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
-1-
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-
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-
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-
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-
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-
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-
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>
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-
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
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>
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)%
</TABLE>
- ---------------------------------
(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.
-9-
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-
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>
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-
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>
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)
</TABLE>
<TABLE>
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)
</TABLE>
(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.
-12-
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-
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>
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
======== ========
</TABLE>
<TABLE>
| 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-
Distribution of Assets, Liabilities and Stockholder's Equity, Interest
----------------------------------------------------------------------
Rates and Interest Differential
-------------------------------
(continued)
<TABLE>
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 $6,921
======= ======
Net yield on interest-
earning assets 3.05% 4.06%
</TABLE>
<TABLE>
| Six Months Ended Year Ended
| December 31, 1992 December 31, 1991
| ------------------------ -------------------------
| Average Yield/ Average Yield/
| Balance Interest Rate Balance Interest Rate
| ------- -------- ------ ------- -------- -----
| (1) (2) (1)
<S> |<C> <S> <C> <C> <C> <C>
LIABILITIES AND STOCK- |
HOLDER'S EQUITY |
|
Interest-bearing |
liabilities: |
Savings deposits |$ 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%
</TABLE>
- -----------------------------
(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
-15-
The following table sets forth, for the periods indicated, a summary of
the changes in interest earned and interest paid resulting from changes
volume, changes in rates and in periods (In thousands):
<TABLE>
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
======= ======= ======= ======
</TABLE>
cont'd
<TABLE>
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)
======= ======= =======
</TABLE>
cont'd
<TABLE>
| Six Months Six Months
| Ended vs. 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)
| ======= ======= ======== ========
</TABLE>
- ---------------------------
(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, (ii) Other time deposits -
$1.8 million and (iv) Advances from Federal Loan Bank - $.2 million.
-16-
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-
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>
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
======= ======= | ====== ======= =======
</TABLE>
(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.
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-
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-
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>
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%
====== ===== ====== ======| ====== ======
</TABLE>
cont'd
<TABLE>
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%
====== ===== ====== ======
</TABLE>
- ------------------------------
(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.
-20-
Investment Activities
---------------------
The following table sets forth the book value of investment securities
at the dates indicated (In thousands):
<TABLE>
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>
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
===== =======
</TABLE>
cont'd
<TABLE>
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>
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
======== ========
</TABLE>
cont'd
<TABLE>
| 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):
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
=======
-21-
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):
Amount Percent
-------- ---------
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
-------- -----
<TABLE>
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-
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>
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-
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 association involved must pay
-24-
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-
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-
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-
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-
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-
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. SFAS No.
-30-
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
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-
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 aggregate transaction accounts up to $46.8 million
-32-
(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-
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 dividends in an
-34-
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-
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, <PAGE>
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
-36-
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 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, <PAGE>
Slate, Meagher & Flom.
-37-
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 during the past five years,
-38-
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-
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
Annual Compensation
-------------------
Other
Annual
Name and Compen-
Principal sation
Position Year Salary ($) Bonus ($) ($)
- -------- ---- ---------- --------- -----
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 - -
Long Term Compensation
--------------------------
Awards Payouts
----------------------
Restricted Underlying All Other
Name and Stock Options/ LTIP Compen-
Principal Award(s) SARS Payouts sation
Position ($) (#) ($) ($)(3)
- -------- -------- ------- ------- -------
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) - - - -
(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 - $11,209). In 1992, represents premiums
paid on life insurance policies for the benefit of the named
executive officers' respective designated beneficiaries.
-40-
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options
granted during 1993 to the named executive officers. No grants of SARs were
made to named executive officers during 1993.
Number of
Securities % of Total
Underlying Options
Options Granted to Exercise
Granted Employees Price Expiration
Name (1) in 1993 ($/Sh)(2) Date
- ---- ---------- --------- --------- ----------
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
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Apreciation
for Option Term (3)
--------------------
Name 5% ($) 10% ($)
- ---- ------ -------
Robert W. Howeth 188,000 477,000
Clayton G. Gring, Sr. 188,000 477,000
(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 futureappreciation, if any, in the
price of the Common Stock.
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.
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
- ---- ----------- ------------- ----------- -------------
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
(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.
-41-
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-
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-
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.
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (3)
- ------------------ -------------------- ----------
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
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.
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership Class (3)
- ----------------------- -------------------- -----------
Russell A. Belinsky 4,000 *
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
(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-
(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 resolutionof 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.
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 % 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-
(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-
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-
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)
-47-
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
Fairfield Communities, Inc. and Subsidiaries
Selected Financial Data
Dollars in thousands, except per share data
<TABLE>
Six Months | Six Months
Year Ended Ended | Ended
December 31, December 31, | June 30,
1993 1992 | 1992
---- ---- | ----
<S> <C> <C> | <C>
OPERATING DATA |
Revenues: |
Vacation ownership, net $ 34,332 $15,255 | $13,558
Homes and lots, net 12,073 5,010 | 4,513
Property management 10,876 5,145 | 4,756
Interest 39,894 23,927 | 28,728
Other 12,553 4,598 | 8,106
-------- ------- | -------
$132,277 $53,935 | $59,661
======== ======= | =======
Earnings (loss): |
Continuing operations $7,170 $1,249 | $(13,284)
Discontinued operations - - | (6,538)
Extraordinary credit (2) - - | 125,895
------ ------ | --------
Net earnings (loss) $7,170 $1,249 | $106,073
====== ====== | ========
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 | *
==== ==== |
Year Ended December 31,
--------------------------------------
1991 1990 1989(1)
---- ---- ----
<C> <C> <C>
$ 34,098 $ 75,859 $ 99,510
4,226 26,136 41,287
8,056 10,123 11,085
65,502 71,163 58,944
10,395 15,491 29,498
------- -------- --------
$132,277 $198,772 $240,324
$(32,780) $(61,703) $ (1,807)
(2,494) (26,756) (22,962)
- - -
-------- -------- --------
$(35,274) $(88,459) $(24,769)
======== ======== ========
* * *
* * *
* * *
* * *
</TABLE>
* Per share data not meaningful due to reorganization.
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 arrangements127,351 180,812 | 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
</TABLE>
- -----------------------
(1) Includes operations of First Federal Savings and Loan Association of
Charlotte ("First Federal") from June 1, 1989.
(2) Gain on discharge of debt.
Note: Effective June 30, 1992, the Company implemented "Fresh Start Reporting"
in connection with confirmation of the 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
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
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
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
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>
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
F-6
mortgage rates and First Federal's current policy of selling 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.
F-7
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. 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
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
F-9
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 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
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
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
<TABLE>
December 31,
1993 1992
---- ----
<S> <S> <S>
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
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
|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 | * *
==== ====
</TABLE>
*Per share amounts are neither comparable nor meaningful due to reorganization.
See notes to consolidated financial statements.
F-13
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
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
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
| 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
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
<TABLE>
|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
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
F-17
losses reflected in operations. 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 installments,
F-18
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:
Percent of Contract Delinquency
Price Paid Period
------------------- -----------
Less than 25% 90 days
25% but less than 50% 120 days
50% and over 150 days
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
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
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 agreements, in general, within applicable loan
F-21
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>
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
NOTE 4 - VACATION OWNERSHIP SALES
- ------ ------------------------
Vacation ownership sales are summarized as follows (In thousands):
<TABLE>
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>
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>
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
======== ========
</TABLE>
- ------------------------
(1) Included in "Net assets of discontinued operations" in 1992 (see Note 12).
F-23
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>
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%
</TABLE>
- ------------------------
(1) Annualized for the six months ended December 31, 1992 and June 30, 1992.
Notes Payable
- -------------
Notes payable are summarized as follows (Dollars in thousands):
<TABLE>
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
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
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>
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
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>
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
====== ==== ======== =======
</TABLE>
- -----------------------
(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.
Deferred tax assets (deductible temporary differences) consisted of the
following (In thousands):
<TABLE>
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>
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
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
NOTE 10 - FAIRFIELD ACCEPTANCE CORPORATION
- ------- --------------------------------
Condensed consolidated financial information for FAC is summarized as
follows (In thousands):
Condensed Consolidated Balance Sheets
<TABLE>
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>
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
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>
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>
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
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>
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>
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
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
Condensed financial information of discontinued operations is as follows
(In thousands):
<TABLE>
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>
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)
======== ======= ======= =======
</TABLE>
- --------------------
(1) Interest expense is allocated to discontinued operations based on debt
that can be specifically attributed to these 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 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
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
F-34
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. 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
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
F-36
currently available to First Federal 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
Certain information of continuing operations by business segment is
presented in the following tables (In thousands):
<TABLE>
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 $ 1,097 |$(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
</TABLE>
(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.
F-38
NOTE 18 - UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL DATA
- ------- -----------------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
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>
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
==== ====
</TABLE>
*Per share amounts are not meaningful due to reorganization.
F-39
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>
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>
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
SCHEDULE III
(Continued)
Condensed Statements of Cash Flows
<TABLE>
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
SCHEDULE VIII
Fairfield Communities, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
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
======= ====== ======== =======
</TABLE>
(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.
F-42
SCHEDULE X
Fairfield Communities, Inc. and Subsidiaries
Supplementary Income Statement Information
(In thousands)
<TABLE>
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
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
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
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
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
APPOINTMENT AND ACCEPTANCE AGREEMENT
This Appointment and Acceptance Agreement, dated as of March 3, 1994
(this "Agreement"), is made and entered into by and between Fairfield
Communities, Inc., a Delaware corporation (the "Company"), and The First
National Bank of Boston, a national banking association ("Bank of Boston").
RECITALS
A. The Company has previously entered into a Rights Agreement, dated
as of September 1, 1992 (the "Rights Agreement"), with Society National
Bank, as Rights Agent ("Society").
B. In accordance with Section 21 of the Rights Agreement, the Company
has notified Society that it has been removed as Rights Agent (as defined in
the Rights Agreement) effective March 28,1994.
C. The Company desires to appoint Bank of Boston as successor Rights
Agent, and Bank of Boston desires to accept such appointment.
The parties hereto hereby agree as follows:
APPOINTMENT AND ACCEPTANCE
1. Pursuant to Section 21 of the Rights Agreement, the Company hereby
appoints Bank of Boston as successor Rights Agent, effective as of the
opening of business on March 28, 1994.
2. Bank of Boston hereby (a) represents and warrants that it meets
the qualifications set forth in Section 21 of the Rights Agreement for as a
successor Rights Agent and (b) accepts its appointment as successor Rights
Agent effective as of the opening of business on March 28, 1994.
3. In accordance with the terms of Section 21 of the Rights
Agreement, effective as of March 28, 1994, Bank of Boston will be vested
with the same powers, rights, duties and responsibilities as if Bank of
Boston had been originally named as Rights Agent, and Bank of Boston hereby
assumes, and agrees, from and after such date, to perform and discharge, all
such duties and responsibilities.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
FAIRFIELD COMMUNITIES, INC.
By: /s/ Marcel J. Dumeny
Name: Marcel J. Dumeny
Title: Senior Vice President and Secretary
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Kenyon Bissell
Name: Kenyon Bissell
Title: Administration Manager
EMPLOYMENT CONTRACT
THIS EMPLOYMENT CONTRACT (the "Agreement"), dated as of the 8th day of
December, 1993, is by and between Fairfield Communities, Inc., a Delaware
corporation (the "Company"), and Morris E. Meacham ("Executive").
WITNESSETH:
WHEREAS, Executive is Executive Vice President of the Company and has
made and is expected to continue to make major contributions to the short-
and long-term profitability, growth and financial strength of the Company;
WHEREAS, Executive and the Company are parties to an Employment
Agreement dated as of September 20, 1991, as amended by Amendment Number One
dated as of July 30, 1992, (as so amended, the "Old Employment Agreement");
and
WHEREAS, because of changed circumstances, the Company and Executive
desire to enter into this Agreement to replace the Old Employment Agreement
and govern the employment relationship of Executive with the Company during
the term hereof, effective as of January 1, 1994;
NOW, THEREFORE, the Company and Executive agree as follows:
1. Employment. Effective January 1, 1994, the Company agrees to and
does hereby employ the Executive to perform the duties of Vice President,
Special Projects, of the Company, and Executive accepts such employment,
upon the terms and conditions set forth herein.
2. Term. The term of this Agreement shall be the period commencing on
January 1, 1994 and continuing thereafter through December 31, 1996 (the
"Term"); provided, however, that at the end of such three year period and
each anniversary date thereafter, the Term will automatically be extended
for an additional year unless, not later than nine months prior to the end
of such three year period or any such anniversary date, as the case may be,
the Company or Executive shall have given notice that it or Executive, as
the case may be, does not wish to have the Term extended.
3. Duties and Services. Executive agrees to serve the Company as Vice
President, Special Projects, and to devote such working time as is
reasonably necessary for the proper performance of the duties and tasks
assigned to him by the Chief Executive Officer of the Company. In attending
to the business and affairs of the Company, Executive agrees to serve the
Company faithfully, diligently and to the best of his ability.
4. Compensation. As consideration for the services to be rendered
hereunder by Executive, the Company agrees to pay Executive, and Executive
agrees to accept, payable in accordance with the Company's standard payroll
practices for executives, but payable in not less than monthly installments,
compensation of One Hundred Twenty Thousand Dollars ($120,000) per annum
(the "Salary"). Unless otherwise agreed in writing, the Salary is fixed for
the Term of this Agreement.
5. Incentive Bonus. For each year of the Term, the Board of Directors
of the Company may establish a bonus program which includes Executive, upon
such terms as the Board may determine to be appropriate. In establishing
such terms, the Board and Executive shall in good faith attempt to negotiate
bonus terms mutually agreeable to both parties. If no agreement can be
reached, however, the decision of the Board will be final.
6. Warrants. The Company has granted to Executive 10 year stock
purchase warrants covering an aggregate of 100,000 shares of the common
stock, $.01 par value per share, of the Company or any successor thereto, at
an exercise price of $3.00 per share. Such grant of warrants is unaffected
by the terms of this Agreement.
7. Termination for Cause.
(a) In the event that Executive shall be discharged for "Cause" as
provided in Section 7(b), all compensation to Executive pursuant to Section
4 in respect of periods after such discharge shall terminate immediately
upon such discharge, and the Company shall have no obligations with respect
thereto, nor shall the Company be obligated to pay Executive severance
compensation under Section 9.
(b) For the purposes of this Agreement, "Cause" shall mean that, prior
to any termination pursuant to Section 7(a) hereof, Executive shall have
committed:
(i) an intentional act or acts of fraud, embezzlement or theft
constituting a felony and resulting or intended to result directly or
indirectly in gain or personal enrichment for Executive at the expense of
the Company; or
(ii) the continued, repeated, intentional and willful refusal to
perform the duties associated with Executive's position with the Company,
which is not cured within 15 days following written notice to Executive.
For purposes of this Agreement, no act or failure to act on the part of
Executive shall be deemed "intentional" if it was due primarily to an error
in judgment or negligence, but shall be deemed "intentional" only if done or
omitted to be done by Executive not in good faith and without reasonable
belief that his action or omission was in the best interest of the Company.
Executive shall not be deemed to have been terminated for "Cause"
hereunder unless and until there shall have been delivered to Executive a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the Board of Directors of the Company then in office at a
meeting of the Board called and held for such purpose, after reasonable
notice to Executive and an opportunity for Executive, together with his
counsel (if Executive chooses to have counsel present at such meeting), to
be heard before the Board, finding that, in the good faith opinion of the
Board, Executive had committed an act constituting "Cause" as herein defined
and specifying the particulars thereof in detail. Nothing herein will limit
the right of Executive or his beneficiaries to contest the validity or
propriety of any such determination.
8. Termination Without Cause. Either the Company or Executive may
terminate his employment without Cause, but (except with respect to
Executive as provided in Section 9(e) hereof) only upon delivery to the
other party of a written notice of termination specifying a termination date
at least 30 days, but not more than 60 days, after the date of delivery of
such notice. Executive may elect to terminate his employment under this
Section 8 at any time prior to receiving the Board resolution described in
Section 7(b) notwithstanding that the Company claims a right to terminate
Executive under Section 7(a) and such election by Executive shall be binding
on both parties.
9. Termination Compensation.
(a) If, during the Term, Executive's employment is terminated (i) for
any reason other than (A) pursuant to Section 7(a), (B) by reason of death,
(C) by reason of "Disability" or (D) by notice by Executive pursuant to
Sections 8 or 9(e) hereof or (ii) by Executive due to "Constructive
Discharge", then Executive shall receive termination pay, payable in cash
within five business days of the date of termination, in an amount equal to
(A) $300,000, if Executive's termination date occurs at any time during the
period extending from January 1, 1994 through December 30, 1994, (B)
$240,000, if Executive's termination date occurs at any time during the
period extending from December 31, 1994 through December 30, 1995, (C)
$180,000, if Executive's termination date occurs at any time during the
period extending from December 31, 1995 through December 30, 1996, and (D)
$120,000, if Executive's termination date occurs at any time from and after
December 31, 1996.
(b) For the purposes of this Agreement, "Constructive Discharge" shall
mean:
(i) any reduction in Salary;
(ii) a required relocation of Executive of more than 35 miles from
Executive's current job location; or
(iii) any breach of any of the terms of this Agreement by the Company
which is not cured within 15 days following written notice thereof by
Executive to the Company;
provided, however, that the term "Constructive Discharge" shall not include
a specific event described in the preceding clause (i), (ii) or (iii) unless
Executive actually terminates his employment with the Company within 60 days
after the occurrence of such event.
(c) The amount of compensation payable pursuant to this Section 9 is
not subject to any deduction (except for withholding taxes), reduction,
offset or counterclaim, and the Company may not give advance notice of
termination in lieu of the payment provided for in this Section 9.
(d) For purposes of this Agreement, "Disability" shall mean an illness
or accident which prevents Executive, for a continuous period lasting six
months, from performing the material job duties normally associated with his
position.
(e) If Executive gives notice to the Company, at any time between
April 1, 1996 and July 1, 1996, terminating his employment effective as of
December 31, 1996, and the other termination provisions of Sections 7 and
9(a) are not then, and do not thereafter (prior to the close of business on
December 30, 1996) become, applicable, then he shall be entitled to receive
$120,000, payable in cash within five business days following December 31,
1996, as compensation for having agreed to terminate the Old Employment
Agreement and enter into this Agreement. The provisions of Sections 9(c),
9(f), 12, 14 and 15 of this Agreement shall apply with respect to such
payment, as though such payment constituted termination pay hereunder.
Notwithstanding anything to the contrary herein contained, or the
circumstances which might exist at the time of Executive's termination of
employment hereunder, Executive shall not be entitled to receive both
termination pay under Section 9(a) and the payment provided by this Section
9(e), it being understood that in any such circumstance which may arise, the
termination pay provisions of Section 9(a) shall control.
(f) Notwithstanding anything to the contrary contained in this
Agreement, if Executive is a "disqualified individual" (as that term is
defined in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor provision thereto) and if any portion of the
payments hereunder would be an "excess parachute payment" (as that term is
defined in Section 28OG of the Code or any successor provision thereto) but
for the application of this sentence, then the amount of such payment
otherwise payable to Executive under this Agreement shall be reduced to the
minimum extent necessary (but in no event to less than zero) so that no
portion of such payment, as so reduced, constitutes an excess parachute
payment, provided, that, any separate compensation arrangements extended to
Executive by the Company which involve non-cash compensation shall be
reduced first in priority before any reduction in payment hereunder. The
Company shall bear responsibility for performing the necessary calculations
under this section and shall indemnify Executive, on a grossed-up, after tax
(federal, state and local) basis, for any error or omission on the part of
the Company which results in additional tax liability to Executive, within
five calendar days following determination of the amount of indemnity owed
to Executive.
10. Life Insurance. The Company shall, at its sole expense, obtain and
maintain in full force and effect life insurance on Executive's life in an
amount equal to $400,000, payable to a beneficiary of Executive's choice.
11. Other Benefits.
(a) Except as expressly provided herein, this Agreement shall not:
(i) be deemed to limit or affect the right of Executive to receive
other forms of additional compensation or to participate in any insurance,
retirement, disability, profit-sharing, stock purchase, stock option, stock
appreciation rights, cash or stock bonus or other plan or arrangement or in
any other benefits now or hereafter provided by the Company or any of the
Company's affiliated companies for its employees; or
(ii) be deemed to be a waiver by Executive of any vested rights which
Executive may have or may hereafter acquire under any employee benefit plan
or arrangement of the Company or any of the Company's affiliated companies.
(b) It is contemplated that, in connection with his employment
hereunder, Executive may be required to incur reasonable business,
entertainment and travel expenses. The Company agrees to reimburse
Executive in full for all reasonable and necessary business, entertainment
and other related expenses, including travel expenses, incurred or expended
by him incident to the performance of his duties hereunder, upon submission
by Executive to the Company of such vouchers or expense statements
satisfactorily evidencing such expenses as may be reasonably requested by
the Company.
(c) It is understood and agreed by the Company that during the term of
Executive's employment hereunder, he shall be entitled to annual paid
vacations (taken consecutively or in segments), the length of which shall be
consistent with the effective discharge of Executive's duties and the
general customs and practices of the Company applicable to its officers.
12. No Mitigation Obligation. The Company hereby acknowledges that it
will be difficult and may be impossible (a) for Executive to find reasonably
comparable employment following the date of termination and (b) to measure
the amount of damages which Executive may suffer as a result of termination
of employment hereunder. Accordingly, the payment of the termination
compensation by the Company to Executive in accordance with the terms of
this Agreement is hereby acknowledged by the Company to be reasonable and
will be liquidated damages, and Executive will not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor will any profits, income, earnings or other
benefits from any source whatsoever create any mitigation, offset, reduction
or any other obligation on the part of Executive hereunder or otherwise.
13. Confidentiality.
(a) Recognizing that the knowledge and information about the business
methods, systems, plans and policies of the Company and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain
or establish as an employee of the Company or its affiliated companies are
valuable and unique assets of the Company and its affiliated companies,
Executive agrees that he shall not (otherwise than pursuant to his duties
hereunder) disclose, without the written consent of the Company, any
confidential knowledge or information pertaining to the Company or its
affiliated companies, or their business, personnel or plans, to any person,
firm, corporation or other entity, which would result in any material harm
or damage to the Company, its business or prospects, for any reason or
purpose whatsoever, unless required by law or legal process. In the event
Executive is required by law or legal process to provide documents or
disclose information, he shall take all reasonable steps to maintain
confidentiality of such documents and information including notifying the
Company and giving it an opportunity to seek a protective order, at its sole
cost and expense.
(b) The provisions of this Section 13 shall survive the expiration or
termination of this Agreement, without regard to the reason therefor, for a
period of two years from the earlier of (i) expiration of the Term or (ii)
termination of Executive's employment with the Company.
14. Legal Fees and Expenses. It is the intent of the Company that
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to Executive hereunder. Accordingly, if it should appear to
Executive that the Company has failed to comply with any of its obligations
under this Agreement or in the event that the Company or any other person
takes or threatens to take any action to declare this Agreement void or
unenforceable or in any way reduce the possibility of collecting the amounts
due hereunder, or institutes any litigation or other action or proceeding
designed to deny, or to recover from, Executive any payments or benefits
provided hereunder, the Company irrevocably authorizes Executive from time
to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other
legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any
jurisdiction. The Company will pay and be solely financially responsible
for any and all attorneys' and related fees and expenses incurred by
Executive in connection with any of the foregoing, except only in the event
of litigation where the Company and/or any director, officer, stockholder or
other person affiliated with the Company who is party to such action fully
and finally prevails on all causes of action.
15. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation
or ruling.
16. Successors and Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise)
to all or substantially all of the business or assets of the Company, by
agreement in form and substance satisfactory to Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the
same extent the Company would be required to perform if no such succession
had taken place. This Agreement will be binding upon and inure to the
benefit of the Company and any successor to the Company, including, without
limitation, any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by
purchase, merger, consolidation, reorganization or otherwise (and such
successor shall thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable or delegable
by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 16(a) and 16(b) hereof and with respect to the
Company's obligation to pay legal fees and expenses under Section 14.
Without limiting the generality or effect of the foregoing, Executive's
right to receive payments hereunder will not be assignable, transferable or
delegable, whether by pledge, creation of a security interest or otherwise,
other than by a transfer by Executive's will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer
contrary to this Section 16(c), the Company shall have no liability to pay
any amount so attempted to be assigned, transferred or delegated, except
with respect to legal fees and expenses, as and to the extent provided in
Section 14 hereof.
17. Notices. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed),
or five business days after having been mailed by United States registered
or certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS or Purolator, addressed to the
Company (to the attention of the President and Chief Executive Officer of
the Company, with a copy to the General Counsel of the Company) at its
principal executive office and to Executive at his principal residence, or
to such other address as any party may have furnished to the other in
writing and in accordance herewith, except that notices of changes of
address shall be effective only upon receipt.
18. Governing Law. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in
accordance with the substantive laws of the State of Arkansas, without
giving effect to the principles of conflict of laws of such State.
19. Validity. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not
be affected, and the provision so held to be invalid, unenforceable or
otherwise illegal will be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid or legal.
20. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed
to in a writing signed by Executive and the Company. No waiver by either
party hereto at any time of any breach by the other party hereto or
compliance with any condition or provision of this Agreement to be performed
by such other party will be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, expressed or implied, with
respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. References to Sections are
references to Sections of this Agreement.
21. Survival of Certain Provisions. Notwithstanding anything herein to
the contrary, the obligations of the Company under Sections 9, 11 and 14 of
this Agreement, to the extent applicable with respect to rights accrued
during the Term of this Agreement, shall remain operative and in full force
and effect regardless of the subsequent expiration, for any reason, of the
Term.
22. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same agreement.
23. Warranty. Executive warrants and represents that he is not a party
to any agreement, contract or understanding, whether of employment or
otherwise, which would in any way restrict or prohibit him from undertaking
or performing employment in accordance with the terms and conditions of this
Agreement.
24. Approval. By executing this Agreement, the Company acknowledges
that this Agreement has been reviewed and approved by the Board of Directors
of the Company and that no other approvals are required as a condition
precedent for this Agreement to become effective, provided that, with
respect to the payments provided in Section 9 hereof, no warranty is
extended by the Company concerning the effect, if any, of section 18(k)(1)
of the Federal Deposit Insurance Act or of any regulations, orders or rules
proposed or adopted thereunder with respect to a "golden parachute payment",
as defined in such act.
25. Prior Agreements. Effective immediately prior to 12:00 a.m.,
January 1, 1994, the Old Employment Agreement shall terminate and be of no
further force and effect. This Agreement shall in all respects supersede
all previous agreements governing the employment of Executive by the Company
and/or providing severance pay benefits (including the Old Employment
Agreement), whether written or oral, between Executive and the Company. In
the event that Executive or the Company has terminated Executive's
employment under the Old Employment Agreement, or given notice of such
termination, prior to the effective date of this Agreement, then,
notwithstanding anything to the contrary herein contained, this Agreement
shall not become effective and the parties' rights, duties and obligations
shall be exclusively governed by the Old Employment Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
FAIRFIELD COMMUNITIES, INC.
By: /s/ J. W. McConnell
J. W. McConnell, President
/s/ M. E. Meacham
M. E. Meacham
SEVERANCE PAY AGREEMENT
THIS SEVERANCE PAY AGREEMENT (the "Agreement"), dated as of May 13,
1993, is by and between Fairfield Communities, Inc., a Delaware corporation
(the "Company"), and _______________ (the "Executive").
WITNESSETH:
WHEREAS, Executive is ______________ of the Company and has made and is
expected to continue to make major contributions to the short- and long-term
profitability, growth and financial strength of the Company; and
WHEREAS, the Company desires to provide certain termination benefits
for Executive, in order to provide additional inducement for Executive to
continue to remain in the ongoing employ of the Company; and
WHEREAS, in consideration for the services rendered by Executive, the
Company currently pays Executive, in accordance with the Company's standard
payroll practices for executives, base compensation of ____________________
Dollars ($_______) per annum, which amount may change from time to time, as
determined by the Board of Directors of the Company (the "Salary");
NOW, THEREFORE, the Company and Executive agree as follows:
1. Term. The term of this Agreement shall be the period commencing as
of the date hereof and continuing through August 31, 1995 (the "Term");
provided, however, that at the end of such initial term and each anniversary
date thereafter, the Term will automatically be extended for an additional
year unless, not later than nine months prior to the end of such initial
term or any such anniversary date, as the case may be, the Company or
Executive shall have given notice that it or Executive, as the case may be,
does not wish to have the Term extended.
2. Termination for Cause.
(a) In the event that Executive shall be discharged for "Cause" as
provided in Section 2(b), the Company shall have no obligation to pay
Executive termination compensation under Section 4.
(b) For the purposes of this Agreement, "Cause" shall mean that, prior
to any termination pursuant to Section 2(a) hereof, Executive shall have
committed:
(i) an intentional act or acts of fraud, embezzlement or theft
constituting a felony and resulting or intended to result directly or
indirectly in gain or personal enrichment for Executive at the expense of
the Company; or
(ii) the continued, repeated, intentional and willful refusal to
perform the duties associated with Executive's position with the Company,
which is not cured within 15 days following written notice to Executive.
For purposes of this Agreement, no act or failure to act on the part of
Executive shall be deemed "intentional" if it was due primarily to an error
in judgment or negligence, but shall be deemed "intentional" only if done or
omitted to be done by Executive not in good faith and without reasonable
belief that his action or omission was in the best interest of the Company.
Executive shall not be deemed to have been terminated for "Cause"
hereunder unless and until there shall have been delivered to Executive a
copy of a resolution duly adopted by the affirmative vote of not less than a
majority of the Board of Directors of the Company then in office at a
meeting of the Board called and held for such purpose, after reasonable
notice to Executive and an opportunity for Executive, together with his
counsel (if Executive chooses to have counsel present at such meeting), to
be heard before the Board, finding that, in the good faith opinion of the
Board, Executive had committed an act constituting "Cause" as herein defined
and specifying the particulars thereof in detail. Nothing herein will limit
the right of Executive or his beneficiaries to contest the validity or
propriety of any such determination.
3. Termination Without Cause. Either the Company or Executive may
terminate Executive's employment without Cause, but only upon delivery to
the other party of a written notice of termination specifying a termination
date at least 30 days, but not more than 60 days, after the date of delivery
of such notice. Executive may elect to terminate his employment under this
Section 3 at any time prior to receiving the Board resolution described in
Section 2(b) notwithstanding that the Company claims a right to terminate
Executive under Section 2(a) and such election by Executive shall be binding
on both parties.
4. Termination Compensation.
(a) If, during the Term, Executive's employment is terminated (i) for
any reason other than (A) pursuant to Section 2(a), (B) by reason of death,
(C) by reason of "Disability" or (D) by notice by Executive pursuant to
Section 3 hereof or (ii) by Executive due to "Constructive Discharge", then
Executive shall receive termination pay in an amount equal to the product of
(A) the "Severance Pay Multiplier" (as defined below) and (B) the highest
annualized rate of Executive's Salary during the term of this Agreement
prior to the date of termination, payable in cash within five business days
of the date of termination. The term "Severance Pay Multiplier" shall be
(A) 1.000, if the Executive's date of termination occurs on or before May
29, 1993, (B) 1.167, if the Executive's date of termination occurs from May
30, 1993 through June 28, 1993, (C) 1.333, if the Executive's date of
termination occurs from the June 29, 1993 through July 28, 1993, and (D)
1.5, if the Executive's date of termination occurs at any time from and
after July 29, 1993.
(b) For purposes of this Agreement, "Constructive Discharge" shall
mean:
(i) any reduction in Salary;
(ii) a material reduction in Executive's job function, duties or
responsibilities, or a similar change in Executive's reporting
relationships; or
(iii) a required relocation of Executive of more than 35 miles from
Executive's current job location;
provided, however, that the term "Constructive Discharge" shall not include
a specific event described in the preceding clause (i), (ii) or (iii) unless
Executive actually terminates his employment with the Company within 60 days
after the occurrence of such event.
(c) The amount of compensation payable pursuant to this Section 4 is
not subject to any deduction (except for withholding taxes), reduction,
offset or counterclaim, and the Company may not give advance notice of
termination in lieu of the payment provided for in this Section 4.
(d) For purposes of this Agreement, "Disability" shall mean an illness
or accident which prevents Executive, for a continuous period lasting six
months, from performing the material job duties normally associated with his
position.
(e) Notwithstanding anything to the contrary contained in this
Agreement, if Executive is a "disqualified individual" (as that term is
defined in Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code") or any successor provision thereto) and if any portion of the
payments hereunder would be an "excess parachute payment" (as that term is
defined in Section 280G of the Code or any successor provision thereto) but
for the application of this sentence, then the amount of such payment
otherwise payable to Executive under this Agreement shall be reduced to the
minimum extent necessary (but in no event to less than zero) so that no
portion of such payment, as so reduced, constitutes an excess parachute
payment, provided, that, any separate compensation arrangements extended to
Executive by the Company which involve non-cash compensation shall be
reduced first in priority before any reduction in payment hereunder. The
Company shall bear responsibility for performing the necessary calculations
under this section and shall indemnify Executive, on a grossed-up, after tax
(federal, state and local) basis, for any error or omission on the part of
the Company which results in additional tax liability to Executive, within
five calendar days following determination of the amount of indemnity owed
to Executive.
5. Other Benefits. Except as expressly provided herein, this Agreement
shall not be deemed to limit or affect the right of Executive to receive
other forms of additional compensation or to participate in any insurance,
retirement, disability, profit-sharing, stock purchase, stock option, stock
appreciation rights, cash or stock bonus or other plan or arrangement or in
any other benefits now or hereafter provided by the Company or any of the
Company's affiliated companies for its employees or be deemed to be a waiver
by Executive of any vested rights which Executive may have or may hereafter
acquire under any employee benefit plan or arrangement of the Company or any
of the Company's affiliated companies.
6. No Mitigation Obligation. The Company hereby acknowledges that it
will be difficult and may be impossible (a) for Executive to find reasonably
comparable employment following the date of termination and (b) to measure
the amount of damages which Executive may suffer as a result of termination
of employment hereunder. Accordingly, the payment of the termination
compensation by the Company to Executive in accordance with the terms of
this Agreement is hereby acknowledged by the Company to be reasonable and
will be liquidated damages, and Executive will not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor will any profits, income, earnings or other
benefits from any source whatsoever create any mitigation, offset, reduction
or any other obligation on the part of Executive hereunder or otherwise.
7. Confidentiality.
(a) Recognizing that the knowledge and information about the business
methods, systems, plans and policies of the Company and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain
or establish as an employee of the Company or its affiliated companies are
valuable and unique assets of the Company and its affiliated companies,
Executive agrees that he shall not (otherwise than pursuant to the
performance of his duties as an officer of the Company) disclose, without
the written consent of the Company, any confidential knowledge or
information pertaining to the Company or its affiliated companies, or their
business, personnel or plans, to any person, firm, corporation or other
entity, which would result in any material harm or damage to the Company,
its business or prospects, for any reason or purpose whatsoever, unless
required by law or legal process. In the event Executive is required by law
or legal process to provide documents or disclose information, he shall take
all reasonable steps to maintain confidentiality of documents and
information including notifying the Company and giving it an opportunity to
seek a protective order, at its sole cost and expense.
(b) The provisions of this Section 7 shall survive the expiration or
termination of this Agreement, without regard to the reason therefor, for a
period of two years from the earlier of (i) expiration of the Term or (ii)
termination of Executive's employment with the Company.
8. Legal Fees and Expenses. It is the intent of the Company that
Executive not be required to incur legal fees and the related expenses
associated with the interpretation, enforcement or defense of Executive's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to Executive hereunder. Accordingly, if it should appear to
Executive that the Company has failed to comply with any of its obligations
under this Agreement or in the event that the Company or any other person
takes or threatens to take any action to declare this Agreement void or
unenforceable or in any way reduce the possibility of collecting the amounts
due hereunder, or institutes any litigation or other action or proceeding
designed to deny, or to recover from, Executive any payments or benefits
provided hereunder, the Company irrevocably authorizes Executive from time
to time to retain counsel of Executive's choice, at the expense of the
Company as hereafter provided, to advise and represent Executive in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other
legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any
jurisdiction. The Company will pay and be solely financially responsible
for any and all attorneys' and related fees and expenses incurred by
Executive in connection with any of the foregoing, except only in the event
of litigation where the Company fully and finally prevails on all causes of
action.
9. Withholding of Taxes. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as the
Company is required to withhold pursuant to any law or government regulation
or ruling.
10. Successors and Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise)
to all or substantially all of the business or assets of the Company, by
agreement in form and substance satisfactory to Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the
same extent the Company would be required to perform if no such succession
had taken place. This Agreement will be binding upon and inure to the
benefit of the Company and any successor to the Company, including, without
limitation, any persons acquiring directly or indirectly all or
substantially all of the business or assets of the Company whether by
purchase, merger, consolidation, reorganization or otherwise (and such
successor shall thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable or delegable
by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto shall, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 10(a) and 10(b) hereof and with respect to the
Company's obligation to pay legal fees and expenses under Section 8.
Without limiting the generality or effect of the foregoing, Executive's
right to receive payments hereunder will not be assignable, transferable or
delegable, whether by pledge, creation of a security interest or otherwise,
other than by a transfer by Executive's will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer
contrary to this Section 10(c), the Company shall have no liability to pay
any amount so attempted to be assigned, transferred or delegated, except
with respect to legal fees and expenses, as and to the extent provided in
Section 8 hereof.
11. Notices. For all purposes of this Agreement, all communications,
including, without limitation, notices, consents, requests or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by
electronic facsimile transmission (with receipt thereof orally confirmed),
or five business days after having been mailed by United States registered
or certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as Federal Express, UPS or Purolator, addressed to the
Company (to the attention of the President and Chief Executive Officer of
the Company, with a copy to the Secretary) at its principal executive office
and to Executive at his principal residence, or to such other address as
either party may have furnished to the other in writing and in accordance
herewith, except that notices of changes of address shall be effective only
upon receipt.
12. Governing Law. The validity, interpretation, construction and
performance of this Agreement will be governed by and construed in
accordance with the substantive laws of the State of Arkansas, without
giving effect to the principles of conflict of laws of such State.
13. Validity. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not
be affected, and the provision so held to be invalid, unenforceable or
otherwise illegal will be reformed to the extent (and only to the extent)
necessary to make it enforceable, valid or legal.
14. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed
to in writing signed by Executive and the Company. No waiver by either
party hereto at any time of any breach by the other party hereto or
compliance with any condition or provision of this Agreement to be performed
by such other party will be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, expressed or implied with
respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement. References to Sections are
references to Sections of this Agreement.
15. Survival of Certain Provisions. Notwithstanding anything herein to
the contrary, the obligations of the Company under Sections 4 and 8 of this
Agreement, to the extent applicable, shall remain operative and in full
force and effect regardless of the expiration, for any reason, of the Term.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same Agreement.
17. Warranty. Executive warrants and represents that he is not a party
to any agreement, contract or understanding, whether of employment or
otherwise, which would in any way restrict or prohibit him from undertaking
or performing employment in his current positions with the Company and its
subsidiaries.
18. Board Approval. By executing this Agreement, the Company
acknowledges that the Compensation Committee of the Board of Directors of
the Company, with the concurrence of the Board of Directors of the Company,
has authorized and approved the granting of the severance pay protection
afforded to Executive under the terms of this Agreement.
19. Prior Agreements. This Agreement shall in all respects supersede
all previous agreements providing severance pay benefits, whether written or
oral, between Executive and the Company, including a change in control
severance letter agreement dated January 31, 1990 and the benefits afforded
Executive under the Separation Plan approved by the bankruptcy court in the
Company's Chapter 11 reorganization proceeding.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
FAIRFIELD COMMUNITIES, INC.
By: __________________________
J. W. McConnell, President
___________________________
_____________, Individually
FAIRFIELD COMMUNITIES, INC.
EXCESS BENEFIT PLAN
ARTICLE I
Establishment of Plan
Section 1.01. Establishment. Fairfield Communities, Inc. Excess
Benefit Plan is hereby established effective as of February 1, 1994.
Section 1.02. Purpose. The purpose of this Plan is solely to provide
benefits in excess of the limitations of Section 415 and Section 401(a)(17)
of the Internal Revenue Code of 1986, or corresponding provisions of
subsequent federal tax laws ("Code"), to a select group of management or
highly compensated employees upon whose efforts the continued successful
operation of the Company is largely dependent, and to ensure the continued
availability of their services to the Company.
Section 1.03. Funding. The Plan is unfunded and the rights, if any, of
any person to any benefits hereunder shall be the same as any unsecured
general creditor of the Company. The benefits payable under this Plan shall
be paid by the Company each year out of its general assets.
ARTICLE II
Definitions and Interpretation
Section 2.01. Definitions. When the initial letter of a word or phrase
is capitalized herein, such word or phrase shall have the meaning
hereinafter set forth;
(a) "Board" means the Board of Directors of the Company which shall
interpret the Plan in its sole discretion.
(b) "Company" means Fairfield Communities, Inc., and any subsidiary as
determined by the Board.
(c) "Excess Benefit Plan Account" means the book reserve established
for each Participant to which shall be credited his benefit under this Plan.
(d) "Participant" means a participant under the Profit-Sharing Plan
(i) who is designated by the Board as being eligible to participate in this
Plan, (ii) who agrees to be bound by the provisions of this Plan on a form
provided by the Company and (iii) who is, or whose beneficiaries are,
entitled to benefits under the Plan.
(e) "Plan" means the "Fairfield Communities, Inc. Excess Benefit Plan"
as set forth herein and as it may be amended from time to time hereafter.
(f) "Profit-Sharing Plan" means the "Profit Sharing Plan for Employees
of Fairfield Communities, Inc." as amended from time to time.
Section 2.02. Construction and Governing Law.
(a) This Plan shall be construed, enforced, and administered and the
validity thereof determined in accordance with the laws of the State of
Arkansas.
(b) Words used herein in the masculine gender shall be construed to
include the feminine gender where appropriate and the words used herein in
the singular or plural shall be construed as being in the plural or singular
where appropriate.
(c) When the initial letter of a word or phrase is capitalized herein
and such word or phrase is not defined in Section 2.01, such word or phrase
shall have such meaning as provided in the Profit-Sharing Plan.
ARTICLE III
Amount of Benefit
Section 3.01. Allocations. If, with respect to any Plan Year, the
allocation made to the Employer Contribution Account ("Account") of a
Participant under the Profit-Sharing Plan is less than the allocation that
would have been made for the benefit of such Participant but for the
application of the limitations on benefits under Code Sections 415(c),
415(e) or 401(a)(17), the Participant shall be entitled to have his Excess
Benefit Plan Account credited with an amount equal to the difference between
the actual allocation made for the benefit of such Participant for the Plan
Year and the allocation that would have been made for such Participant but
for the application of such Code limitations. Such allocation shall be made
at such time as this allocation would have been made to the Profit Sharing
Plan, if determinable, otherwise as of the last day of the corresponding
year.
Section 3.02. Credited Interest. The balance of a Participant's Excess
Benefit Plan Account as of any Annual Accounting Date shall be credited with
an amount equal to the amount which would have been earned had such account
been invested at a rate of return for the period equal to the publicly
quoted base (prime) rate of The First National Bank of Boston at the close
of business on the date of any contribution made with respect to 1993, and
for subsequent years, as of the first banking day of each succeeding
calendar year.
Section 3.03. Vesting. A Participant under this Plan shall vest in his
Excess Benefit Plan Account in accordance with the vesting schedule set
forth in the Profit-Sharing Plan.
ARTICLE IV
Benefits payable under this Plan shall be payable to a Participant, or
to the beneficiary of such Participant in the event of his death before
receipt of benefits to which he is entitled hereunder, at such time and in
such manner as his benefits are payable under the Profit Sharing Plan.
ARTICLE V
Administration
Section 5.01. Plan Administrator. The person or persons designated by
the Plan Administrator of the Profit-Sharing Plan to perform the
administrative functions for the Profit-Sharing Plan shall perform the
administrative functions necessary for the operation of this Plan, except
that no person shall vote or take action with respect to his own Plan
benefit.
ARTICLE VI
Miscellaneous
Section 6.01. Amendments. The Board from time to time may amend,
suspend, or terminate, in whole or in part, any or all of the provisions of
this Plan, effective as of the beginning of any calendar year commencing on
or after the date of adoption of such action by the Board; provided,
however, that no such action shall affect the rights of any Participant, or
the operation of this Plan with respect to any benefits of a Participant
which have accrued prior to such action.
Section 6.02. No Employment Rights. Neither the establishment of this
Plan nor the status of an employee as a Participant shall give any
Participant any right to be retained in the employ of the Company; and no
Participant and no person claiming under or through such Participant shall
have any right or interest in any benefit under this Plan unless and until
the terms, conditions and provisions of this Plan affecting such Participant
shall have been satisfied.
Section 6.03. Nonalienation. The right of any Participant or any
person claiming under or through such Participant to any benefit or any
payment hereunder shall not be subject in any manner to attachment or other
legal process for the debts of such Participant or person; and the same
shall not be subject to anticipation, alienation, sale, transfer, assignment
or encumbrance.
Section 6.04. Limitation of Liability. No member of the Board and no
officer or employee of the Company shall be liable to any person for any
action taken or omitted in connection with the administration of this Plan,
nor shall the Company be liable to any person for any such action or
omission. No person shall, because of the Plan, acquire any right to an
accounting or to examine the books or the affairs of the Company. Nothing
in this Plan shall be construed to create any trust or fiduciary
relationship between the Company and any Participant or any other person.
Section 6.05. Acceleration of Payment. The Board in its sole
discretion may accelerate the time of payment of any benefit to any
Participant or beneficiary to the extent that it deems it equitable or
desirable under the circumstances.
Section 6.06. Representative of Board. The Board may from time to time
designate an individual or committee to carry out any duties or
responsibilities of the Board hereunder.
Section 6.07. Designation of Beneficiary. Each Participant may
designate a beneficiary in writing to receive any and all payments to which
he may be entitled under this Plan upon his death. If a Participant fails
to designate a beneficiary in writing, benefits remaining unpaid at his
death shall be paid to his surviving spouse and if there is no surviving
spouse to the executor or other personal representative of the Participant
to be distributed in accordance with the Participant's will or applicable
law.
IN WITNESS WHEREOF, the undersigned has caused this Plan to be executed
as of this 21st day of March, 1994.
FAIRFIELD COMMUNITIES, INC.
By: /s/ J. W. McConnell
Its: President
<PAGE>
FAIRFIELD COMMUNITIES, INC.
EXCESS BENEFIT PLAN
ELECTION FORM
As an employee entitled to become a Participant under the above Plan, I
hereby make the following certifications, agreements, and elections:
A. I certify that I have received and read a copy of the Plan, and
agree to be bound by all of the provisions thereof.
B. I understand that I will become a Participant in the Plan as of the
date below subject to all the terms and conditions of the Plan.
C. I hereby designate _______________________ as the beneficiary of
any benefits under this Plan to which I may be entitled at the time of my
death.
Date: _________________ ______________________________
Signature
______________________________
Printed Name
On behalf of the Company, I hereby acknowledge receipt of the above.
Date:____________________ ______________________________
EXHIBIT 11
----------
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
<TABLE>
Year Ended Six Months Ended
December 31, 1993 December 31, 1992
----------------- -----------------
Fully Fully
Primary Diluted Primary Diluted
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares:
Shares outstanding 10,490,083 10,490,083 3,820,125 3,820,125
Shares issued to wholly owned
subsidiaries (2,395,295) (2,395,295) (2,395,295) (2,395,295)
Estimated increase in shares
outstanding due to allowed
claims exceeding $85 million(1) 2,942,977 2,942,977 9,709,287 9,709,287
Net effect of dilutive warrants
based on the treasury stock
method using ending market price - 66,667 - -
Contingent issuance -
Holders of FCI Notes (2) - 588,235 - 588,235
----------- ---------- ---------- ----------
Total weighted average shares
outstanding 11,037,765 11,692,667 11,134,117 11,722,352
=========== ========== ========== ==========
Net earnings $7,170,000 $7,170,000 $1,249,000 $1,249,000
========== ========== ========== ==========
Earnings per share $.65 $.61 $.11 $.11
==== ==== ==== ====
</TABLE>
(1) In accordance with the terms of the Seventh Amended and Restated Joint
Plans of Reorganization (the "Plans"), the number of shares to be
issued to unsecured claim holders will increase if the amount of the
allowed unsecured claims exceeds $85 million. The number of shares
issued will be increased to a number equal to 10,000,000 multiplied by
the quotient of the total amount of the allowed unsecured claims divided
by $85 million. For purposes of the earnings per share computation,
the estimated amount of allowed claims, exclusive of the contingent
issuance for the holders of the FCI Notes, total $111.7 million.
(2) In accordance with the terms of the Plans, Fairfield has reserved, but
not issued, 588,235 shares of Common Stock for the benefit of the holders
of the FCI Notes in the event the proceeds from the sale of the
collateral securing the FCI Notes, or the value of any such collateral
not sold, is not sufficient to repay the FCI Notes. <PAGE>
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 preconfirmation periods is, therefore, neither comparable
nor meaningful and is not disclosed herein.
SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21
The following is a list of the subsidiaries of Fairfield Communities,
Inc. as of February 28, 1994. Each subsidiary, some of which are inactive,
is wholly-owned by Fairfield or by a wholly-owned subsidiary of Fairfield,
unless otherwise indicated.
State of
Subsidiary Incorporation
---------- -------------
Fairfield Bay, Inc. Arkansas
Shirley Realty Company Arkansas
Fairfield Flagstaff Realty, Inc. Arizona
Fairfield Green Valley, Inc. Arizona
Fairfield Broadcasting, Inc. Arizona
Green Valley Water Company Arizona
Fairfield Mortgage Corporation of Arizona Arizona
Fairfield Glade, Inc. Tennessee
Fairfield Mortgage Corporation Arkansas
Fairfield Mortgage Acceptance Corporation Delaware
Fairfield Sunrise Village, Inc. Arizona
Turesco, Inc. Arizona
Fairfield Fort Valley, Inc. Arizona
Fairfield Mountains, Inc. North Carolina
Mountains Utility Company North Carolina
Fairfield Homes Construction Company Florida
Northeast Craven Utility Company North Carolina
Fairfield Sapphire Valley, Inc. North Carolina
Jackson Utility Company North Carolina
Intermont Properties, Inc. Delaware
Fairfield Properties, Inc. Arizona
Fairfield River Ridge, Inc. Florida
Harbour Ridge, Ltd.
(a limited partnership; 35.5.% interest)
Fairfield Equities, Inc. Delaware
Fairfield Acceptance Corporation Delaware
Fairfield Funding Corporation Delaware
Fairfield Pagosa Realty, Inc. Colorado
Fairfield Fort George, Inc. Florida
Fort George Country Club, Inc. Florida
Caribbean Real Property Company, Inc. Florida
Fairfield Communities Purchasing and Design, Inc. Tennessee
The Florida Companies Florida
Imperial Life Insurance Company Arkansas
Rock Island Land Corporation Florida
Sunset Hills Land Company of Lauderdale Lakes, Inc Florida
EXHIBIT 21 (continued)
State of
Subsidiary Incorporation
---------- -------------
Suntree Development Company Florida
St. Andrews Club Management Corporation Florida
St. Andrews Realty, Inc. Florida
Commercial Land Equity Corporation Florida
TFC Realty of Indiana, Inc. Florida
Fairfield St. Croix, Inc. Delaware
Sugar Island Associates, Ltd.
(a limited partnership; 25% interest)
Fairfield Virgin Islands, Inc. Delaware
Davis Beach Co.
(a limited partnership; 50% interest)
Fairfield Myrtle Beach, Inc. Delaware
Ventura Management, Inc. Delaware
First Federal Savings and Loan of Charlotte North Carolina
Carolina Financial Services Corporation North Carolina
First Residential Mortgage Group, Inc. North Carolina
Northbound, Ltd. North Carolina
North Carolina Financial Services Corporation North Carolina
University Financial Service Corporation North Carolina
Fairfield Resorts International, Ltd. Arkansas
(a limited partnership; 50% interest)
-----------------------
FAIRFIELD COMMUNITIES, INC.
10% SENIOR SUBORDINATED SECURED NOTES
OMBUDSMAN REPORT
FOR THE PERIOD ENDING
DECEMBER 31, 1993
PREPARED BY
HOULIHAN LOKEY HOWARD & ZUKIN
-------------------------
Date Prepared: February 11, 1994
INTRODUCTION
-------------
In connection with Houlihan Lokey Howard & Zukin's role
("Houlihan Lokey") as the official ombudsman ("Ombudsman") to the
Fairfield Communities, Inc. ("Fairfield" or the "Company") Senior
Subordinated Secured Noteholders ("Noteholders"), the following
is the quarterly report regarding the Noteholders' collateral for
the quarter ending December 31, 1993.
The Noteholders' collateral (the "Collateral") consists of all of
Fairfield's interest in its (i) Fairfield Pointe Alexis
development (excluding certain lots pledged as Collateral to the
First National Bank of Boston) located in Tarpon Springs, Florida
("Pointe Alexis"); (ii) Harbour Ridge joint venture in Stuart,
Florida ("Harbour Ridge"); (iii) Sugar Island joint venture in
St. Croix, U.S. Virgin Islands ("Sugar Island"); and (iv)
Harbour Golf Course at the Fairfield Harbour development in New
Bern, North Carolina ("Harbour Golf Course"). Noteholders
previously had a collateral interest in the Bald Mountain Golf
Course at the Fairfield Mountain Development ("Bald Mountain Golf
Course") until it was sold on February 9, 1993.
Pursuant to Fairfield's plan of reorganization, efforts are
underway to liquidate all of the Fairfield controlled Collateral
(Pointe Alexis) and to continue receipt of cash flow
distributions from Collateral consisting of Fairfield general and
limited partnership interests (Sugar Island and Harbour Ridge).
Fairfield also must maintain the Collateral it controls until the
liquidation process is complete.
Collateral proceeds during the quarter ended December 31, 1993
totaled approximately $2,172,033. The balances in the
Noteholders' Interest Payment Account and Development Account,
were $85,659 and $176,862, respectively, as of December 31, 1993.
During the quarter ended December 31, 1993, and pursuant to the
Ombudsman agreement, Houlihan Lokey inspected all of the
Noteholders' unsold Collateral. Generally speaking, the
Collateral remains in excellent condition and sales efforts are
proceeding as expected. A more detailed description of the due
diligence results is included in the narratives attached hereto.
This report will serve to more fully describe the Collateral as
well as to update the Noteholders with respect the both the
condition and expected cash flow of all of the remaining
Collateral.
POINTE ALEXIS
-------------
Fairfield Pointe Alexis is divided into two separate
developments, Pointe Alexis South and Pointe Alexis North
(Harbour Watch), both located in Tarpon Springs, Florida.
During our due diligence trip to Tarpon Springs, we met with the
general manager of Pointe Alexis as well as a senior officer from
Fairfield. Our discussion focused on the decision to develop
additional water-front lots and spur sales activity of interior
lots at Harbour Watch, and the development of an overall sales
strategy for Pointe Alexis South.
Pointe Alexis South is a Fairfield community master planned for
271 units. As of December 31, 1993, 148 had been sold, 3 were
built and waiting for sale, 55 were vacant lots with roads and
improvements installed, and 65 were raw land with no
improvements. The aggregate release price (the amount which must
be paid to Noteholders upon sale of each unit) for all the
remaining lots and developed units is $1,644,750 although some of
the interior lots may never yield any appreciable value.
Originally developed as a retirement community, Pointe Alexis has
both single- and multi-family product. As a result of
Fairfield's Chapter 11 filing and limited sales at Pointe Alexis,
however, the Company limited construction activity to projects in
progress and began marketing tracts of land in bulk to other
developers. This strategy will continue going forward. Lot
prices range from $12,000 to $20,000 but may be discounted if
large tracts of land are sold in bulk.
The community surrounding the development consists mostly of
lower income housing and access from the Tampa airport is poor;
however, some of the lots (especially the waterfront lots) do
have appeal. In addition, Pointe Alexis is one of the few
remaining sites in Florida where gulf-front properties can be
purchased at relatively inexpensive prices, and the Tarpon
Springs area does have a strong retirement community. A market
does exist for Pointe Alexis lots, albeit at significantly
discounted prices from historical levels. At the current sales
and release prices, the remaining land inventory will likely
liquidate over approximately three years as undeveloped lots are
sold in small to medium sized tracts to developers.
During the quarter ended December 31, 1993, at Pointe Alexis
South, Fairfield recorded 4 lot sales and 1 lot closing compared
to 2 lot sales and 1 lot closing during the quarter ended
December 31, 1992. Total revenues at Pointe Alexis South during
the fourth quarter ended December 31, 1993 totaled $30,000
compared to $20,000 revenue during the fourth quarter ended
December 31, 1992.
Harbour Watch shares the same location and access problems as
Pointe Alexis South, but has superior marketing characteristics
and collateral value. Harbour Watch is a gated community with
card-controlled access. From inception, it has been operated as
a lot sale development with no home building operations conducted
by Fairfield (in contrast to Pointe Alexis South). Lot prices
generally range from $50,000 for interior lots to $170,000 or
more for waterfront lots with docks. The master plan calls for
sales of 180 lots. As of December 31, 1993, 103 lots had been
sold, 45 more were developed with roads and available for sale
and 31 more lots were held as raw land. Of the 76 remaining
lots, the First National Bank of Boston has a first lien on 18
lots. The aggregate release price on the lots pledged as
Collateral to the Noteholders is $2,728,700. The above numbers
are provided to the Ombudsman by the Company for purposes of
monitoring the Collateral and preparing this report. In
connection with the preparation of the December 31, 1993 report,
the Company corrected certain numbers that it had prepared for
earlier reports. Houlihan Lokey has reviewed the nature of the
corrections, including a review of the Indenture, and concurs
with the Company's revised figures as reflected above.
During the later stages of Fairfield's Chapter 11 proceedings,
the Official Committee of Noteholders together with the
Bankruptcy Court approved a plan to reinvest certain of the lot
sale proceeds being held on behalf of the Noteholders for the
development of additional gulf front lots to spur sales volume.
In total, 14 lots were developed for an aggregate purchase price
of $185,366. The estimated cost to develop all of the remaining
lots (many of which are waterfront lots) is $636,371 which,
pursuant to the Indenture, must be funded by Collateral proceeds.
During our recent due diligence trip, we reviewed the development
cost estimates and expected selling prices of the undeveloped
lots. Based upon our review, and the success of the earlier lot
development project, we have approved the decision to develop the
remaining lots and have taken the necessary steps with the
Noteholder Indenture Trustee to provide the funding. We expect
that all development costs will be funded from Pointe Alexis lot
sales activity and that proceeds from the sale of the other
Collateral will continue to be distributed to the Noteholders.
During the quarter ended December 31, 1993, at Harbour Watch,
Fairfield recorded 1 lot sale and 3 lot closings, compared to 0
lot sales and 1 lot closing during the quarter ended December 31,
1992. Total revenues at Harbour Watch during the quarter ended
December 31, 1993 were $312,000 compared to $140,000 during the
quarter ended December 31, 1992.
Many of the homes which have been built are quite large and
expensive, particularly some of the waterfront homes. There is
an ongoing sales effort in place with a sales trailer at the
entrance to the community. During the quarter ending December
31, 1993 construction of several new homes continued, maintaining
the community's positive ambiance of ongoing activity. The time
estimate to sell the remaining land inventory is approximately
2.5 to 3.0 years.
Pointe Alexis South and Harbour Watch collectively had monthly
cash operating expenses of approximately $126,034 during the
quarter ended December 31, 1993, which, together with closing
costs and commissions, may be funded out of excess sale proceeds
(the sale price that is in excess of the release price).
As the Ombudsman, Houlihan Lokey will continue to monitor the
spread between the sales prices and release prices and its
relationship with operating expenses and closing costs. At its
discretion, Houlihan Lokey can instruct Fairfield to increase (up
to the levels in the December 31, 1989 Indenture) or decrease
release prices as appropriate. Given the slow sales activity,
Houlihan Lokey does not foresee increasing prices in the
immediate future.
------------------------------------
Houlihan Lokey Howard & Zukin
HARBOUR RIDGE
---------------
Harbour Ridge is a for-sale luxury recreational community located
on a beautiful stretch of land fronting on the St. Lucie River
approximately one hour from the West Palm Beach Airport in
Stuart, Florida. The Collateral interest entitles Noteholders to
35.5 percent of the net partnership cash flow. The community is
a high-end luxury community with a strong seasonal element, as
opposed to year-round residence, with prices ranging from
approximately $175,000 to approximately $1 million. Primary
emphasis is on a golf and clubhouse lifestyle, with a secondary
emphasis on boating. There are also boat slips for sale ranging
in price from $20,000 to $40,000.
The managing general partner of Harbour Ridge is Harbour Ridge,
Inc., the principals of which have years of experience and
success in the business which are clearly expressed in the
competent and professional look and feel of the project. The
homes are attractively designed and appear well built. The
clubhouse also is attractively designed and is surrounded by two
golf courses, one designed by Joe Lee and the other by Pete Dye.
During our recent trip to Port St. Lucie we met with the managing
general partner and toured the undeveloped lot sites. The
project is proceeding as planned and, at current sales activity,
could be concluded as early as mid-1995.
During the quarter ending December 31, 1993, 4 units were sold,
leaving approximately 52 more units to be sold. The total number
of available units was reduced by 7 units as a result of the
managing general partner's decision to develop 9 patio homes
instead of 16 apartments as specified in the original master
plan. A total of 644 units have been sold since the inception of
the project. Although many of the choicest sites have been
previously sold, there remains an excellent cross section and mix
of single-family/multi-family, waterfront/non-waterfront
properties with varying prices.
Sale of the remaining project inventory will likely take between
two and three years for sell-out. The Noteholders received no
distribution from Harbor Ridge during the quarter ending December
31, 1993. Current projections indicate that an additional $1.7
to $2.7 million of cash flow should be generated for the
Noteholders.
------------------------------
Houlihan Lokey Howard & Zukin
SUGAR ISLAND
------------
The Sugar Island Partnership (the "Partnership") was formed
during 1984 to purchase approximately 4,091 acres of land located
on the island of St. Croix, Territory of the Virgin Islands of
the United States. The Partnership paid $10 million for the
property. At the time of the purchase, the property was
undeveloped except for the 166-acre Fountain Valley Golf Course
(renamed Carambola Golf Club) designed by Robert Trent Jones.
Fairfield's interest in the Partnership entitles it to 30 percent
of the total net cash flow distributed.
To date, the Partnership has sold 883 acres of the property in
two separate transactions. During 1986, the Partnership sold 855
acres of the inland property to Danested Associates ("Danested")
for an aggregate purchase price of $10.7 million. Danested has
developed condominiums and vacant lots designated for single-
family homes on the property. Also during 1986, the Partnership
sold 28.5 acres of waterfront land to the Davis Beach Company for
approximately $2.5 million for use in the development of the 157-
unit Carambola Beach Resort (not included in the Collateral).
Danested had entered into an option to purchase approximately
1,069 additional acres of land for $12.0 million, but the option
expired unexercised on March 31, 1991. The land that was under
option to Danested is located in the central part of the island.
It is mostly flat and easily developed but for the most part has
no direct ocean views. Danested also had an option to purchase
the Carambola Golf Club (the "Golf Club") for $7.5 million which
expired unexercised on March 31, 1993.
The remaining parcel of 2,139 acres is arguably some of the most
beautiful land on St. Croix. The terrain is mountainous and
covered with dense foliage. Most of the property has ocean
views. The coastal portions are set in a series of coves ideal
for development but currently there are no significant natural
beaches and very limited road access. Development of the
property will be difficult and expensive, limiting the number of
potential buyers. The Partnership has indicated that it is
considering selling small sections of land or even individual
lots, if possible. The cost of holding the property is
relatively low. The Partnership leases the land to local farmers
which results in a 95 percent property tax exemption.
The Carambola Beach Resort (the "Resort") is a five-star
development and was completely rebuilt following hurricane Hugo
in 1990. As a result of decreasing tourism and occupancy rates,
however, the senior Resort lenders decided to foreclose on the
hotel property and shut down hotel operations during June 1991.
The Resort remained closed until an investment group, operating
through a Radisson Hotel International franchise agreement,
------------------------------
Houlihan Lokey Howard & Zukin
purchased the property on June 8, 1993. The resort has now
resumed full operations and is operating at an occupancy rate of
approximately 40%. Resort management indicated that low
occupancy rates were expected during the resorts first year of
operations and that it was pleased with the results.
--------------------------------
Houlihan Lokey Howard & Zukin
---------------------------------
Although the buyer of the Resort has indicated that it has no
interest in purchasing the Golf Club at this time, increased play
since the Resort opened has increased cash flow at the Golf Club
to approximately $200,000 on an annualized basis, some of which
may be used to make a distribution to the Sugar Island partners.
During our recent trip to St. Croix, we met with the managing
general partner of the Partnership and conducted an inspection of
the property. The golf course is in good condition and, as
previously mentioned, is operating with a positive cash flow. As
expected, the undeveloped raw acreage is unchanged. Although
some inquiries have been received regarding the property, no
meaningful discussions have materialized.
From a Collateral value perspective, Sugar Island should generate
cash flow for the Noteholders, although the magnitude and the
time frame over which the cash flow will be realized are
difficult to determine. The Golf Club will likely be sold (or
leased on a long-term basis) within the next one or two years,
but the undeveloped land acreage could take several years to
sell.
-------------------------------
Houlihan Lokey Howard & Zukin
BALD MOUNTAIN GOLF COURSE
--------------------------
The Bald Mountain Golf Course is one of two golf courses located
at the Fairfield Mountains development in Rutherford County,
North Carolina. The 18-hole, par 72, 6,689 yard Bald Mountain
Golf Course was designed by William B. Lewis and sits on
approximately 115 acres, with bermuda grass tees and fairways,
bent grass greens, 28 sand traps and 10 water hazards. The Bald
Mountain Golf Course is located behind a gated entrance and
attracts almost exclusively Fairfield residents and timeshare
owners.
On February 9, 1993, Fairfield completed the sale of the Bald
Mountain Golf Course to the Fairfield Mountains Development
Property Owners Association (the "Mountain POA") for net cash
proceeds of $1,787,519.74.
In addition to the sale proceeds, the Mountains POA withdrew
various claims alleging its rights to golf course ownership.
-----------------------------------
Houlihan Lokey Howard & Zukin
HARBOUR GOLF COURSE
---------------------
The Harbour Golf Course is one of two golf courses located at the
Fairfield Harbour development in New Bern, North Carolina. The
18-hole, par 72, 6,600-yard Harbour Golf Course was designed by
Dominic Palumbo and is located on approximately 188 acres with
narrow sloping fairways, a site-wide canal system, 77 sand traps
and 3 lakes. The course does not allow access to the general
public .
On October 8, 1993, Fairfield completed the sale of the Harbour
Golf Course to the Fairfield Harbour Property Owners' Association
for net cash proceeds of $1,947,948.26. Subsequently, an
additional $22,800 was received in connection with the release of
certain contingent closing costs.
------------------------------
Houlihan Lokey Howard & Zukin
