
losses reflected in operations.
F-17
<PAGE>
Depreciation of assets used directly in the development of projects is
capitalized as part of the development costs.
EARNINGS PER SHARE
Primary earnings per share for the periods subsequent to June 30, 1992
are computed based on the estimated weighted average number of common shares
and common equivalent shares deemed to be outstanding during the period. Such
shares include those shares issued to the unsecured creditors as authorized by
the Plans plus the additional shares to be issued based on an estimate of the
remaining unsecured allowed claims (see Note 9). This number of shares has
been reduced by the shares held by wholly owned subsidiaries of Fairfield.
The computation of fully diluted earnings per share further includes (i)
the effect, in 1993, of common shares issuable upon the exercise of warrants
using the treasury stock method and (ii) 588,235 shares which have been
reserved, but not issued, for the benefit of the holders of the Senior
Subordinated Secured Notes (the "FCI Notes"). The weighted average number of
common shares and common equivalent shares outstanding for the calculation of
primary earnings per share was 11,037,765 in 1993 and 11,134,117 for the six
months ended December 31, 1992. The weighted average number of shares used to
compute earnings per share, assuming full dilution, was 11,692,667 in 1993 and
11,722,352 for the six months ended December 31, 1992.
Information for the periods through June 30, 1992 relates to periods
prior to confirmation of the Plans when the Predecessor Company had a
different capital structure than that of the Company. Per share data
pertaining to the pre-confirmation periods is, therefore, neither comparable
nor meaningful and is not disclosed herein.
INCOME TAXES
Income taxes have been provided in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") since July 1, 1992. Under SFAS 109, deferred tax assets or liabilities
are determined based on the estimated future tax effects attributable to
temporary differences and carryforwards. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for the amount of
any tax benefits that, based on available evidence, are not expected to be
realized. Prior to July 1, 1992, the Company accounted for income taxes in
accordance with Accounting Principles Board Opinion No. 11.
Fresh Start Reporting requires the Company to report federal income tax
expense on income before utilization of pre-confirmation net operating loss
carryforwards and recognition of the benefit of pre-confirmation deductible
temporary differences. Benefits realized from utilization of pre-confirmation
net operating loss carryforwards and recognition of pre-confirmation
deductible temporary differences are recorded as reductions of the valuation
allowance and as direct additions to paid-in capital.
LEISURE PRODUCTS
REVENUE AND PROFIT RECOGNITION
VACATION OWNERSHIP/LOTS
Vacation ownership is a concept whereby either fixed week intervals or
undivided fee simple interests are sold in fully-furnished vacation homes.
Generally, vacation ownership intervals ("VOIs") and lots are sold under
contracts for deed which provide for a down payment and monthly
F-18
<PAGE>
installments, including interest, for periods up to seven years. Both
vacation ownership and lot sales are included in revenues when a 10%
minimum down payment (including interest) has been received. Revenue is
recognized on the percentage of completion basis and, if appropriate,
a valuation discount yielding a market interest rate is applied to the
contract receivable balance. Under the percentage of completion method, the
portion of revenue applicable to cost incurred, as compared to total
estimated construction costs and selling expenses, is recognized in the
period of sale. Remaining revenue is deferred and recognized as remaining
costs are incurred.
HOMES/PROPERTY SALES
Homes sales are included in revenues when the shelter unit is complete,
ready for occupancy and title is transferred to the buyer. Sales of bulk
acreage are recognized when title has passed to the buyer, the Company's
continuing involvement in the property is limited, if not eliminated, and
sufficient nonrefundable funds have been received to reasonably assure the
continuing commitment of the buyer.
ALLOWANCE FOR LOAN LOSSES
The Company provides for losses on contracts receivable arising from
vacation ownership and lot sales by a charge against earnings at the time of
sale at a rate based upon historical cancellation experience. When a contract
is cancelled in a year subsequent to the year in which the underlying sale was
recorded, the outstanding balance, less recoverable costs, is charged to the
allowance for loan losses. When a contract is cancelled in the same year as
the related sale, all entries applicable to the sale are reversed and
nonrecoverable selling expenses are charged to operations. For financial
statement purposes, contracts receivable are considered delinquent and fully
reserved if a payment remains unpaid under the following conditions:
<TABLE>
<CAPTION>
Percent of Contract Delinquency
Price Paid Period
------------------- -----------
<S> <C>
Less than 25% 90 days
25% but less than 50% 120 days
50% and over 150 days
</TABLE>
DEPOSITS AND DEFERRED SELLING COSTS
Until a contract for sale qualifies for revenue recognition, all
payments received are accounted for as deposits. Commissions and other
selling costs, directly attributable to the sale, are deferred until the sale
is recorded. If a contract is cancelled before qualifying as a sale,
nonrecoverable selling expenses are charged to expense and deposits forfeited
are credited to income.
REAL ESTATE INVENTORIES
Real estate inventories are valued at the lower of cost or estimated net
realizable value. Cost includes land, land improvements, capitalized
interest, and a portion of the costs of amenities constructed for the use and
benefit of property owners.
Land and improvement costs are allocated for the purpose of accumulating
costs to match with related sales revenues. The Company allocates acquisition
and carrying costs to these areas on the acreage or the value basis, as
appropriate. Improvement costs in each project are allocated to the
appropriate areas on a specific identification basis. Certain amenity costs
are allocated on an acreage or benefit basis, as appropriate.
F-19
<PAGE>
Unexpended costs for committed improvements to areas from which lots
have been sold are calculated using the Company's projections of quantities,
timing and cost of work to be completed, including an inflation factor. The
projections are reviewed and refined annually based on work completed and
current plans for development. The effect of these revised cost estimates is
recognized prospectively.
FIRST FEDERAL
REVENUE RECOGNITION
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. First Federal provides an allowance for loss of
uncollected interest when a loan becomes 90 days past due as to principal or
interest or when, in management's opinion, there is doubt as to the
collectibility of the interest. Such interest ultimately collected is
credited to income in the period of recovery.
Loan origination and commitment fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of the
related loan's yield. First Federal is generally amortizing these amounts
over the contractual life of the related loans using the interest method.
Commitment fees based on a percentage of a customer's unused line of credit
and fees related to stand-by letters of credit are recognized over the
commitment period.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered
adequate by management to absorb potential losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of individual loans, past loan loss experience, current economic
conditions and other relevant factors. The allowance is increased by
provisions for loan losses charged against income.
REAL ESTATE OWNED
Real estate owned includes property acquired for development or sale,
acquired in settlement of loans or through in-substance foreclosures. Real
estate is generally considered foreclosed in-substance when: (1) the debtor
has little or no equity in the real estate as compared to the current fair
market value of the property, (2) proceeds for repayment of the loan can be
expected to come only from the operation or sale of the real estate, and (3)
the debtor has either: (a) formally or effectively abandoned control of the
real estate to the Company or (b) retained control of the real estate but,
because of the current financial condition of the debtor or the economic
prospects for the debtor and/or the real estate in the foreseeable future, it
is doubtful that the debtor will be able to rebuild equity in the real estate
or otherwise repay the loan in the foreseeable future. Real estate acquired
for development or sale or in settlement of loans and properties classified as
in-substance foreclosures are recorded at the lower of cost or estimated fair
value at the date of acquisition. Loan losses arising from the acquisition of
such property are charged against the allowance for loan losses.
Other investments in real estate, as well as real estate previously
acquired in settlement of loans, are stated at the lower of cost or estimated
fair value. These investments are reviewed regularly and valuation allowances
are established when recorded values exceed estimated fair values. Interest
charges during the period of construction or development, if applicable, are
capitalized. After construction or development is complete, interest charges
are expensed as a period cost.
F-20
<PAGE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities are stated at cost, adjusted
for amortization of premiums and accretion of discounts using the interest
method. Gains or losses on the sale of these securities are recognized on the
specific identification basis at the time of sale. Management has the intent
and First Federal has the ability to hold these securities to maturity.
NOTE 2 - SALE OF FIRST FEDERAL
On December 15, 1993, Fairfield entered into a letter of intent to sell
100% of the outstanding stock (the "Sale") of First Federal, to Security
Capital Bancorp ("SCBC"). On April 6, 1994, Fairfield finalized its
negotiations with SCBC and entered into a Stock Purchase Agreement.
The Stock Purchase Agreement provides for a sales price of $40.4
million, which will be increased (subject to the limitation hereafter
described) to reflect the consolidated pretax net earnings of First Federal
and its subsidiaries for the period from October 1, 1993 through the closing
of the Sale, or decreased by the consolidated pretax net losses of First
Federal and its subsidiaries during this period, whichever is the case (the
"Sales Price"). The increase for pretax earnings of First Federal and its
subsidiaries cannot exceed approximately $1.8 million plus, if the closing of
the Sale occurs after August 1, 1994, in general, the pretax earnings or
losses of First Federal and its subsidiaries from August 1, 1994 through the
closing, provided that the foregoing amounts may be reduced under certain
circumstances for reserves taken or losses (in excess of gains) on Excluded
Assets (as defined below) after September 30, 1993. Up to approximately $1.4
million of the Sales Price is to be retained by SCBC to securitize Fairfield's
obligation to indemnify SCBC against three existing lawsuits/claims which have
been asserted against First Federal (the "Litigation Indemnity").
As part of the proposed transaction, Fairfield is to purchase for cash
(a) at book value, net of reserves, up to approximately $22.6 million, as of
December 31, 1993, of certain real estate, classified loans, joint venture
interests and other assets owned by First Federal (the "Excluded Association
Assets"), subject to the right of SCBC to elect for First Federal to retain
all or part of such assets, and (b) lot and timeshare contracts receivable and
related assets, which First Federal previously acquired from Fairfield (the
"Contracts Receivable"), having a book value less certain reserves and a
weighted average yield, at December 31, 1993, of approximately $53.3 million
and 11.6%, respectively. The Excluded Association Assets and the Contracts
Receivable are collectively referred to as the "Excluded Assets". Fairfield
expects to dispose of certain of the Excluded Association Assets in one or
more transactions, and otherwise to monetize the remaining Excluded
Association Assets, following the closing of the Sale. Management intends to
dispose of a substantial portion of the Excluded Association Assets by
December 31, 1994.
Approximately $2.9 million in net book value of the Excluded
Association Assets are to be pledged to SCBC, to provide additional security
with respect to both the Litigation Indemnity and the general indemnities
under the Agreement. Fairfield has certain rights to substitute collateral in
connection with such pledge, including the right to substitute $0.60 to $0.70
of cash for every $1.00 of net book value of Excluded Association Assets so
pledged. Reserves taken by Fairfield after the closing on the Excluded
Association Assets securing the Litigation Indemnity may increase the total
Excluded Association Assets required as collateral.
Fairfield expects to utilize (a) the cash portion of the Sales Price to
fund the purchase of the Excluded Association Assets and (b) the remaining
cash portion of the Sales Price, plus proceeds from borrowings under the
Company's revolving credit agreements with The First National Bank of Boston
("FNBB"), to fund the purchase of the Contracts Receivable. Under the
Company's revolving credit
F-21
<PAGE>
agreements, in general, within applicable loan limits, $0.75 of additional
borrowing availability is created for each $1.00 in outstanding principal
balance of qualifying Contracts Receivable pledged to FNBB.
Management estimates that the Sale will result in a net gain of
approximately $5.5 million after taking into account (i) writedowns related to
the Excluded Assets estimated at approximately $4.0 million, based upon
Fairfield's accelerated method of disposal of these assets subsequent to the
consummation of the Sale, and (ii) anticipated selling expenses, including
professional fees and other direct expenses, of approximately $3.3 million.
The Sale is subject to numerous conditions, including the obtaining of
necessary approvals from (i) state and federal regulatory authorities, (ii)
FNBB and (iii) Fairfield's stockholders. There is no assurance that the
conditions to closing will be satisfied or that the various regulatory
approvals will be obtained on terms satisfactory to the parties. Assuming
such conditions to closing are satisfied and the approvals are obtained, the
Sale is expected to close by September 30, 1994.
Fairfield had previously classified the First Federal segment as a
discontinued operation. As a result of the retention of a significant amount
of assets of First Federal, the consolidated financial statements have been
revised to reflect the Sale as a disposal of a portion of a segment rather
than a discontinued operation. As a result of this change, the consolidated
statements of operations and cash flows include the operations and cash flows
of First Federal. Accordingly, the assets to be sold and liabilities to be
assumed by the purchaser have been included in "Net liabilities held for sale"
in the Consolidated Balance Sheet at December 31, 1993 (see Note 11).
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following (In thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- -----
<S> <C> <C>
Contracts $159,874 $199,784
Mortgages 17,366 22,779
-------- --------
177,240 222,563
Less: Allowance for loan losses (10,992) (13,284)
Unamortized valuation discount (673) (775)
-------- --------
165,575 208,504
First Federal, net (Note 11) - 169,533
-------- --------
$165,575 $378,037
======== ========
</TABLE>
The weighted average stated interest rates on the Company's contracts
receivable were 12.3% and 12.2% at December 31, 1993 and 1992, respectively,
with interest rates on these receivables ranging generally from 7.75% to 15%.
Contractual maturities of these receivables within the next five years are as
follows: 1994 - $36.7 million; 1995 - $35.4 million; 1996 - $32.3 million;
1997 - $25.1 million and 1998 - $17.1 million. The Company's contracts
receivable were 98.2% and 96.9% current on a 30-day basis as of December 31,
1993 and 1992, respectively.
Contracts receivable at December 31, 1993 and 1992 includes $52.5
million and $72.9 million, respectively, of contracts receivable owned by
First Federal which are to be purchased by the Company (see Note 2).
F-22
<PAGE>
NOTE 4 - VACATION OWNERSHIP SALES
Vacation ownership sales are summarized as follows (In thousands):
<TABLE>
<CAPTION>
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,|June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> | <C> <C>
Vacation ownership sales $35,265 $15,107 | $11,616 $36,061
Less: Deferred revenue |
on current year |
sales, net (2,101) (22) | (1,146) (3,258)
Add: Deferred revenue on |
prior year sales 1,168 170 | 3,088 1,295
------- ------- | ------- ------
$34,332 $15,255 | $13,558 $34,098
======= ======= | ======= =======
</TABLE>
NOTE 5 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (In thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
Land:
Under development $ 9,490 $ 4,959
Undeveloped 14,771 15,273
------- -------
24,261 20,232
------- -------
Residential housing:
Vacation ownership 8,759 9,245
Homes 1,587 1,181
------- -------
10,346 10,426
First Federal (Note 11) - 20,846
------- -------
$34,607 $51,504
======= =======
</TABLE>
NOTE 6 - FINANCING ARRANGEMENTS
Financing arrangements are summarized as follows (In thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
Revolving credit agreements $ 12,223 $104,101
Notes payable 100,358 30,408
Senior Subordinated Secured Notes 14,770 - (1)
Advances from Federal Home Loan
Bank, net (Note 11) - 35,127
Subordinated debt - 11,176
-------- --------
$127,351 $180,812
======== ========
- - - - - ------------------------
<FN>
(1) Included in "Net assets of discontinued operations" in 1992 (see Note 12).
</TABLE>
F-23
<PAGE>
REVOLVING CREDIT AGREEMENTS
On September 28, 1993, Fairfield and certain of its subsidiaries entered
into the Amended and Restated Revolving Credit Agreement (the "FCI Agreement")
with FNBB. The FCI Agreement provides for revolving loans of up to $25
million (including up to $7 million for letters of credit), bearing interest
at FNBB's base rate plus 1.5%. The FCI Agreement also provides for an annual
facility fee of 1% of the total commitment. The revolving loans mature on
September 28, 1996, if not extended in accordance with the terms of the
agreement. The FCI Agreement is collateralized by substantially all of the
borrowers' loans receivable and real estate inventories with Fairfield
Acceptance Corporation ("FAC") being a guarantor pursuant to the FCI
Agreement. At December 31, 1993, Fairfield had outstanding borrowings under
the FCI Agreement totaling $7.9 million, additional borrowing availability of
$10.9 million, and outstanding letters of credit totaling $2.6 million.
On September 28, 1993, FAC entered into the Third Amended and Restated
Revolving Credit Agreement (the "FAC Agreement") with FNBB. The FAC Agreement
provides for revolving loans of up to $35 million (including up to $1 million
for letters of credit), bearing interest at FNBB's base rate plus .75%. The
FAC Agreement also provides for an annual facility fee of 1% of the total
commitment amount. The revolving loans mature on September 28, 1996, if not
extended in accordance with the terms of the agreement. The FAC Agreement is
collateralized by certain loans receivable with Fairfield being a guarantor
pursuant to the FAC Agreement. At December 31, 1993, FAC had outstanding
borrowings under the FAC Agreement totaling $4.3 million and additional
borrowing availability of $.1 million.
Information related to revolving credit agreements is summarized as
follows (Dollars in thousands):
<TABLE>
<CAPTION>
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,| June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> | <C> <C>
Weighted average amount |
outstanding for the period $74,325 $107,414 | $107,155 $107,118
Weighted average interest |
rate at end of period 7.2% 8.6% | 8.3% 8.3%
Weighted average interest |
rate for the period (1) 8.2% 8.8% | 8.6% 9.9%
- - - - - ------------------------
<FN>
(1) Annualized for the six months ended December 31, 1992 and June 30, 1992.
</TABLE>
NOTES PAYABLE
Notes payable are summarized as follows (Dollars in thousands):
<TABLE>
<CAPTION>
Average
Interest December 31,
Collateral Rate 1993 1992
---------- ---- ---- ----
<S> <C> <C> <C>
Real estate inventories 9.9% $ 13,431 $14,352
Mortgages receivable 9.3% 5,368 14,818
Contracts receivable 7.6% 81,559 1,238
------- -------
$100,358 $30,408
======== =======
</TABLE>
F-24
<PAGE>
On September 30, 1993, Fairfield Funding Corporation ("FFC"), a wholly
owned subsidiary of FAC, completed a private placement of $82.7 million of
7.6% Notes (the "FFC Notes") with seven institutional investors. The FFC
Notes were secured by and payable from a pool of $99.6 million of contracts
receivable purchased from FAC pursuant to the Receivables Purchase Agreement
among Fairfield as originator, FAC, as seller and FFC, as purchaser. Net
proceeds were applied to reduce existing indebtedness, which included
repayment of $54.3 million under FAC's previous revolving credit agreement
and $12.8 million, including interest, of FAC's 16% subordinated debt. As a
result of the restructuring and in accordance with the terms of FAC's
previous revolving credit agreement, the differential between the interest
accrued and paid was forgiven. After payment of a maturity fee and certain
other costs, a net gain of $.4 million was recognized on the restructuring
transactions.
The Agreement provides for the principal amounts collected from the
contracts receivable pool to be reinvested into additional contracts
receivable limited monthly to (i) the availability of eligible contracts as
defined in the Agreement and (ii) the amounts accumulated in the
reinvestment account. The excess of funds held in the reinvestment account
over $6 million is to be used to redeem the FFC Notes. At December 31,
1993, the excess amount in the reinvestment account of $1.1 million is
reflected as a reduction in the outstanding principal balance of the FFC
Notes. The reinvestment period expires March 31, 1995.
Maturities of notes payable within the next five years are as follows:
1994 - $3.2 million; 1995 - $17.1 million; 1996 - $18.7 million; 1997 -
$15.5 million and 1998 - $14.5 million.
SENIOR SUBORDINATED SECURED NOTES
At December 31, 1993, the Senior Subordinated Secured Notes ("FCI
Notes") were collateralized by Fairfield's interest in (i) its Pointe Alexis
development in Tarpon Springs, Florida; (ii) Sugar Island limited
partnership in St. Croix, U.S. Virgin Islands, and (iii) Harbour Ridge
limited partnership in Stuart, Florida. At December 31, 1993, collateral
proceeds of $2.2 million were held in escrow to pay accrued interest and to
partially redeem the FCI Notes. For financial reporting purposes, the
amount held in escrow at December 31, 1993, in excess of accrued interest,
has been reflected as a reduction in the outstanding principal balance.
The FCI Notes bear interest at 10% compounded semi-annually and mature
on the earlier of (i) the sale of all the collateral, or (ii) the later of
(a) 60 days after the FNBB loans have been paid in full or (b) March 1,
1997. The FCI Notes are nonrecourse to Fairfield and its two wholly owned
subsidiaries that guarantee the notes. The sole sources of repayment for
the FCI Notes consist of the collateral, any proceeds from the sale of the
collateral and, as described below, the shares of common stock of Fairfield
reserved as additional collateral for the FCI Notes. In the event the
proceeds from the sale of the other collateral presently securing the FCI
Notes, or the value of any such collateral not sold, is not sufficient to
repay the FCI Notes, Fairfield will issue shares of common stock, up to a
maximum number equal to what a holder of a $5 million general unsecured
claim was entitled to receive on the effective date of the Plans.
NOTE 7 - DEFERRED REVENUE - ESTIMATED COSTS TO DEVELOP LAND SOLD
At December 31, 1993, estimated cost to complete development work in
subdivisions from which lots had been sold totaled $14.7 million. The
estimated costs to complete development work within the next five years is
as follows: 1994 - $1.8 million; 1995 - $2.2 million; 1996 - $1.2 million;
1997 - $.9 million and 1998 - $.6 million.
F-25
<PAGE>
NOTE 8 - INCOME TAXES
Fresh Start Reporting requires the Company to report federal income tax
expense on income before utilization of pre-confirmation net operating loss
carryforwards and recognition of the benefit of pre-confirmation deductible
temporary differences. Benefits realized from the utilization of pre-
confirmation net operating loss carryforwards and recognition of pre-
confirmation deductible temporary differences are recorded as reductions of
the valuation allowance and as direct additions to paid-in capital.
At December 31, 1993, the Company had net operating loss carryforwards
totaling $37 million which reflects the amount available to offset taxable
income in future periods based on the Company's current assessment of the
limitations imposed by Internal Revenue Code Section 382. Should the Company
undergo an ownership change as defined in Section 382 within a specified
period after confirmation of the Plans, the pre-confirmation net operating
loss carryforwards would be eliminated. Available carryovers expire in the
years 2005 through 2007 if not utilized.
At December 31, 1993, the Company had a total deferred tax liability of
$5.3 million. In addition, the Company had deferred tax assets totaling $33.6
million, which were offset by a valuation allowance of $33.6 million. This
valuation allowance is attributable to the uncertainty of realization of pre-
confirmation net operating loss carryforwards and pre-confirmation deductible
temporary differences. The reduction in the valuation allowance from $43
million at December 31, 1992 results from (i) the utilization of pre-
confirmation tax attributes totaling $3 million recorded as a direct addition
to paid-in capital and (ii) the refinement of prior year estimates of certain
deferred tax assets, including net operating loss carryforwards and tax
credits subject to the limitations of Internal Revenue Code Section 382 ($6.4
million). Substantially all of the valuation allowance at December 31, 1993
relates to pre-confirmation tax attributes.
Components of the provision for income taxes are as follows (In
thousands):
<TABLE>
<CAPTION>
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,| June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> | <C> <C>
Current: |
Federal $ - $283 | $ - $ -
State 4 57 | 154 103
------ ---- | ----- ----
4 340 | $154 $103
------ ---- | ===== ====
Deferred: |
Federal 2,770 274 |
State 383 44 |
----- ----- |
3,153 318 |
------ ----- |
$3,157 $658 |
====== ===== |
|
Utilization of pre-confirmation |
income tax attributes as a |
direct addition to paid-in |
capital $3,016 $274 | N/A N/A
====== ====
</TABLE>
F-26
<PAGE>
Components of the variance between taxes computed at the expected
federal statutory income tax rate and the provision for income taxes on
continuing operations are as follows (In thousands):
<TABLE>
<CAPTION>
Six Months | Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31, | June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> | <C> <C>
Statutory tax provision |
(benefit) $3,511 $648 | $36,117 $(11,110)
State income taxes, net of |
federal benefit 255 38 | 151 101
Bad debt deduction - |
First Federal - - | (38) 1,343
Adjustment relating to tax |
benefits not recorded in the |
consolidated financial |
statements (1) - - | 2,781 10,189
Gain on discharge of debt - - | (42,804) -
Reorganization expenses - - | 4,089 -
Other (609) (28) | (142) (420)
------- ----- | -------- -------
Provision for income taxes $3,157 $658 | $ 154 $ 103
====== ==== ======== =======
- - - - - -----------------------
<FN>
(1) Income tax benefits relating to the Company's operating losses were
not recorded as there was no assurance that such benefits would be realized.
</TABLE>
Deferred tax assets (deductible temporary differences) consisted of the
following (In thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
Net operating loss carryforwards $14,111 $11,138
Loan and cancellation loss reserves 7,081 6,636
Tax over book basis in inventory 3,394 8,375
Deferred revenue 2,425 3,791
Accrual for discontinued operations 2,381 6,848
Credit carryforwards 1,882 2,033
Accrued expenses and reserves 1,467 1,830
Other 908 2,323
------- -------
33,649 42,974
Less: valuation allowance (33,649) (42,974)
------- -------
$ - $ -
======= =========
</TABLE>
Deferred tax liabilities (taxable temporary differences) consisted of
the following (In thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
Book over tax basis of assets $2,398 $1,042
Book asset adjustments for
Fresh Start Reporting 1,276 2,091
Basis in partnership assets 1,239 1,005
Other 370 581
------ ------
$5,283 $4,719
====== ======
</TABLE>
F-27
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY
Pursuant to the Plans, all of the outstanding Common Stock of
Predecessor Fairfield was cancelled effective September 1, 1992. Fairfield is
authorized to issue 25,000,000 shares of Common Stock, par value $.01 per
share, and 5,000,000 shares of Preferred Stock, par value $.01 per share. The
rights and preferences of shares of authorized but unissued Preferred Stock
are to be established by Fairfield's Board of Directors at the time of
issuance.
As of December 31, 1993, Fairfield has issued 11,960,330 shares of
Common Stock to holders of unsecured resolved claims, of which 2,395,295
shares were held by wholly owned subsidiaries. In accordance with the Plans,
Fairfield will issue additional shares as the remaining unsecured claims are
resolved. The ultimate amount of allowed unsecured claims and the timing of
the resolution of claims is largely within the control of the Bankruptcy
Court. However, based upon available information, Fairfield presently
estimates that approximately 13,144,000 shares of Common Stock will be issued,
including shares held by wholly owned subsidiaries (see Note 12).
Additionally, 588,235 shares have been reserved, but not issued, for the
benefit of the holders of the FCI Notes (see Note 6).
The Pagosa Lakes Property Owners Association and Archuleta County have
filed claims in the Bankruptcy Court for approximately $10.4 million and $9.7
million, respectively, for promised improvements to be constructed at the
Pagosa, Colorado resort site and other matters. The above claims estimate
includes these claims, which are acknowledged to be largely duplicative, at $6
million. Fairfield has pending summary judgment motions before the Bankruptcy
Court, which are expected to be ruled upon in April, 1994. If such motions
are granted in whole or in part, the estimated amount of allowed claims may be
correspondingly reduced. If summary judgment is not granted, trial is
scheduled for May, 1994.
Fairfield's First Amended and Restated 1992 Warrant Plan (the "1992
Plan") provides for the grant of nonqualified stock warrants to certain key
employees and directors to purchase up to 1,000,000 shares of Common Stock.
Warrants under the 1992 Plan are to be granted at prices not less than the
fair market value of such shares on the date of grant and may be exercisable
for periods of up to 10 years from the date of grant. During 1992, the Board
of Directors granted warrants to purchase a total of 350,000 shares, at an
exercise price of $3.00 per share, with 25% of such awards effective September
1, 1992 and additional 25% increments effective on each anniversary date
thereafter. During 1993, the Board of Directors granted warrants to purchase
a total of 450,000 shares. These warrants were granted effective October 1,
1993, at an exercise price of $3.00 per share, of which 20% of the shares
become exercisable on each of the first through fifth anniversaries from the
date of grant. No warrants issued pursuant to the 1992 Plan have been
cancelled and, at December 31, 1993, warrants for 175,000 shares were
exercisable.
In accordance with the Plans, Fairfield adopted a Rights Agreement which
provides for the issuance of one right for each outstanding share of
Fairfield's Common Stock. The rights, which entitle the holder to purchase
from Fairfield one one-hundredth of a share of Series A Junior Participating
Preferred Stock at $25 per share, become exercisable (i) ten days after a
person becomes the beneficial holder of 20% or more of Fairfield's Common
Stock, other than pursuant to a cash tender offer for all outstanding shares,
or (ii) ten business days following the commencement of a tender or exchange
offer for at least 20% of Fairfield's Common Stock. Fairfield may redeem the
rights at $.01 per right under certain circumstances. The rights expire on
September 1, 2002.
The FCI Agreement prohibits Fairfield from paying any dividends or other
distributions on its Common Stock, other than dividends payable solely in
shares of Common Stock.
F-28
<PAGE>
NOTE 10 - FAIRFIELD ACCEPTANCE CORPORATION
Condensed consolidated financial information for FAC is summarized as
follows (In thousands):
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1993 1992
---- ----
<S> <C> <C>
ASSETS
Cash $ 711 $ 5,951
Loans receivable, net 94,668 105,891
Restricted cash and escrow accounts 10,602 1,324
Due from parent 7,392 204
Other assets 3,113 1,133
------- --------
$116,486 $114,503
======== ========
LIABILITIES AND EQUITY
Financing arrangements $ 85,842 $ 87,711
Accrued interest and other liabilities 745 2,862
Equity 29,899 23,930
-------- --------
$116,486 $114,503
======== ========
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,| June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> |<C> <C>
Revenues $14,582 $7,580 |$7,438 $15,269
Expenses 8,198 4,878 | 4,319 9,352
------- ------ |------ -------
Earnings before |
reorganization expenses 6,384 2,702 | 3,119 5,917
Reorganization expenses - - | 3,582 1,675
Provision for income taxes 2,444 1,035 | 435 2,246
------- ------- |------- -------
Earnings (loss) before |
extraordinary credit 3,940 1,667 | (898) 1,996
Extraordinary credit - |
realization of net |
operating loss carryforwards - - | 435 2,246
------- ------- |------- -------
Net earnings (loss) $ 3,940 $1,667 |$ (463) $ 4,242
======= ======= |====== =======
</TABLE>
In accordance with the terms of the Amended and Restated Operating
Agreement entered into on September 1, 1992 (the "Operating Agreement"), FAC
is permitted to purchase eligible receivables from Fairfield for a price equal
to $.94 per $1.00 of such receivables. Fairfield is required by the Operating
Agreement to repurchase defaulted receivables from FAC at a price equal to
$.75 per $1.00 or substitute an eligible receivable on the basis of $.85 per
$1.00 of such receivables. During 1993 and 1992, FAC purchased receivables
from Fairfield with outstanding principal balances of $25.4 million and $33.7
million, respectively.
F-29
<PAGE>
NOTE 11 - NET LIABILITIES HELD FOR SALE
As more fully described in Note 2, the Company has agreed to sell 100%
of the outstanding stock of First Federal and purchase from First Federal
certain Excluded Assets. Accordingly, the assets to be sold and the
liabilities to be assumed by the purchaser have been included in "Net
liabilities held for sale" in the Consolidated Balance Sheet at December 31,
1993. Amounts at December 31, 1992 are included in the Consolidated Balance
Sheet in their respective captions.
Condensed financial information of net liabilities held for sale at
December 31, 1993 compared to the related amounts in 1992 is as follows (In
thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
Cash $ 14,205 $ 36,086
Loans receivable, net 157,178 169,533
Real estate owned 15,322 20,846
Investment and mortgage-backed securities 76,708 51,756
Other 15,476 15,009
--------- ---------
278,889 293,230
Savings deposits (276,672) (298,640)
Advances from Federal Home Loan Bank (20,907) (35,127)
Other liabilities (4,603) (4,469)
--------- ---------
$(23,293) $ (45,006)
======== =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
1993 1992 1992 1991
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $18,762 $10,098 $13,375 $ 30,935
Interest expense 13,105 7,053 11,803 31,026
Other expenses 10,085 5,870 5,119 15,474
------- ------- ------- --------
$ (4,428) $(2,825) $(3,547) $(15,565)
======== ======= ======= ========
</TABLE>
Pro forma financial information as if the Sale had occurred as of
January 1, 1993 is as follows: Revenues - $91 million; earnings from
continuing operations before gain of the Sale - $6.1 million; earnings per
share from continuing operations before gain on the Sale (primary) -
$.55; earnings per share from continuing operations before gain on Sale (fully
diluted) - $.52.
F-30
<PAGE>
Certain additional information related to net liabilities held for sale
is summarized as follows:
LOANS RECEIVABLE
Loans receivable consist of the following (In thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- ----
<S> <C> <C>
Real estate - mortgage $141,043 $149,780
Real estate-construction 8,074 8,379
Consumer and other 9,780 10,236
-------- --------
158,897 168,395
Add (less):
Loans in process (2,510) (2,140)
Accounting premium 3,039 4,607
Allowances for loan losses (2,248) (1,329)
-------- --------
$157,178 $169,533
======== ========
</TABLE>
At December 31, 1993, First Federal was servicing $138 million in loans
that it had previously sold. The amount of loans sold by First Federal and
subject to recourse provisions at December 31, 1993 totaled $17.3 million.
Loans and mortgage-backed securities totaling $36 million at December 31, 1993
were pledged as collateral for advances from the Federal Home Loan Bank.
SAVINGS DEPOSITS
Savings deposits and related weighted average rates consisted of the
following (Dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1993 1992
---------------- -----------------
Average Average
Balance Rate Balance Rate
---------------- -----------------
<S> <C> <C> <C> <C>
NOW demand accounts $ 18,532 1.97% $ 16,238 2.80%
Passbook and statement accounts 13,853 2.54 13,975 3.05
Money market accounts 40,359 2.89 39,352 3.60
Term certificates 202,108 5.27 225,363 5.73
-------- -------
274,852 4.56% 294,928 5.15%
==== ====
Accounting premium 1,820 3,712
-------- --------
$276,672 $298,640
======== ========
</TABLE>
REGULATORY MATTERS
On September 29, 1992, the OTS, together with the other federal banking
regulatory agencies, adopted rules to implement the "prompt corrective action"
provisions of Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). Under the new rules, which were effective December 19, 1992, a
savings association is deemed to be "well capitalized", if it has a total
Risk-based Capital ratio of 10% or greater, a Tier 1 Risk-based Capital ratio
of 6% or greater (Tier 1 Capital is defined as Core Capital), a Leverage ratio
of 5% or greater and is not subject to any order to meet and maintain a
specific capital level. At December 31, 1993, First Federal had a total Risk-
based Capital ratio of 14.00%, and a Tier 1 Risk-based Capital ratio and a
Leverage ratio of 8.35%.
F-31
<PAGE>
TRANSACTIONS WITH FAIRFIELD
Fairfield and First Federal have entered into a Remarketing Agreement
whereby Fairfield uses its best efforts to remarket VOIs and lots underlying
cancelled First Federal contracts receivable and replaces those contracts with
new contracts generated by the remarketing efforts. Pursuant to the
Remarketing Agreement, Fairfield receives for its remarketing efforts up to
40% of cash sales and all down payments up to 50% of the gross sales price of
the remarketed inventory. During 1993 and 1992, Fairfield remarketed, at
amounts approximating book value, $1.2 million and $1.3 million, respectively,
of VOIs and lots underlying First Federal's cancelled contracts receivable.
At December 31, 1993, the balance of unremarketed cancelled contracts
receivable, including accrued interest thereon, was $3.7 million (the
"Defaulted Contract Account").
Fairfield and First Federal have also entered into a Tax Sharing
Agreement which provides that First Federal may retain up to 50% of amounts
owed thereunder to reduce the Defaulted Contract Account. During 1993 and
1992, First Federal paid $.5 million and $2.7 million, respectively, to
Fairfield and applied $.5 million and $1.2 million, respectively, to the
Defaulted Contract Account in accordance with the Tax Sharing Agreement. Upon
reduction of the Defaulted Contract Account to zero and compliance with
certain other financial covenants, Fairfield will be entitled to receive all
cash proceeds generated from the remarketing effort and all cash payments to
which it is entitled under the Tax Sharing Agreement. Except for previously
approved agreements, First Federal may not enter into transactions with or
make cash distributions to Fairfield without prior written approval of the
OTS. The Defaulted Contract Account will be settled upon the sale of First
Federal.
NOTE 12 - DISCONTINUED OPERATIONS
In November 1993, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin #93 which expressed the view of the SEC staff
regarding accounting and related disclosures pertaining to discontinued
operations. In the staff's view, the estimates necessary for accounting for a
business as discontinued cannot be developed with sufficient reliability if
projections beyond 12 months from the measurement date are required by the
disposal plan. As the Company had certain assets included in discontinued
operations which had a planned disposal date beyond 12 months, the Company
reviewed its plans of disposal of discontinued operations and determined that
such assets and related liabilities should be reclassified into continuing
operations. Real estate inventories and other assets having net realizable
values of $6.4 million and $5 million, respectively, were reclassified as of
December 31, 1993 into continuing operations. These assets partially
collateralize the FCI Notes, which had an outstanding principal balance of
$14.8 million at December 31, 1993, and which were also reclassified into
continuing operations as of December 31, 1993 (see Note 6). The Company is
continuing its business plan to dispose of its remaining resort amenity
operations, consisting primarily of resort-based restaurants, golf courses and
recreation centers.
F-32
<PAGE>
Condensed financial information of discontinued operations is as follows
(In thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
---- -----
<S> <C> <C>
Real estate inventories $ 15,652 $ 33,241
Property and equipment 21,429 35,039
Other assets - 5,153
-------- --------
37,081 73,433
Revolving credit agreements (19,933) (33,693)
Notes payable (2,458) (5,567)
FCI Notes - (26,110)
Accrual for losses (6,219) (5,775)
-------- -------
Net assets of discontinued operations $ 8,471 $ 2,288
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Ended Ended Year Ended
December 31, December 31, June 30, December 31,
1993 1992 1992 1991
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $47,737 $37,911 $27,000 $72,372
======= ======= ======= =======
Allocated interest (1): $ 3,110 $2,196 $2,663 $7,109
======= ====== ====== ======
Gains (losses) on
asset disposals $ - $ - $(7,826) $ 1,580
Operating gains (losses) - - 1,288 (4,074)
------- ------ ------- -------
Loss from discontinued
operations $ - $ - $(6,538) $(2,494)
======== ======= ======= =======
- - - - - --------------------
<FN>
(1) Interest expense is allocated to discontinued operations based on debt
that can be specifically attributed to these operations.
</TABLE>
In March 1994, Fairfield sold the stock of its wholly owned
subsidiaries, Fairfield Green Valley, Inc. and Fairfield Sunrise Village, Inc.
(collectively, the "Arizona Subsidiaries") at its approximate book value. The
Arizona Subsidiaries, with assets totaling $25 million at December 31, 1993,
conducted Fairfield's Arizona home building business. The consideration
received by Fairfield included (i) release of a lien on and transfer to
Fairfield of 2,235,294 shares of Fairfield's Common Stock (no book value)
owned by the Arizona Subsidiaries and pledged to their primary lender, a
subsidiary of Bank of America Arizona (the "Bank"), (ii) release of a mortgage
in favor of the Bank on a tract of unimproved property owned by Fairfield, and
(iii) release from any further liability to the Bank. At December 31, 1993,
the Arizona Subsidiaries had loans of $19.9 million outstanding under their
revolving credit agreement with the Bank, bearing interest at rates ranging
from 8% to 8.5%. These loans, which are included in net assets of
discontinued operations at December 31, 1993, were paid off in conjunction
with the sale of the Arizona Subsidiaries. Subsequent to the closing,
Fairfield recorded the shares of its Common Stock previously owned by the
Arizona Subsidiaries as treasury stock.
F-33
<PAGE>
NOTE 13 - SUPPLEMENTAL INFORMATION
Fairfield has a profit sharing plan covering substantially all
employees, with one year or more of credited service. Contributions to the
plan are determined annually by the Board of Directors and the amount approved
for 1993 totaled $527,769. There were no contributions for 1992 or 1991.
Reorganization expenses paid totaled $5.3 million, $3.4 million, $5.5
million and $14.3 million for the year ended December 31, 1993, the six months
ended December 31, 1992, the six months ended June 30, 1992 and the year ended
December 31, 1991, respectively.
Interest paid on financing arrangements, including debt collateralized
principally by assets of discontinued operations, totaled $23.3 million, $16.6
million, $22 million and $58.8 million for the year ended December 31, 1993,
the six months ended December 31, 1992, the six months ended June 30, 1992 and
the year ended December 31, 1991, respectively. Of these amounts, $11.1
million, $7.2 million, $12 million, and $31.2 million, respectively, were
related to First Federal.
Other revenues for the year ended December 31, 1993 include (i) cash
distributions totaling $2 million related to the Company's 35% partnership
interest in Harbour Ridge, Ltd., (ii) $.5 million related to the recovery by
FAC of a previously written-off note receivable and (iii) $.5 million related
to the recovery of certain professional fees previously expensed. Also
included in other revenues and other expenses for 1993 are bulk asset sales
and related cost of sales totaling $1.7 million and $1.2 million,
respectively. Bulk asset sales and related cost of sales totaled $2.2 million
and $1.8 million, respectively, for the six months ended December 31, 1992 and
$4.8 million and $4.7 million, respectively, for the six months ended June 30,
1992. For 1991, bulk asset sales and related cost of sales totaled $2.4
million and $2.1 million, respectively.
NOTE 14 - CONTINGENCIES
In June 1992, the Pagosa Lakes Property Owners Association ("PLPOA")
filed an adversary proceeding in the Bankruptcy Court for the Eastern District
of Arkansas, Western Division (the "Bankruptcy Court") asserting equitable
ownership or lien interests in certain recreational amenities, including golf
courses. In March 1994, the Bankruptcy Court issued its decision upholding
Fairfield's ownership of the Pagosa recreational amenities, subject to a
restrictive covenant allowing Pagosa property owners and their guests to use
the recreational amenities. The time has not yet run for the PLPOA to appeal
the Bankruptcy Court's decision. Fairfield's ability to dispose of the
recreational amenities at Pagosa is restricted until the claim is finally
resolved.
In August 1992, the PLPOA filed an appeal of the Bankruptcy Court's
final order confirming Fairfield's plan of reorganization. This appeal is
pending before the United States District Court, Eastern District of Arkansas,
Western Division. The basis for the appeal is the PLPOA's position that
Fairfield should have been required to resolicit the plan of reorganization
due to its amendment in accordance with the Bankruptcy Court's conditional
confirmation order to eliminate any recovery for Fairfield's previous
stockholders. The Bankruptcy Court rejected this argument, finding that the
property owner group lacked standing to raise this issue, and in management's
opinion, the appeal is without merit and moot, since the plan of
reorganization has been substantially implemented. The issues on appeal have
been briefed, but no decision has been rendered.
On or about July 21, 1993 and September 9, 1993, two lawsuits (the
"Recreation Fee Litigation") were filed by 29 individuals and a company
against Fairfield in the District Court of Archuleta County, Colorado. The
Recreation Fee Litigation, which seeks certification as class actions, alleges
that Fairfield and its predecessors in interest wrongfully imposed an annual
recreation fee on
F-34
<PAGE>
owners of lots, condominiums, townhouses, VOIs and single family residences
in Fairfield's Pagosa, Colorado development. The amount of the recreation fee,
which was adopted in August, 1983, is $180 per lot, condominium,
townhouse and single family residence subject to the fee and $360 per unit
for VOIs. The Recreation Fee Litigation in general seeks (a) a
declaratory judgment that the recreation fee is invalid; (b) the refund, with
interest, of the recreation fees which were allegedly improperly collected by
Fairfield; (c) damages arising from Fairfield's allegedly improper attempts to
collect the recreation fee (i) in an amount of not less than $1,000 per lot in
one case and (ii) in an unstated amount in the other case; (d) punitive
damages; and (e) recovery of costs and expenses, including attorneys' fees.
The court has not yet ruled on whether or not the Recreation Fee Litigation
will be allowed to proceed as class actions or on whether the cases will be
consolidated. Because of the preliminary nature of the litigation and
uncertainty concerning the time period covered by the suits' allegations,
Fairfield is unable to determine with any certainty the dollar amount sought
by plaintiffs, but believes it to be material.
On November 3, 1993, Fairfield filed an adversary proceeding in the
Bankruptcy Court, alleging that the Recreation Fee Litigation violates the
discharge granted to Fairfield in its Chapter 11 bankruptcy reorganization and
the injunction issued by the Bankruptcy Court against prosecution of any
claims discharged in the bankruptcy proceedings. The Colorado State Court
separately has stayed further proceedings in the Recreation Fee Litigation
pending decision by the Bankruptcy Court.
Fairfield intends to defend vigorously the Recreation Fee Litigation.
Fairfield has previously implemented recreation fee charges at certain other
of its resort sites which are not subject to the pending action.
On December 10, 1993, Charlotte T. Curry, who purchased a lot from
Fairfield under an installment sale contract subsequently sold to First
Federal, filed suit against First Federal, currently pending in Superior Court
in Mecklenburg County, North Carolina, alleging breach of contract, breach of
fiduciary duty and unfair trade practices. The litigation, which seeks class
action certification, contests the method by which Fairfield calculated
refunds for lot purchasers whose installment sale contracts were canceled due
to failure to complete payment of the deferred purchase price for the lot.
Most installment lot sale contracts require Fairfield to refund to a
defaulting purchaser the amount paid in principal, after deducting the greater
of (a) 15% of the purchase price of the lot or (b) Fairfield's actual damages.
The plaintiff disputes Fairfield's method of calculating damages, which has
historically included certain sales, marketing and other expenses. In the
case of Ms. Curry's lot, the amount of refund claimed as having been
improperly retained is approximately $3,600. Fairfield estimates that the
potential number of people who might be included in the class definition in
the CURRY litigation against First Federal (including certain people subject
to statute of limitation and other defenses and contracts where Fairfield,
instead of First Federal, was economically the party at interest) is less than
165 lot purchasers, with refund claims amounting in the aggregate to several
hundred thousand dollars. The CURRY lawsuit seeks damages, punitive damages,
treble damages under North Carolina law for unfair trade practices,
prejudgment interest and attorney's fees and costs.
First Federal intends to defend the CURRY litigation vigorously.
Fairfield also cancels defaulted lot installment sales contracts owned by it
and its subsidiaries (other than First Federal), using the same method of
calculating refunds as is at issue in the CURRY litigation.
NOTE 15 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Company, primarily through its ownership of First Federal, is a
party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers and to reduce
its own exposure to the fluctuations in interest rates. These financial
F-35
<PAGE>
instruments include loans receivable sold to third parties subject to
repurchase agreements and commitments to extend credit. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the financial statements. The contract amount reflects the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Unless noted
otherwise, the Company does not require collateral or other security to
support financial instruments with off-balance-sheet risk. At December 31,
1993, First Federal had commitments to extend credit for secured loans
totaling $9.1 million and loans sold subject to repurchase agreements of $17.3
million. At December 31, 1993, First Federal had purchased special risk
insurance against this recourse obligation related to $12.6 million of loan
sales. As a result of the planned disposal of First Federal, the Company's
exposure to credit loss related to financial instruments with off-balance-
sheet risk will be reduced (see Note 2).
The Company's business activities are regionally diversified, with
significant operations in Arkansas, Virginia and North Carolina. The Company
had $159.9 million of contracts receivable outstanding at December 31, 1993.
These contracts receivable are regionally diversified. A minimum downpayment
of 15% is generally required for purchases financed by the contracts
receivable.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at December
31, 1993:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the
balance sheet for cash and cash equivalents approximated its fair
value.
LOANS RECEIVABLE: For First Federal's real estate construction
loans, which have a weighted average maturity of less than one
year, fair values approximated the carrying values. The fair
values for First Federal's real estate mortgage and consumer and
other loans are estimated using (i) discounted cash flow analyses,
(ii) interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality and (iii) prepayment
rates published by the Federal Home Loan Bank. At December 31,
1993, the carrying amount of such loans approximated the fair
value. The estimated fair values of contracts receivable
approximated their carrying amounts based on prior year third-party
valuations and consideration of market rate fluctuations since that
time. The carrying amounts of accrued interest and Fairfield's
mortgages receivable approximate their fair values.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: The fair values for
investment and mortgage-backed securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values based on quoted market prices of comparable
instruments are used. At December 31, 1993, the carrying amounts
of these assets approximated the fair values.
FINANCING ARRANGEMENTS AND DEBT COLLATERALIZED PRINCIPALLY BY
ASSETS OF DISCONTINUED OPERATIONS: The carrying amounts of the
Company's borrowings under its revolving credit agreements and
notes payable approximate their fair values at December 31, 1993.
The fair values of Advances from the Federal Home Loan Bank are
estimated using discounted cash flow analyses, based on rates
currently available to First Federal
F-36
<PAGE>
for advances with similar terms and remaining maturities. Such
fair values approximated the carrying values at December 31, 1993.
SAVINGS DEPOSITS: The fair values for demand deposits, passbook
and statement savings, and money market accounts are, by
definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). Fair values for certificates
of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates
in First Federal's market area to a schedule of aggregated expected
monthly maturities of such deposits. Such fair values approximated
the carrying amounts at December 31, 1993.
NOTE 17 - BUSINESS SEGMENTS
The Company is engaged in two major business segments: Leisure Products
and First Federal. The Company's Leisure Products segment is engaged
primarily in the development and marketing of leisure products (including
vacation ownership) at various resort locations. Since vacation ownership
often serves as an introduction to other forms of real estate ownership, this
segment also develops and markets lots and primary and secondary residences at
these resort locations. First Federal is engaged in the traditional savings
and loan operations which includes originating, acquiring, selling and
servicing residential mortgage, commercial and construction loans. As more
fully described in Note 2, the Company has agreed to sell 100% of the
outstanding stock of First Federal and purchase from First Federal certain
Excluded Assets. Accordingly, the assets to be sold and the liabilities to be
assumed by the purchaser have been included in "Net liabilities held for sale"
in the Consolidated Balance Sheet at December 31, 1993.
Operating profit represents total revenues less operating expenses,
which include expenses directly related to the industry segment benefitted.
Identifiable assets by industry segment are those assets that are used in the
Company's operations in each industry segment; corporate assets consist
principally of property and equipment.
F-37
<PAGE>
Certain information of continuing operations by business segment is
presented in the following tables (In thousands):
<TABLE>
<CAPTION>
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,| June 30, December 31,
1993 1992 | 1992 1991
---- ---- | ---- ----
<S> <C> <C> |<C> <C>
REVENUES |
Net sales and revenues: |
Leisure products $ 81,870 $39,119 |$ 40,503 $87,762
First Federal (1) 25,862 14,833 | 19,114 44,197
Equity in earnings of |
unconsolidated |
affiliates 1,996 (17) | 44 318
-------- ------- |-------- -------
$109,728 $53,935 |$ 59,661 $132,277
======== ======= |======== ========
OPERATING PROFIT (LOSS): |
Leisure products $ 18,193 $ 8,225 |$ 8,079 $ 12,798
First Federal (1) 4,099 3,010 | 2,746 (1,052)
-------- ------- |-------- --------
Total operating profit 22,292 11,235 | 10,825 11,746
General corporate expenses (2,139) (941) | (1,097) (2,923)
Interest expense, net (11,822) (8,370) | (8,554) (21,021)
Minority interest expense - - | (338) (913)
Reorganization expenses - - | (14,010) (19,884)
Equity in earnings (loss) of |
unconsolidated affiliates 1,996 (17) | 44 318
-------- -------- |-------- --------
Earnings (loss) from |
continuing operations |
before provision for |
income taxes and |
extraordinary items $ 10,327 $ 1,907 |$(13,130) $(32,677)
======== ======== |========= =========
IDENTIFIABLE ASSETS: |
Leisure products $240,208 $219,711 |$234,177 $262,216
First Federal (Note 2) - 362,633 | 389,408 408,602
-------- -------- |-------- --------
240,208 582,344 | 623,585 670,818
General corporate assets 114 147 | 427 561
Investments in |
unconsolidated affiliates 5,790 1,921 | 3,478 5,224
Net assets of discontinued |
operations 8,471 2,288 | 547 8,865
------- ------- | ------- -------
$254,583 $586,700 |$628,037 $685,468
======== ======== |======== ========
DEPRECIATION: |
Leisure products $1,045 $754 | $880 $2,455
First Federal 432 295 | 266 465
CAPITAL EXPENDITURES: |
Leisure products $1,005 $175 | $ 79 $ 491
First Federal 661 169 | 146 1,415
<FN>
(1) As First Federal is a financial institution, interest income has been
included in sales and revenues, and interest expense is a component of
operating profit.
</TABLE>
F-38
<PAGE>
NOTE 18 - UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL DATA
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Year Ended December 31, 1993
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues $21,177 $30,894 $30,851 $26,806
Total expenses 20,945 25,933 27,261 25,262
------- ------- ------- -------
Earnings before provision
for income taxes 232 4,961 3,590 1,544
Provision for income taxes 146 1,639 1,211 161
------- ------- -------- -------
Net earnings $ 86 $ 3,322 $ 2,379 $ 1,383
======= ======= ======= =======
EARNINGS PER SHARE
Primary $.01 $.30 $.21 $.13
==== ==== ==== ====
Fully diluted $.01 $.28 $.20 $.12
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended | Six Months Ended
June 30, 1992 | December 31, 1992
------------------ |--------------------
First Second | Third Fourth
Quarter Quarter | Quarter Quarter
------- ------- | ------- -------
<S> <C> <C> | <C> <C>
Total revenues $27,271 $ 32,390 | $27,857 $26,078
Total expenses 27,166 31,615 | 26,720 25,308
------- ------- | ------- -------
Earnings from continuing operations |
before reorganization expenses |
and provision for income taxes 105 775 | 1,137 770
Reorganization expenses 4,963 9,047 | - -
Provision for income taxes 57 97 | 120 538
------- ------- | ------- -------
Earnings (loss) from |
continuing operations (4,915) (8,369)| 1,017 232
Loss from discontinued operations - (6,538)| - -
Extraordinary item - |
discharge of debt - 125,895 | - -
------- ------- | ------- --------
Net earnings (loss) $(4,915) $110,988 | $ 1,017 $ 232
======= ======== | ======= ========
EARNINGS PER SHARE |
Primary: |
Earnings from continuing operations * * | $.09 $.02
| ==== ====
Net earnings * * | $.09 $.02
| ==== ====
Fully diluted: |
Earnings from continuing operations * * | $.09 $.02
| ==== ====
Net earnings * * | $.09 $.02
==== ====
<FN>
*Per share amounts are not meaningful due to reorganization.
</TABLE>
F-39
<PAGE>
SCHEDULE III
Registrant's condensed financial statements for periods prior to
reorganization are not presented as the Registrant had a different capital
structure and, as a result, financial information for these periods is not
meaningful. Condensed financial information of Registrant is as follows
(In thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31,
1993 1992
---- ----
<S> <C> <C>
Assets:
Cash $ 1,110 $ 15,660
Loans receivable, net 9,612 10,259
Real estate inventories 31,584 26,773
Investments in and net amounts due
from other subsidiaries 64,353 63,506
Other assets 23,324 15,950
-------- --------
$129,983 $132,148
======== ========
Liabilities and Stockholders' Equity:
Financing arrangements $ 36,141 $ 43,157
Deferred revenue 20,599 20,052
Other liabilities 26,095 31,977
Stockholders' equity 47,148 36,962
-------- ---------
$129,983 $132,148
======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Earnings
Six Months
Year Ended Ended
December 31, December 31,
1993 1992
---- ----
<S> <C> <C>
Net sales and revenues $60,696 $27,275
Interest income 2,025 1,425
------- -------
62,721 28,700
------- -------
Costs and expenses:
Cost of sales 29,020 12,634
Selling and administrative 33,007 16,683
Interest, net 3,377 2,953
------- --------
65,404 32,270
------- --------
Loss before provision for income taxes
and equity in undistributed earnings
of subsidiaries (2,683) (3,570)
Equity in undistributed earnings
of subsidiaries 13,010 5,477
Provision for income taxes 3,157 658
------- -------
Net earnings $ 7,170 $ 1,249
======= =======
</TABLE>
F-40
<PAGE>
SCHEDULE III
(Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
December 31, December 31,
1993 1992
---- ----
<S> <C> <C>
Operating activities:
Net cash (used in) provided by
continuing operating activities $ (3,570) $ 631
-------- ---------
Investing activities:
Net (purchases) proceeds from sales of
property and equipment (749) 89
Principal collections on loans 16,497 6,344
Origination of loans (33,035) (8,810)
Cash received from unconsolidated
subsidiaries 2,364 1,089
Sales of loans to subsidiaries 23,812 18,911
Purchases of loans from subsidiaries (13,384) (2,743)
Net investment activities of
discontinued operations (15,706) (10,640)
-------- --------
Net cash (used in) provided by
investing activities (20,201) 4,240
-------- --------
Financing activities:
Net repayments of financing arrangements (7,328) (3,113)
Net decrease in intercompany advances 16,549 11,248
-------- --------
Net cash provided by financing activities 9,221 8,135
-------- --------
Net increase (decrease) in cash (14,550) 13,006
Cash, beginning of period 15,660 2,654
-------- -------
Cash, end of period $ 1,110 $ 15,660
======== ========
</TABLE>
F-41
<PAGE>
SCHEDULE VIII
Fairfield Communities, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Additions
---------
Balance at Charged Balance at
Beginning to Costs End of
Description of Period and Expenses Deductions Period
- - - - - ------------------------ -------- ------------ ---------- ------
<S> <C> <C> <C> <C>
Year Ended December 31, 1993
Deducted from asset accounts:
Allowance for loan losses $14,613 $3,586 $(7,207)(a) $10,992
======= ====== ======= =======
Six Months Ended December 31, 1992
Deducted from asset accounts:
Allowance for loan losses $16,660 $1,631 $(3,678)(b) $14,613
======= ====== ======= =======
- - - - - ----------------------------------------------------------------------------
Six Months Ended June 30, 1992
Deducted from asset accounts:
Allowance for loan losses $20,323 $1,170 $(4,833)(b) $16,660
======= ====== ======= =======
Year Ended December 31, 1991
Deducted from asset accounts:
Allowance for loan losses $21,037 $9,401 $(10,115)(b) $20,323
======= ====== ======== =======
<FN>
(a) Includes $2,248 transfer to net liabilities held for sale and $5,544
uncollectible loans receivable written-off, net of recoveries.
(b) Uncollectible loans receivable written-off, net of recoveries.
</TABLE>
F-42
<PAGE>
SCHEDULE X
Fairfield Communities, Inc. and Subsidiaries
Supplementary Income Statement Information
(In thousands)
<TABLE>
<CAPTION>
Charged to Costs and Expenses
----------------------------------------------
Six Months |Six Months
Year Ended Ended | Ended Year Ended
December 31, December 31,| June 30, December 31,
Item 1993 1992 | 1992 1991
- - - - - ---- ---- ---- | ---- ----
<S> <C> <C> | <C> <C>
Maintenance and repairs $1,549 $ 799 | $ 850 $ 2,079
====== ====== | ====== =======
|
Taxes, other than payroll |
and income taxes $1,183 $ 644 | $ 958 $ 2,446
====== ====== | ====== =======
|
Advertising $7,872 $5,144 | $2,961 $10,860
====== ====== | ====== =======
</TABLE>
NOTE: Amounts for depreciation and amortization of intangible assets
and royalties are not presented as such amounts were less than
1% of total sales and revenues.
F-43
<PAGE>
FAIRFIELD COMMUNITIES, INC.
EXHIBIT INDEX
Exhibit
Number
- - - - - ------
3(a) Second Amended and Restated Certificate of Incorporation of the
Registrant, effective September 1, 1992 (previously filed with the
Registrant's Current Report on Form 8-K dated September 1, 1992
and incorporated herein by reference)
3(b) Amended and Restated By-laws of the Registrant, effective
September 1, 1992 (previously filed with the Registrant's Current
Report on Form 8-K dated September 1, 1992 and incorporated herein
by reference)
4.1 Supplemented and Restated Indenture between the Registrant,
Fairfield River Ridge, Inc., Fairfield St. Croix, Inc. and IBJ
Schroder Bank & Trust Company, as Trustee, and Houlihan Lokey
Howard & Zukin, as Ombudsman, dated September 1, 1992, related to
the Modified Exchange Notes (previously filed with the
Registrant's Current Report on Form 8-K dated September 1, 1992
and incorporated herein by reference)
4.2 First Supplemental Indenture to the Supplemented and Restated
Indenture referenced in 4.1 above, dated September 1, 1992
(previously filed with the Registrant's Current Report on Form 8-K
dated September 1, 1992 and incorporated herein by reference)
4.3 Second Supplemental Indenture to the Supplemented and Restated
Indenture referenced in 4.1 above, dated September 1, 1992
(previously filed with the Registrant's Annual Report on Form 10-K
dated December 31, 1992 and incorporated herein by reference)
4.4 Third Supplemental Indenture to the Supplemented and Restated
Indenture referenced in 4.1 above, dated March 18, 1993
(previously filed with the Registrant's Quarterly Report on Form
10-Q dated March 31, 1993 and incorporated herein by reference)
4.5 Certificate of Designation, Preferences, and Rights of Series A
Junior Participating Preferred Stock, dated September 1, 1992
(previously filed with the Registrant's Current Report on Form 8-K
dated September 1, 1992 and incorporated herein by reference)
10.1 Amended and Restated Revolving Credit and Term Loan Agreement,
dated as of September 28, 1993, by and between the Registrant,
Fairfield Myrtle Beach, Inc., Suntree Development Company, FAC and
The First National Bank of Boston ("FNBB") (previously filed with
the Registrant's Current Report on Form 8-K dated October 1, 1993
and incorporated herein by reference)
10.2 Second Amended and Restated Credit Agreement, between Fairfield
Sunrise Village, Inc., Fairfield Green Valley, Inc. and BA
Mortgage and International Realty Corporation, dated as of
November 6, 1992 (previously filed with the Registrant's Annual
Report on Form 10-K dated December 31, 1992 and incorporated
herein by reference)
10.3 Limited Partnership Agreement, dated March 3, 1981, between
Harbour Ridge, Inc., Fairfield River Ridge, Inc. and Harbour
Ridge Investments, Inc. forming the limited partnership of
Harbour Ridge, Ltd. (previously filed with the Registrant's
Registration Statement on Form S-7 No. 2-75301 effective
February 11, 1982 and incorporated herein by reference)
E-1
<PAGE>
Exhibit
Number
- - - - - ------
10.4 Sugar Island Associates, Ltd. Amended Limited Partnership
Agreement, dated October 17, 1984 (previously filed with the
Registrant's current Report on Form 8-K dated October 25, 1984 and
incorporated herein by reference)
10.5 Rights Agreement, dated as of September 1, 1992, between
Registrant and Society National Bank, as Rights Agent (previously
filed with the Registrant's Current Report on Form 8-K dated
September 1, 1992 and incorporated herein by reference)
10.6 Fourth Amended and Restated Title Clearing Agreement (Lawyer's)
between the Registrant, Fairfield Acceptance Corporation ("FAC"),
Lawyer's Title Insurance Corporation, FNBB individually and in
various capacities as agent and trustee, First Bank National
Association, First Commercial Trust Company, N.A., First American
Trust Company, N.A. and First Federal, dated September 1, 1992
(previously filed with the Registrant's Annual Report on Form 10-K
dated December 31, 1992 and incorporated herein by reference)
10.7 Servicing Agreement between the Registrant, First Federal Savings
and Loan Association of Charlotte ("First Federal") and First
Commercial Bank, N.A., dated September 14, 1992 (previously filed
with Registrant's Current Report on Form 8-K dated September 1,
1992 and incorporated herein by reference)
10.8 Second Amended and Restated Title Clearing Agreement (Colorado)
between the Registrant, FAC, Colorado Land Title Company, FNBB,
First Bank National Association, First Commercial Trust Company,
N.A. and First Federal, dated September 1, 1992 (previously filed
with the Registrant's Annual Report on Form 10-K dated December
31, 1992 and incorporated herein by reference)
10.9 Westwinds Third Amended and Restated Title Clearing Agreement
(Lawyers) between the Registrant, FAC, Fairfield Myrtle Beach,
Inc., Lawyers Title Insurance Corporation, FNBB, and Resort
Funding, Inc. dated November 15, 1992 (previously filed with the
Registrant's Annual Report on Form 10-K dated December 31, 1992
and incorporated herein by reference)
10.10 Third Amended and Restated Revolving Credit Agreement between FAC
and FNBB, dated as of September 28, 1993 (previously filed with
Registrant's Current Report on Form 8-K dated October 1, 1993 and
incorporated herein by reference)
10.11 Pledge and Servicing Agreement between Fairfield Funding
Corporation ("FFC"), FAC, First Commercial Trust Company, N.A. and
Texas Commerce Trust Company, N.A., dated September 28, 1993
(previously filed with Registrant's Current Report on Form 8-K
filed October 1, 1993 and incorporated herein by reference)
10.12 Voting and Disposition Rights/Dividend Agreement between the
Registrant and the Federal Savings and Loan Insurance Corporation,
dated May 30, 1989, (previously filed with the Registrant's
Current Report on Form 8-K on June 15, 1989 and incorporated
herein by reference)
E-2
<PAGE>
Exhibit
Number
- - - - - ------
10.13 First Amendment to Voting and Disposition Rights/Dividend
Agreement referenced in 10.12 above (previously filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992 and incorporated herein by reference)
10.14 Supervisory Agreement, dated as of August 26, 1992, between First
Federal and the Office of Thrift Supervision (previously filed
with Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992 and incorporated herein by reference)
10.15 Remarketing Agreement between the Registrant and First Federal,
dated as of September 14, 1992 (previously filed with Registrant's
Current Report on Form 8-K dated September 1, 1992 and
incorporated herein by reference)
10.16 Contract of Sale of Timeshare Receivables with Recourse, dated as
of November 15, 1992, between Resort Funding, Inc. and Fairfield
Myrtle Beach, Inc. (previously filed with Registrant's Annual
Report on Form 10-K dated December 31, 1992 and incorporated
herein by reference)
10.17 Receivable Purchase Agreement, dated as of September 28, 1993,
between the Registrant, FAC, and FFC (previously filed with the
Registrant's Current Report on Form 8-K filed October 1, 1993 and
incorporated herein by reference)
10.18 Second Amended and Restated Operating Agreement, dated as of
September 28, 1993, between the Registrant and FAC (previously
filed with the Registrant's Quarterly Report on Form 10-Q dated
September 30, 1993 and incorporated herein by reference)
10.19 Stock Purchase Agreement by and between the Registrant and F.F.
Homes of Arizona, Inc. (previously filed with the Registrant's
Current Report on Form 8-K filed November 3, 1993 and incorporated
herein by reference)
10.20 Appointment and Acceptance Agreement, dated as of March 3, 1994,
between the Registrant and FNBB appointing FNBB as successor
Rights Agent (attached)
10.21 Letter of Intent for the sale of First Federal, dated as of
December 15, 1993, between the Registrant and Security Capital
Bancorp (previously filed with the Registrant's Current Report on
Form 8-K filed December 21, 1993 and incorporated herein by
reference)
10.22 Stock Purchase Agreement dated as of April 5, 1994, between the
Registrant and Security Capital Bancorp (previously filed with the
Registrant's Current Report on Form 8-K dated April 14, 1994
and incorporated herein by reference)
COMPENSATORY PLANS OR ARRANGEMENTS
10.22 Form of Warrant Agreement between the Registrant and directors of
the Registrant (previously filed with the Registrant's Quarterly
Report on Form 10-Q dated September 30, 1993 and incorporated
herein by reference)
10.23 Registrant's Employee Profit Sharing Plan and amendment thereto,
adopted February 10, 1977 (previously filed with the Registrant's
Registration Statement on Form S-1 No. 2-62091 effective September
6, 1978 and incorporated herein by reference)
E-3
<PAGE>
Exhibit
Number
- - - - - ------
10.24 Employment Agreement, dated as of September 20, 1991, by and
between the Registrant and Mr. John W. McConnell (previously filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference)
10.25 Employment Agreement, dated as of September 20, 1991, by and
between the Registrant and Mr. Morris E. Meacham (previously filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference)
10.26 Employment Contract, effective January 1, 1994, by and between the
Registrant and Mr. Morris E. Meacham (attached)
10.27 Employment Agreement, dated as of September 20, 1991, by and
between the Registrant and Mr. Marcel J. Dumeny (previously filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference)
10.28 Form of Amendment No. One to Employment Agreements between
Registrant and certain officers (previously filed with
Registrant's Current Report on Form 8-K dated September 1, 1992
and incorporated herein by reference)
10.29 Form of Warrant Agreement between Registrant and certain officers
and executives of the Registrant (previously filed with
Registrant's Quarterly Report on Form 10-Q dated September 30,
1993 and incorporated herein by reference)
10.30 Registrant's First Amended and Restated 1992 Warrant Plan
(previously filed with Registrant's Quarterly Report on Form 10-Q
dated September 30, 1993 and incorporated herein by reference)
10.31 Form of Indemnification Agreement between the Registrant and
certain officers and directors of the Registrant (previously filed
with the Registrant's Current Report on Form 8-K dated September
1, 1992 and incorporated herein by reference)
10.32 Form of Severance Agreement between the Registrant and certain
officers of the Registrant (attached)
10.33 Registrant's Excess Benefit Plan, adopted February 1, 1994 (attached)
11 Computation of earnings per share (attached)
21 Subsidiaries of the Registrant (attached)
28 Ombudsman Report for the period ending December 31, 1993 related
to the Registrant's Senior Subordinated Secured Notes (attached)
E-4
<PAGE>
EXHIBITS INTENTIONALLY OMITTED
<PAGE>
APPENDIX IV - QUARTERLY REPORT ON FORM 10-Q/A (NO. 1) FOR THE
QUARTER ENDED MARCH 31, 1994 OF FAIRFIELD COMMUNITIES, INC.
<PAGE>
COMPOSITE COPY
REFLECTING AMENDMENT
NO. 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A (No.1)
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended March 31, 1994
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 1-8096
FAIRFIELD COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0390438
(State of Incorporation) (I.R.S. Employer Identification No.)
2800 Cantrell Road, Little Rock, Arkansas 72202
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (501) 664-6000
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
----- -----
APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
----- -----
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of May 6, 1994 totaled 9,890,239, of which 160,001 shares were
held by wholly owned subsidiaries of the registrant.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,737 $ 4,475
Loans receivable, net 150,739 165,575
Real estate inventories 34,382 34,607
Restricted cash accounts 12,536 10,602
Property and equipment, net 6,273 7,527
Other assets 21,499 23,326
Net assets of discontinued operations 10,315 8,471
-------- --------
$238,481 $254,583
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Financing arrangements $123,757 $127,351
Deferred revenue 19,684 20,599
Other liabilities 28,626 36,192
Net liabilities held for sale 17,776 23,293
-------- --------
189,843 207,435
-------- --------
Stockholders' equity:
Common stock 120 120
Paid-in capital 39,021 38,609
Retained earnings 9,497 8,419
-------- --------
48,638 47,148
-------- --------
$238,481 $254,583
======== ========
</TABLE>
Note: The consolidated balance sheet at December 31, 1993 has been derived from
the audited consolidated financial statements at that date.
See notes to consolidated financial statements.
2
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
REVENUES
Vacation ownership, net $ 6,398 $ 4,195
Homes and lots, net 1,795 1,799
Property management 2,740 2,190
Interest 5,324 10,703
Other 3,203 2,290
------- -------
19,460 21,177
------- -------
EXPENSES
Vacation ownership 2,033 1,393
Homes and lots 973 804
Provision for loan losses 580 471
Selling 4,306 3,352
Property management 2,385 2,362
General and administrative 2,535 4,785
Interest, net 2,719 6,887
Other 2,389 891
------- -------
17,920 20,945
------- -------
Earnings before provision for income taxes 1,540 232
Provision for income taxes 462 146
------- -------
Net earnings $ 1,078 $ 86
======= =======
NET EARNINGS PER SHARE
Primary $.10 $.01
==== ====
Fully diluted $.09 $.01
==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 11,095,519 11,134,117
========== ==========
Fully diluted 11,710,273 11,722,352
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Earnings from operations $ 1,078 $ 86
Adjustments to reconcile net earnings to net cash
used in operations:
Depreciation and amortization 335 (758)
Provision for loan losses 580 471
Earnings from unconsolidated affiliates (354) -
Changes in operating assets and liabilities, net:
Restricted cash accounts (1,934) (13)
Other (1,567) (2,313)
------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,862) (2,527)
------- -------
INVESTING ACTIVITIES
Net purchases of property and equipment (198) (201)
Principal collections on loans 16,875 26,919
Loans originated (5,403) (12,287)
Proceeds from sales of loans to third parties - 8,087
Purchases of investment and mortgage-backed securities - (16,749)
Payments from maturing investment and
mortgage-backed securities - 12,306
Net cash received from unconsolidated affiliates 354 366
Net investment activities of assets held for sale (5,400) -
Net investment activities of discontinued operations (2,510) (1,126)
------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 3,718 17,315
------- --------
FINANCING ACTIVITIES
Proceeds from financing arrangements 27,088 -
Repayments of financing arrangements (30,682) (17,116)
Net increase in demand, savings and money
market accounts - 906
Proceeds from sales of certificates of deposit - 3,263
Payments for maturing certificates of deposit - (9,052)
------- --------
NET CASH USED IN FINANCING ACTIVITIES (3,594) (21,999)
------- --------
Net decrease in cash and cash equivalents (1,738) (7,211)
Cash and cash equivalents, beginning of period 4,475 60,921
-------- --------
Cash and cash equivalents, end of period $ 2,737 $53,710
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1994
(UNAUDITED)
The accompanying unaudited financial statements of Fairfield
Communities, Inc. ("Fairfield") and its wholly owned subsidiaries
(collectively, the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial statements and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the statements for the unaudited interim periods
include all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the financial position and the results of
operations of the Company for such periods. Results of operations for the
period ended March 31, 1994 are not necessarily indicative of the results of
operations that may be expected for a full year or any interim period.
Certain previously reported amounts have been reclassified to conform to the
presentation used for the current period. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Annual Report on Form 10-K, as amended, of the Company for the year ended
December 31, 1993. The accompanying consolidated financial statements, and
related notes thereto, include the accounts of Fairfield and its wholly owned
subsidiaries, with all significant intercompany transactions eliminated.
NOTE 1 - FIRST FEDERAL
On April 6, 1994, Fairfield entered into a Stock Purchase Agreement to
sell the stock (the "Sale") of its wholly owned subsidiary, First Federal
Savings and Loan Association of Charlotte ("First Federal"), to Security
Capital Bancorp ("SCBC").
The Stock Purchase Agreement provides for a sales price of $40.4 million,
which will be increased (subject to the limitation hereafter described)
to reflect the consolidated pretax net earnings of First Federal and its
subsidiaries for the period from October 1, 1993 through the closing of the
Sale, or decreased by the consolidated pretax net losses of First Federal
and its subsidiaries during this time period, whichever is the case (the
"Sales Price"). The increase for pretax earnings of First Federal and
its subsidiaries cannot exceed $1.8 million plus, if the closing of the Sale
occurs after August 1, 1994, in general, the pretax earnings or losses of
First Federal and its subsidiaries from August 1, 1994 through the closing,
provided that the foregoing amounts may be reduced under certain
circumstances for reserves taken or losses (in excess of gains) on Excluded
Assets (as defined below) after September 30, 1993. Up to approximately $1.4
million of the Sales Price is to be retained by SCBC to securitize Fairfield's
obligation to indemnify SCBC against three existing lawsuits/claims which have
been asserted against First Federal (the "Litigation Indemnity").
As part of the proposed transaction, Fairfield is to purchase for cash
(a) at book value, net of reserves, up to approximately $19.8 million, as of
March 31, 1994, of certain real estate, classified loans, joint venture
interests and other assets owned by First Federal (the "Excluded Association
Assets"), subject to the right of SCBC to elect for First Federal to retain
all or part of such assets, and (b) lot and timeshare contracts receivable and
related assets which First Federal previously acquired from Fairfield (the
"Contracts Receivable"), having a book value less certain reserves and a
weighted average yield at March 31, 1994, of approximately $49.7 million and
11.6%, respectively. The Excluded Association Assets and the Contracts
Receivable are collectively referred to as the "Excluded Assets". Fairfield
expects to
5
<PAGE>
dispose of certain of the Excluded Association Assets in one or more
transactions, and otherwise to monetize the remaining Excluded Association
Assets, following the closing of the Sale. Management intends to dispose of a
substantial portion of the Excluded Association Assets by December 31, 1994.
Approximately $2.9 million in net book value of the Excluded
Association Assets are to be pledged to SCBC, to provide additional security
with respect to both the Litigation Indemnity and the general indemnities
under the Stock Purchase Agreement. Fairfield has certain rights to substitute
collateral in connection with such pledge, including the right to substitute
$0.60 to $0.70 of cash for every $1.00 of net book value of Excluded
Association Assets so pledged. Reserves taken by Fairfield after the
closing on the Excluded Association Assets securing the Litigation Indemnity
may increase the total Excluded Association Assets required as collateral.
Fairfield expects to utilize (a) the cash portion of the Sales Price to
fund the purchase of the Excluded Association Assets and (b) the remaining
cash portion of the Sales Price, plus proceeds from borrowings under the
Company's revolving credit agreements with The First National Bank of Boston
("FNBB"), to fund the purchase of the Contracts Receivable. Under the
Company's revolving credit agreements, in general, within applicable loan
limits, $0.75 of additional borrowing availability is created for each $1.00
in outstanding principal balance of qualifying Contracts Receivable pledged to
FNBB.
Management estimates that the Sale will result in a net gain of
approximately $5.5 million after taking into account (i) writedowns related to
the Excluded Assets estimated at approximately $4.0 million, based upon
Fairfield's accelerated method of disposal of these assets subsequent to the
consummation of the Sale, and (ii) anticipated selling expenses, including
professional fees and other direct expenses, of approximately $3.3 million.
The Sale is subject to numerous conditions, including the obtaining of
necessary approvals from (i) state and federal regulatory authorities, (ii)
FNBB and (iii) Fairfield's stockholders. There is no assurance that the
conditions to closing will be satisfied or that the various regulatory
approvals will be obtained on terms satisfactory to the parties. Assuming
such conditions to closing are satisfied and the approvals are obtained, the
sale is expected to close by September 30, 1994.
Fairfield had previously classified the First Federal segment as a
discontinued operation. As a result of the retention of a significant amount
of assets of First Federal, the consolidated financial statements have been
revised to reflect the Sale as a disposal of a portion of a segment rather
than a discontinued operation. As a result of this change, the consolidated
statement of operations and cash flows for the three months ended March 31,
1993 include the operations and cash flows of First Federal. In addition, the
assets to be sold and liabilities to be assumed by the purchaser have been
included in the Consolidated Balance Sheet at December 31, 1993 and March 31,
1994 as "Net liabilities held for sale" (see Note 8). Pro forma financial
information as if the Sale had occurred as of January 1, 1994 is as follows:
Revenues - $19.5 million; earnings from continuing operations before gain on
the Sale - $.7 million; earnings per share from continuing operations before
gain on the Sale (primary) - $.07; earnings per share from continuing
operations before gain on Sale (fully diluted) - $.06.
6
<PAGE>
NOTE 2 - VACATION OWNERSHIP SALES
Vacation ownership sales for the three months ended March 31, 1994 and
1993 are summarized as follows (In thousands):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Vacation ownership sales $5,755 $3,854
Less: Deferred revenue on
current year sales, net (729) (58)
Add: Deferred revenue on
prior year sales 1,372 399
------ ------
$6,398 $4,195
====== ======
</TABLE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable consisted of the following (In thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
<S> <C> <C>
Contracts $148,600 $159,874
Mortgages 13,304 17,366
-------- --------
161,904 177,240
Less: Allowance for loan losses (10,557) (10,992)
Unamortized valuation discount (608) (673)
-------- --------
$150,739 $165,575
======== ========
</TABLE>
As of March 31, 1994 and December 31, 1993, contracts receivable include
$48.1 million and $52.5 million, respectively, of contracts receivable owned
by First Federal which are to be purchased by the Company (see Note 1).
NOTE 4 - REAL ESTATE INVENTORIES
Real estate inventories are summarized as follows (In thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
<S> <C> <C>
Land:
Under development $ 8,680 $ 9,490
Undeveloped 13,779 14,771
------- -------
22,459 24,261
------- -------
Residential housing:
Vacation ownership 10,124 8,759
Homes 1,799 1,587
------- -------
11,923 10,346
------- -------
$34,382 $34,607
======= =======
</TABLE>
-7-
<PAGE>
NOTE 5 - FINANCING ARRANGEMENTS
Financing arrangements are summarized as follows (In thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
<S> <C> <C>
Revolving credit agreements $ 12,652 $ 12,223
Notes payable 96,335 100,358
Senior Subordinated Notes 14,770 14,770
-------- --------
$123,757 $127,351
======== ========
</TABLE>
Notes payable include $78.3 million and $81.6 million at March 31, 1994
and December 31, 1993, respectively, of 7.6% Notes secured by a pool of
contracts receivable totaling $86.2 million and $91.8 million, respectively.
NOTE 6 - SUPPLEMENTAL INFORMATION
Reorganization expenses paid totaled $.2 million and $.9 million for the
three months ended March 31, 1994 and 1993, respectively. Interest paid on
financing arrangements, including debt collateralized principally by assets of
discontinued operations, totaled $6.2 million and $8.4 million for the three
months ended March 31, 1994 and 1993, respectively. Of these amounts, $3.2
million and $3.4 million, respectively, were related to First Federal.
Other revenues and expenses for the three months ended March 31, 1994
include $2.3 million and $2.1 million, respectively, relating to bulk asset
sales and related cost of sales. During the three months ended March 31,
1993, bulk asset sales and related costs of sales totaled $.5 million and $.4
million, respectively. Other revenues for the three months ended March 31,
1994 also include cash distributions totaling $.4 million related to the
Company's 35% partnership interest in Harbour Ridge, Ltd., a limited
partnership engaged in the development of a tract of land in St. Lucie,
Florida. There were no similar revenues for the three months ended March 31,
1993.
During the three months ended March 31, 1994 and 1993, benefits realized
from the utilization of pre-confirmation net operating loss carryforwards and
recognition of pre-confirmation deductible temporary differences of $.4
million and $41,000, respectively, were recorded as reductions of the
Company's valuation allowance for deferred tax assets and as additions to
paid-in capital.
8
<PAGE>
NOTE 7 - FAIRFIELD ACCEPTANCE CORPORATION ("FAC")
Condensed consolidated financial information for FAC is summarized as
follows (In thousands):
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
<S> <C> <C>
ASSETS
Cash $ 1,037 $ 711
Loans receivable, net 90,232 94,668
Restricted cash and escrow accounts 12,536 10,602
Due from parent 8,281 7,392
Other assets 2,884 3,113
-------- --------
$114,970 $116,486
======== ========
LIABILITIES AND EQUITY
Notes payable $ 78,299 $ 81,559
Revolving credit agreement 4,958 4,283
Accrued interest and other liabilities 708 745
Equity 31,005 29,899
-------- --------
$114,970 $116,486
======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
1994 1993
---- ----
<S> <C> <C>
Revenues $3,189 $3,578
Expenses 2,006 2,312
------ ------
Earnings before provision for income taxes 1,183 1,266
Provision for income taxes 453 485
------ ------
Net earnigs $ 730 $ 781
====== ======
</TABLE>
NOTE 8 - NET LIABILITIES HELD FOR SALE
A summary of net liabilities held for sale is as follows (In thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
<S> <C> <C>
Cash $ 30,048 $ 14,205
Loans receivable, net 144,361 157,178
Real estate owned 15,722 15,322
Investment and mortgage-backed securities 68,834 76,708
Other 13,465 15,476
-------- --------
272,430 278,889
Savings deposits (272,055) (276,672)
Advances from Federal Home Loan Bank (13,886) (20,907)
Other liabilities (4,265) (4,603)
--------- --------
Net liabilities held for sale $ (17,776) $ (23,293)
========= =========
</TABLE>
9
<PAGE>
NOTE 9 - DISCONTINUED OPERATIONS
A summary of net assets of discontinued operations is as follows (In
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---- ----
<S> <C> <C>
Real estate inventories $ - $ 15,652
Property and equipment 11,968 21,429
------- --------
11,968 37,081
Revolving credit agreements - (19,933)
Notes payable (1,447) (2,458)
Accrual for losses (206) (6,219)
------- --------
Net assets of discontinued
operations $10,315 $ 8,471
======= ========
</TABLE>
In March 1994, Fairfield sold the stock of its wholly owned
subsidiaries, Fairfield Green Valley, Inc. and Fairfield Sunrise Village, Inc.
(collectively, the "Arizona Subsidiaries") at approximate book value. The
consideration received by Fairfield included (i) release of a lien on and
transfer to Fairfield of 2,235,294 shares of Fairfield's Common Stock owned
by the Arizona Subsidiaries and pledged to their primary lender, an affiliate
of Bank of America Arizona (the "Bank"), (ii) release of a mortgage in favor
of the Bank on a tract of unimproved property owned by Fairfield, and (iii)
release from any further liability to the Bank. Subsequent to the closing,
Fairfield recorded the shares of its Common Stock previously owned by the
Arizona Subsidiaries as treasury stock.
NOTE 10 - CONTINGENCIES
In June 1992, the Pagosa Lakes Property Owners Association ("PLPOA")
filed an adversary proceeding in the Bankruptcy Court for the Eastern District
of Arkansas, Western Division (the "Bankruptcy Court") asserting equitable
ownership or lien interests in certain recreational amenities, including golf
courses. In March 1994, the Bankruptcy Court issued its decision upholding
Fairfield's ownership of the Pagosa recreational amenities, subject to a
restrictive covenant allowing Pagosa property owners and their guests to use
the recreational amenities. The PLPOA has filed an appeal of the Bankruptcy
Court's decision with the United States District Court, Eastern District of
Arkansas, Western Division.
In August 1992, the PLPOA filed an appeal of the Bankruptcy Court's
final order confirming Fairfield's plan of reorganization. This appeal is
pending before the United States District Court, Eastern District of Arkansas,
Western Division. The basis for the appeal is the PLPOA's position that
Fairfield should have been required to resolicit the plan of reorganization
due to its amendment in accordance with the Bankruptcy Court's conditional
confirmation order to eliminate any recovery for Fairfield's previous
stockholders. The Bankruptcy Court rejected this argument, finding that the
property owner group lacked standing to raise this issue, and in management's
opinion, the appeal is without merit and moot, since the plan of
reorganization has been substantially implemented. The issues on appeal have
been briefed, but no decision has been rendered.
The PLPOA and Archuleta County have filed claims, which are largely
duplicative, in the Bankruptcy Court for approximately $10.4 million and $9.7
million, respectively, for promised improvements to be constructed at the
Pagosa, Colorado resort site and other matters. Trial is scheduled for May,
1994.
10
<PAGE>
On or about July 21, 1993 and September 9, 1993, two lawsuits (the
"Recreation Fee Litigation") were filed by 29 individuals and a company
against Fairfield in the District Court of Archuleta County, Colorado. The
Recreation Fee Litigation, which seeks certification as class actions, alleges
that Fairfield and its predecessors in interest wrongfully imposed an annual
recreation fee on owners of lots, condominiums, townhouses, VOIs and single
family residences in Fairfield's Pagosa, Colorado development. The amount of
the recreation fee, which was adopted in August, 1983, is $180 per lot,
condominium, townhouse and single family residence subject to the fee and $360
per unit for VOIs. The Recreation Fee Litigation in general seeks (a) a
declaratory judgment that the recreation fee is invalid; (b) the refund, with
interest, of the recreation fees which were allegedly improperly collected by
Fairfield; (c) damages arising from Fairfield's allegedly improper attempts to
collect the recreation fee (i) in an amount of not less than $1,000 per lot in
one case and (ii) in an unstated amount in the other case; (d) punitive
damages; and (e) recovery of costs and expenses, including attorneys' fees.
The court has not yet ruled on whether or not the Recreation Fee Litigation
will be allowed to proceed as class actions or on whether the cases will be
consolidated. Because of the preliminary nature of the litigation and
uncertainty concerning the time period covered by the suits' allegations,
Fairfield is unable to determine with any certainty the dollar amount sought
by plaintiffs, but believes it to be material.
On November 3, 1993, Fairfield filed an adversary proceeding in the
Bankruptcy Court, alleging that the Recreation Fee Litigation violates the
discharge granted to Fairfield in its Chapter 11 bankruptcy reorganization and
the injunction issued by the Bankruptcy Court against prosecution of any
claims discharged in the bankruptcy proceedings. The Colorado State Court
separately has stayed further proceedings in the Recreation Fee Litigation
pending decision by the Bankruptcy Court.
Fairfield intends to defend vigorously the Recreation Fee Litigation.
Fairfield has previously implemented recreation fee charges at certain other
of its resort sites which are not subject to the pending action.
On December 10, 1993, Charlotte T. Curry, who purchased a lot from
Fairfield under an installment sale contract subsequently sold to First
Federal, filed suit against First Federal, currently pending in Superior Court
in Mecklenburg County, North Carolina, alleging breach of contract, breach of
fiduciary duty and unfair trade practices. On April 8, 1994, the complaint
was amended, (a) adding Fairfield as a party, (b) adding an additional count
against both Fairfield and First Federal alleging violation of the North
Carolina's Racketeer Influenced and Corrupt Organizations ("RICO") Statute and
(c) adding a count against Fairfield alleging fraud. The litigation, which
seeks class action certification, contests the method by which Fairfield
calculated refunds for lot purchasers whose installment sale contracts were
canceled due to failure to complete payment of the deferred sales price for
the lot. Most installment lot sale contracts require Fairfield to refund to a
defaulting purchaser the amount paid in principal, after deducting the greater
of (a) 15% of the purchase price of the lot or (b) Fairfield's actual damages.
The plaintiff disputes Fairfield's method of calculating damages, which has
historically included certain sales, marketing and other expenses. In the
case of Ms. Curry's lot, the amount of refund claimed as having been
improperly retained is approximately $3,600. The CURRY lawsuit seeks damages,
punitive damages, treble damages under North Carolina law for unfair trade
practices and RICO, prejudgment interest and attorney's fees and costs.
Fairfield and First Federal intend to defend the CURRY litigation
vigorously. Fairfield also cancels defaulted lot installment sales contracts
owned by it and its subsidiaries (other than First Federal), using the same
method of calculating refunds as is at issue in the CURRY litigation.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The disposal of First Federal had previously been recorded as a disposal
of a segment whereby the operations and cash flows of First Federal were
reported as those of discontinued operations. As a significant amount of the
assets of First Federal are to be retained, the consolidated financial
statements have been revised to reflect the disposal of First Federal as a
disposal of a portion of a segment rather than as a discontinued operation.
Specifically, this results in the operations and cash flows of First Federal,
for periods prior to January 1, 1994, being included in the Consolidated
Financial Statements of Earnings and Cash Flows. For periods subsequent to
January 1, 1994, the operations of First Federal which relate to the assets to
be sold and the liabilities to be assumed by the purchaser have been deferred
as a net gain on the disposal of First Federal is anticipated. In addition,
the net liabilities to be sold have been recorded in the December 31, 1993 and
March 31, 1994 Consolidated Balance Sheets as "Net liabilities held for sale".
For purposes of management's discussion and analysis, the consolidated
statement of earnings for the three months ended March 31, 1993 has been
adjusted to exclude the effects of the operations related to the assets of
First Federal which are to be sold and the liabilities which are to be assumed
by the purchaser. As a result, interest income totals $6.5 million, interest
expense totals $4.3 million and general and administrative expense totals $2.6
million.
RESULTS OF OPERATIONS
VACATION OWNERSHIP
Gross vacation ownership interval ("VOI") revenues totaled $5.8 million
and $3.9 million for the three months ended March 31, 1994 and 1993,
respectively. This improvement is reflective of (i) increased sales volume at
several of the Company's sites and (ii) additional sales at the Company's
newest destination site at Branson, Missouri, which began sales efforts in
June 1993.
Net VOI revenues increased to $6.4 million for the three months ended
March 31, 1994 from $4.2 million for the three months ended March 31, 1993.
The increase in net VOI revenues is attributable to the same factors as noted
above, plus the recognition of $.3 million of previously deferred revenue
related to the percentage of completion method of accounting. Under this
method, the portion of revenues attributable to costs incurred as compared to
total estimated construction costs and selling expenses, is recognized in the
period of sale. The remaining revenue is deferred and recognized as the
remaining costs are incurred.
Cost of sales, as a percentage of revenues, improved to 31.8% for the
three months ended March 31, 1994 from 33.2% from the comparable period in
1993. The fluctuation in the percentage is primarily attributable to the mix
of the products sold and the varying acquisition and development costs at
certain sites.
Selling expenses, including commissions, for both VOI and lot sales, as
a percentage of related revenues, were 56.2% and 59.4%, for the three months
ended March 31, 1994 and 1993, respectively. The decrease in selling
expenses, as a percentage of related revenues, is attributed to efficiencies
experienced primarily at the Company's destination site at Branson, Missouri.
The Company continues to emphasize less expensive marketing programs (e.g.,
property owner referrals) in an effort to reduce these expenses, as a
percentage of related revenues.
12
<PAGE>
PROPERTY MANAGEMENT
Net property management revenues totaled $.4 million for the three
months ended March 31, 1994 as compared to net property management expenses of
$.2 million for the three months ended March 31, 1993. The improvement
reflects increased property management revenues coupled with more effective
cost controls.
INTEREST
Interest income totaled $5.3 million for the three months ended March
31, 1994 as compared to $6.5 million for the three months ended March 31,
1993. The decrease is primarily attributable to a lower average balance of
outstanding contracts receivable (1994 - $151.3 million; 1993 - $191.3
million), resulting primarily from principal collections exceeding
originations.
Interest expense, net of capitalized interest, totaled $2.7 million and
$4.3 million for the three months ended March 31, 1994 and 1993, respectively.
The decrease is primarily attributable to the restructuring of the Company's
debt in September 1993 which contributed to (i) reductions in the average
outstanding balance of interest-bearing debt (1994 - $124.6 million; 1993 -
$138.4 million) and (ii) a decrease in the weighted average interest rates
between the respective periods.
OTHER
Other revenues and expenses for the three months ended March 31, 1994
include $2.3 million and $2.1 million, respectively, relating to bulk asset
sales and related cost of sales. During the three months ended March 31,
1993, bulk asset sales and related costs of sales totaled $.5 million and $.4
million, respectively. Other revenues for the three months ended March 31,
1994, also include cash distributions totaling $.4 million related to the
Company's 35% partnership interest in Harbour Ridge, Ltd., a limited
partnership engaged in the development of a tract of land in St. Lucie,
Florida. There were no similar revenues for the three months ended March 31,
1993.
PROVISION FOR INCOME TAXES
During the three months ended March 31, 1994 and 1993, benefits realized
from the utilization of pre-confirmation net operating loss carryforwards and
recognition of pre-confirmation deductible temporary differences of $.4
million and $41,000, respectively, were recorded as reductions of the
Company's valuation allowance for deferred tax assets and as additions to
paid-in capital.
FINANCIAL CONDITION
Total consolidated assets of the Company decreased $16.1 million from
December 31, 1993 to March 31, 1994. The decrease in assets is primarily
attributable to a $14.8 million decrease in loans receivable resulting
primarily from principal collections exceeding origination of receivables.
Total consolidated liabilities of the Company decreased $17.6 million from
December 31, 1993 to March 31, 1994 and is primarily attributable to (i) a
$5.5 million decrease in net liabilities held for sale and (ii) a $3.6 million
net decrease in financing arrangements. The reduction in net liabilities held
for sale was primarily attributable to a decrease in the liabilities of First
Federal of $12 million, which was partially offset by a $6.5 million decrease
in the assets of First Federal (see Note 8 of "Notes to Consolidated Financial
Statements").
13
<PAGE>
Other variations in the Company's assets and liabilities generally
reflect the revenue and expense activities the Company experienced during the
three months ended March 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of the Company decreased $1.7 million from
December 31, 1993 to March 31, 1994. During the three months ended March 31,
1994, the Company generated $16.9 million of cash from principal collections
on loans receivable (including $4.6 million related to contracts receivable
held by First Federal) which was partially offset by $5.4 million of loan
originations. Using available cash, the Company reduced the outstanding
balances of its financing arrangements by $3.6 million. In addition,
restricted cash accounts increased $1.9 million relating to Fairfield Funding
Corporation's ("FFC") private placement as discussed below.
The Company has sources of funds from two revolving credit agreements.
Fairfield and certain of its subsidiaries are borrowers under the Amended and
Restated Revolving Credit Agreement (the "FCI Agreement") with FNBB. The FCI
Agreement provides for revolving loans of up to $25 million (including up to
$7 million for letters of credit), bearing interest at FNBB's base rate plus
1.5%. The FCI Agreement also provides for an annual facility fee of 1% of the
total commitment. The revolving loans mature on September 28, 1996, if not
extended in accordance with the terms of the agreement. The FCI Agreement is
collateralized by substantially all of the borrowers' loans receivable and
real estate inventories with FAC being a guarantor pursuant to the FCI
Agreement. At March 31, 1994, Fairfield had outstanding borrowings under the
FCI Agreement totaling $7.7 million, additional borrowing availability of $9.5
million, and outstanding letters of credit totaling $2.6 million.
FAC is the borrower under the Third Amended and Restated Revolving
Credit Agreement (the "FAC Agreement") with FNBB. The FAC Agreement provides
for revolving loans of up to $35 million (including up to $1 million for
letters of credit), bearing interest at FNBB's base rate plus .75%. The FAC
Agreement also provides for an annual facility fee of 1% of the total
commitment amount. The revolving loans mature on September 28, 1996, if not
extended in accordance with the terms of the agreement. The FAC Agreement is
collateralized by certain loans receivable with Fairfield being a guarantor
pursuant to the FAC Agreement. At March 31, 1994, FAC had outstanding
borrowings under the FAC Agreement totaling $5 million and no additional
borrowing availability.
An additional source of funds is the Company's ability to securitize
contracts receivable pursuant to a receivable purchase agreement (the
"Agreement") related to the Company's 7.6% Notes (the "FFC Notes"). The
Agreement provides for the principal amounts collected from the contracts
receivable pool to be reinvested into additional contracts receivable limited
monthly to (i) the availability of eligible contracts as defined in the
Agreement and (ii) the amounts accumulated in the reinvestment account.
During the three months ended March 31, 1994, the Company securitized $2.5
million of contracts receivable. The excess of funds held in the reinvestment
account over $6 million, determined on a monthly basis, is to be used to
reduce the FFC Notes. During the three months ended March 31, 1994, the
outstanding balance of the FFC Notes was reduced by $3.3 million. In April
1994, the Company securitized an additional $2.5 million of contracts
receivable under the reinvestment provisions of the Agreement. The
reinvestment period expires March 31, 1995.
The Company expects to finance its future cash needs from (i) principal
collections from its loans receivable, (ii) borrowings under the revolving
credit facilities and, in the short-term, the securitization of additional
eligible contracts receivable during the reinvestment period provided by the
Agreement, (iii) operating cash flows, (iv) proceeds from asset sales and (v)
other financings that it may obtain in the future.
14
<PAGE>
FIRST FEDERAL
Cash flows from First Federal are currently restricted as to use by
First Federal and are generally not available to fund any of the Company's
other operations. In 1994, principal collections from the contracts
receivable included in assets of continuing operations totaled $4.6 million.
Once these assets are acquired by Fairfield, the cash flow therefrom will be
that of the Company. The following cash flow data reflects the cash flow
from First Federal's total operations.
For the three months ended March 31, 1994, cash from operations for
First Federal totaled $2.4 million. During the same period, cash provided
from First Federal's investing activities totaled $24.7 million resulting
primarily from $18.8 million in proceeds from the sale of loans to third
parties and net increases in investment and mortgage-backed securities of $7.8
million, which increases were partially offset by loan originations exceeding
loan collections by $2 million. Cash used in First Federal's financing
activities for the three months ended March 31, 1994 totaled $11.3 million,
resulting from repayments of Advances from the Federal Home Loan Bank of $7
million and a $4.3 million net decrease in savings deposits. Except for
previously approved agreements, First Federal may not enter into transactions
with or make cash distributions to Fairfield without prior written approval of
the Office of Thrift Supervision.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Incorporated by reference. See Note 10 of "Notes to Consolidated
Financial Statements".
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Reference is made to the Exhibit Index.
(b) REPORTS ON FORM 8-K
On April 14, 1994, a Current Report on Form 8-K was filed in which
the Registrant announced it had entered into a Stock Purchase
Agreement for the possible sale of First Federal Savings and Loan
Association of Charlotte, North Carolina.
16
<PAGE>
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.
FAIRFIELD COMMUNITIES, INC.
Date: May 10, 1994 /s/Robert W. Howeth
--------------- ----------------------------------------
Robert W. Howeth, Senior Vice President,
Chief Financial Officer and Treasurer
Date: May 10, 1994 /s/William G. Sell
--------------- ----------------------------------------
William G. Sell, Vice President/
Controller (Chief Accounting
Officer)
17
<PAGE>
SIGNATURE
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.
FAIRFIELD COMMUNITIES, INC.
Date: August 9, 1994 /s/William G. Sell
----------------- ---------------------------------
William G. Sell, Vice President/
Controller (Chief Accounting
Officer)
18
<PAGE>
FAIRFIELD COMMUNITIES, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER
- - - - - ------
4.1 Supplemented and Restated Indenture between the Registrant,
Fairfield River Ridge, Inc., Fairfield St. Croix, Inc. and IBJ
Schroder Bank & Trust Company, as Trustee, and Houlihan Lokey
Howard & Zukin, as Ombudsman, related to the Senior Subordinated
Secured Notes, dated September 1, 1992 (previously filed with the
Registrant's Current Report on Form 8-K dated September 1, 1992
and incorporated herein by reference)
4.2 First Supplemental Indenture to the Supplemental and Restated
Indenture referenced in 4.1 above, dated September 1, 1992
(previously filed with the Registrant's Current Report on Form 8-K
dated September 1, 1992 and incorporated herein by reference)
4.3 Second Supplemental Indenture to the Supplemental and Restated
Indenture referenced in 4.1 above, effective September 1, 1992
(previously filed with the Registrant's Annual Report on Form 10-K
dated December 31, 1992 and incorporated herein by reference)
4.4 Third Supplemental Indenture to the Supplemental and Restated
Indenture referenced in 4.1 above, effective March 18, 1993
(previously filed with the Registrant's Quarterly Report on Form
10-Q dated March 31, 1993 and incorporated herein by reference)
4.5 Certificate of Designation, Preferences, and Rights of Series A
Junior Participating Preferred Stock, dated September 1, 1992
(previously filed with the Registrant's Current Report on Form 8-K
dated September 1, 1992 and incorporated herein by reference)
10.1 Stock Purchase Agreement dated as of April 5, 1994, between the
Registrant and Security Capital Bancorp (previously filed with the
Registrant's Current Report on Form 8-K dated April 14, 1994 and
incorporated herein by reference)
11 Computation of earnings per share (attached)
28 Ombudsman Report for the period ending March 31, 1994 related to
the Registrant's Senior Subordinated Notes (attached)
19
<PAGE>
EXHIBITS INTENTIONALLY OMITTED
<PAGE>
FAIRFIELD COMMUNITIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF FAIRFIELD COMMUNITIES, INC. FOR USE AT THE ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON SEPTEMBER 20, 1994
P
R The undersigned hereby appoints John W. McConnell and Marcel J. Dumeny,
O and each of them, jointly and severally and with full power of substitution,
X as Proxies to vote, as designated below, all common stock of Fairfield
Y Communities, Inc. owned by the undersigned at the Annual Meeting of
Stockholders to be held on September 20, 1994 at 10:00 a.m. Central
Daylight Savings Time at the Arkansas Excelsior Hotel, Markham and
Louisiana Streets, Little Rock, Arkansas, and at any and all postponements
and adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION FOR VOTING IS
GIVEN, THE PROXY WILL BE VOTED "FOR" THE ELECTION TO THE BOARD OF DIRECTORS OF
THE NOMINEES LISTED IN PROPOSAL 1, "FOR" THE SALE OF FIRST FEDERAL SAVINGS AND
LOAN ASSOCIATION OF CHARLOTTE IN PROPOSAL 2, "FOR" THE RIGHTS AGREEMENT
AMENDMENT IN PROPOSAL 3, "FOR" EACH PART OF PROPOSAL 4 AND THE APPROVAL OF THE
CLASSIFIED BOARD AMENDMENT THEREIN, "FOR" EACH PART OF PROPOSAL 5 AND THE
APPROVAL OF THE STOCKHOLDER ACTION AMENDMENT THEREIN, "FOR" THE APPROVAL OF
THE SECTION 1123 DELETION AMENDMENT IN PROPOSAL 6 AND IN ACCORDANCE WITH THE
JUDGMENT OF THE PERSON OR PERSONS VOTING THE PROXY WITH RESPECT TO ANY OTHER
BUSINESS THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Stockholders, the Proxy Statement, the Annual Report on Form 10-K/A
(No. 2) for the year ended December 31, 1993 of Fairfield Communities, Inc.,
and the Quarterly Report on Form 10-Q/A (No. 1) for the Quarter Ended
March 31, 1994 of Fairfield Communities, Inc., each of which is being
furnished therewith.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
-------------
SEE REVERSE
SIDE
-------------
<PAGE>
/X/ PLEASE MARK
VOTES AS IN THIS EXAMPLE.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION TO THE BOARD OF
DIRECTORS OF THE NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4,
5 AND 6.
1. Election of Directors:
NOMINEES FOR ELECTION AS CLASS I DIRECTORS:
Daryl J. Butcher, William C. Scott, J. Steven Wilson
NOMINEES FOR ELECTION AS CLASS II DIRECTORS:
Ernest D. Bennett, III, John W. McConnell
NOMINEES FOR ELECTION AS CLASS III DIRECTORS:
Russell A. Belinsky, Philip L. Herrington
/ / / /
FOR WITHHELD
ALL FROM ALL
NOMINEES NOMINEES
- - - - - ----------------------------------------------
For all nominees except as noted above
FOR AGAINST ABSTAIN
2. Sale of First Federal Savings and Loan / / / / / /
Association of Charlotte:
3. Rights Agreement Amendment: / / / / / /
4. Classified Board Amendment to the / / / / / /
Certificate of Incorporation:
A. Classification of the Board:
B. Removal of Directors Only For Cause: / / / / / /
C. Filling of Vacancies on the Board: / / / / / /
D. Fixing the Size of the Board: / / / / / /
5. Stockholder Action Amendment to the / / / / / /
Certificate of Incorporation:
A. Prohibition of Action By Written Consent:
B. Call of Special Meeting: / / / / / /
6. Section 1123 Deletion Amendment to the
Certificate of Incorporation: / / / / / /
Please complete, date, sign and return this proxy promptly in the enclosed
envelope. If signing as attorney, executor, administrator, trustee or guardian,
please give full title as such. If signing on behalf of a corporation, please
sign in full corporate name by an authorized officer. If shares are registered
in more than one name, all holders must sign.
Signature: ______________________________________ Date ______________________
Signature: ______________________________________ Date ______________________
