SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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 definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to 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 of securities 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: Parts I, II and III of this Form 10-K
incorporate certain information by reference from the registrant's Annual
Report to Stockholders for the year ended December 31, 1993 and 1993 Proxy
Statement issued in connection with its Annual Meeting of Stockholders to be
held June 1, 1994.
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............................... 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................. 38
Item 13. Certain Relationships and Related Transactions....... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 38
-2-
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
---------------------------------------
GENERAL
Fairfield Communities, Inc. was incorporated in Delaware in 1969, and <PAGE>
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 restructure its operations to
focus on the marketing and sales of VOIs, a letter of intent to sell First
Federal was signed by Fairfield on December 15, 1993. In anticipation of
the divestiture of First Federal, the savings association has been
accounted for as a discontinued operation and, accordingly, the
consolidated financial statements have been restated to retroactively
reflect, as discontinued operations, the respective assets and liabilities
sold and the results of operations related thereto.
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 38% 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 are secured by and payable from a pool of approximately $91.8
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 last year. 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
---------------------
In December 1993, Fairfield entered into a letter of intent (the
"Letter of Intent") to sell the stock (the "Sale") of its wholly owned
subsidiary, First Federal Savings and Loan Association of Charlotte
("First Federal"), to Security Capital Bancorp ("SecCap"). The term of
the Letter of Intent has been extended on successive occasions, with the
current extension running through March 28, 1994. SecCap and Fairfield
have undertaken the preparation and negotiation of definitive agreements
setting forth the terms of the Sale, but these agreements have not yet
been finalized or signed by the parties. The following discussion of the
terms of the Sale is based on the terms of the Letter of Intent, but
reflects changes and supplemental information, as a result of negotiations
with SecCap concerning the terms of the definitive agreements.
The purchase price, which is to be paid in cash, is approximately
$40.3 million, adjusted for earnings of First Federal from October 1, 1993
through the date of closing, less $1.25 million (the "Purchase Price").
At September 30, 1993, First Federal's consolidated book value was $27.4
million. The amount of First Federal's net earnings for the period from
October 1, 1993 through December 31, 1993 was approximately $1.2 million.
Up to approximately $1.4 million of the Purchase Price is to be retained
by SecCap to securitize Fairfield's obligation to indemnify SecCap 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 of certain real estate,
classified loans, joint venture interests and other assets owned by First
Federal (the "Excluded Assets"), subject to the right of SecCap to elect
for First Federal to retain all or part of such assets, and (b) lot and
timeshare contracts receivable and related assets which First Federal
previously acquired from Fairfield (the "Contracts Receivable"), having a
book value less certain negotiated reserves, and a weighted average yield,
at December 31, 1993, of approximately $53.3 million and 11.6%,
respectively. Approximately $2.9 million in net book value of the
Excluded Assets are to be pledged to SecCap, to provide additional
security with respect to both the Litigation Indemnity and the general
indemnities under the purchase agreement. Fairfield has certain rights to
substitute collateral in connection with such securitization, including
the right to substitute $0.60 to $0.70 of cash for every $1.00 of net book
value of Excluded Assets so pledged.
Fairfield expects to utilize (a) a portion of the Purchase Price to
fund the purchase of the Excluded Assets and (b) the remaining Purchase
Price, plus proceeds from borrowings under its revolving credit agreements
with The First National Bank of Boston ("FNBB"), to fund the purchase of
the Contracts Receivable. Under Fairfield'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.
Fairfield expects to dispose of certain of the Excluded Assets in one
or more transactions, and otherwise to monetize the remaining Excluded
Assets, following the closing of the sale of First Federal. Any gain
resulting from the sale of First Federal may be reduced by additional
write-downs of these assets, which may be material, depending upon
Fairfield's intended method of disposing of, or monetizing, the Excluded
Assets.
The Sale is subject to numerous conditions, including (a) the
negotiation and signature of definitive agreements providing for the Sale,
(b) the approval of the Sale by SecCap's Board of Directors and (c) 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. The sale is not expected to close before June 1994.
-6-
First Federal, which previously constituted a separate reporting
segment, has been accounted for as a discontinued operation and,
accordingly, the consolidated financial statements have been restated to
retroactively reflect, as discontinued operations, the respective assets
and liabilities sold and the results of operations related thereto.
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 liabilities of discontinued operations at
December 31, 1993, were paid off in conjunction with the sale of the
Arizona Subsidiaries.
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.
-7-
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 Months 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
authority to bring actions against all "institution-affiliated parties,"
which includes directors, officers, employees or controlling
-27-
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.
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
-30-
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.
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
-31-
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
(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.
-32-
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.
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
-33-
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
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
-34-
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
-----------------
The information required by Item 3 is incorporated herein by
reference to Note 9 - Stockholders' Equity and Note 13 -
Contingencies of "Notes to Consolidated Financial Statements"
included in the Registrant's Annual Report to Stockholders for the
year ended December 31, 1993.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of stockholders during the
fourth quarter of 1993.
Executive Officers of the Registrant
- ------------------------------------
The following is a listing of the executive officers of Fairfield, none
of whom has a family relationship with directors or other executive officers:
John W. McConnell, age 52, President and Chief Executive
Officer since 1991; President and Chief Operating Officer from 1990
to 1991; Senior Vice-President and Chief Financial Officer from
1986 to 1990.
Morris E. Meacham, age 55, Executive Vice President since
1990; Senior Vice President and Chief Operating Officer of Leisure
Products Group from 1986 to 1990. Effective January 1, 1994, Mr.
Meacham entered into a new Employment Agreement as Vice President
of Special Projects.
Marcel J. Dumeny, age 43, Senior Vice President and General
Counsel since 1989; Senior Vice President/Law and Development from
1987 to 1989.
Clay G. Gring, Sr., age 62, Senior Vice President/Leisure
Products Group since September 1991. Self-employed from 1984 to
September 1991 specializing in the development and management of
real estate properties, including resort communities and
hospitality related properties.
Robert W. Howeth, age 46, Senior Vice President and Treasurer
since October 1992; Senior Vice President/Planning and
Administration from 1990 to October 1992; Vice President and
Treasurer from 1988 to 1990.
Joe T. Gunter, age 52, Senior Vice President, General
Counsel/Leisure Products Group since 1989; Senior Vice President
and Special Counsel from 1984 to 1989.
Robert T. Waugh, age 63, President of First Federal Savings
and Loan Association of Charlotte, a wholly owned subsidiary of
Fairfield, since 1972.
William G. Sell, age 40, Vice President/Controller and Chief
Accounting Officer since 1988.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
------------------------------------------------
STOCKHOLDER MATTERS
-------------------
Pursuant to the Plans, all of the outstanding Common Stock of
Predecessor Fairfield was cancelled effective September 1, 1992.
As of March 18, 1994, the outstanding number
-36-
of shares of Fairfield's Common Stock totaled 9,792,601, of which 160,001
shares were held by wholly owned subsidiaries. In accordance with the
Plans, 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 is incorporated herein by
reference to the table titled Selected Financial Data included
in the Registrant's Annual Report to Stockholders for the year
ended December 31, 1993.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Information required by Item 7 is incorporated herein by
reference to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the
Registrant's Annual Report to Stockholders for the year ended
December 31, 1993.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Financial statements and supplementary data required by Item 8
are set forth below in Item 14(a), Index to Financial Statements.
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
---------------------------
This item is incorporated herein by reference to Registrant's
Proxy Statement for its annual meeting of stockholders to be held
June 1, 1994.
-37-
(b) Identification of Executive Officers
------------------------------------
In accordance with Regulation S-K Item 401(b), Instruction 3,
the information required by Item 10(b) concerning the Company'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
-------------------------------------------------
This item is incorporated by reference to Registrant's Proxy
Statement for its annual meeting of stockholders to be held June 1,
1994.
Item 11. EXECUTIVE COMPENSATION
----------------------
This item is incorporated by reference to Registrant's Proxy
Statement for its annual meeting of stockholders to be held June 1,
1994.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
This item is incorporated by reference to Registrant's Proxy
Statement for its annual meeting of stockholders to be held June 1,
1994.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
This item is incorporated by reference to Registrant's Proxy
Statement for its annual meeting of stockholders to be held June 1,
1994.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)(1) Index to Financial Statements:
------------------------------
The following consolidated financial statements and Report
of Ernst & Young, Independent Auditors, included in the
Registrant's Annual Report to Stockholders for
the year ended December 31, 1993 are incorporated herein by
reference:
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 Ended June 30, 1992 and 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
-38-
(2) The following financial statements schedules should be read in
conjunction with the consolidated financial statements included in
the Registrant's Annual Report to Stockholders for the year ended
December 31, 1993:
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.
(3) Exhibits required by this item are listed on the Exhibit Index
attached to this report and hereby incorporated by reference.
(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 attached to this Report is
hereby incorporated by reference.
(d) Financial Statements Schedules
------------------------------
Following are the schedules as referenced in the
Index to Financial Statements included in Item 14(a)
above.
-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)
Provision for income taxes 3,600 695
Equity in undistributed
earnings of subsidiaries:
Continuing operations 13,593 5,383
Discontinued operations (140) 131
------- -------
Net earnings $ 7,170 $ 1,249
======= =======
</TABLE>
-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>
-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 $13,284 $3,252 $(5,544)(a) $10,992
======= ====== ======== ======
Six Months Ended December 31, 1992
Deducted from asset accounts:
Allowance for loan losses $13,868 $1,253 $(1,837)(a) $13,284
======= ====== ======== ========
- ----------------------------------------------------------------------------
Six Months Ended June 30, 1992
Deducted from asset accounts:
Allowance for loan losses $15,214 $1,166 $(2,512)(a) $13,868
======= ====== ======== =======
Year Ended December 31, 1991
Deducted from asset accounts:
Allowance for loan losses $17,969 $4,367 $(7,122)(a) $15,214
======= ====== ======== ========
</TABLE>
(a) Uncollectible loans receivable written-off, net of recoveries.
-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.
-43-
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 and (Chief
Accounting Officer)
-44-
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)
-45-
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)
-46-
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)
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)
-47-
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)
13 Selected Financial Data; Management's Discussion and
---------------------------------------------------
Analysis of Financial Condition and Results of Operations;
---------------------------------------------------------
Report of Ernst & Young, Independent Auditors; Consolidated
Balance Sheets; Consolidated Statements of Operations;
Consolidated Statements of Cash Flows and Notes to
Consolidated Financial Statements included in the Registrant's
Annual Report to Stockholders for the year ended
December 31, 1993 (attached)
21 Subsidiaries of the Registrant (attached)
23 Consent of Independent Auditors (attached)
28 Ombudsman Report for the period ending December 31,
1993 related to the Registrant's Senior Subordinated
Secured Notes (attached)
-48-
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
========== ========== ========== ==========
Earnings (loss):
Continuing operations $7,310,000 $7,310,000 $1,118,000 $1,118,000
Discontinued operations (140,000) (140,000) 131,000 131,000
---------- ---------- ---------- ----------
Net earnings $7,170,000 $7,170,000 $1,249,000 $1,249,000
========== ========== ========== ==========
Earnings per share:
Earnings from continuing
operations $.66 $.63 $.10 $.10
==== ==== ==== ====
Net earnings $.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, totals $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.
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 pre-confirmation periods is, therefore, neither comparable
nor meaningful and is not disclosed herein. <PAGE>
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, Year Ended December 31,
1993 1992 | 1992 1991 1990 1989
<S> <C> <C> | <C> <C> <C> <C>
OPERATING DATA |
Revenues: |
Vacation ownership, |
net $34,332 $15,255 | $13,558 $ 34,098 $ 75,859 $ 99,510
Homes and lots, |
net 12,073 5,010 | 4,513 14,226 26,136 41,287
Property |
management 10,876 5,145 | 4,756 8,056 10,123 11,085
Interest 24,089 14,670 | 16,089 37,294 40,790 40,372
Other 9,596 3,756 | 7,148 7,668 13,243 28,282
------- ------ | ------ ------- ------- -------
$90,966 $43,836 | $46,064 $101,342 $166,151 $220,536
======= ======= | ======= ======== ======== ========
Earnings (loss): |
Continuing |
operations $ 7,310 $ 1,118 |$(13,754) $(27,236)$(49,277)$ (222)
Discontinued |
operations (140) 131 | (6,068) (8,038) (39,182)(24,547)(1)
Extraordinary |
credit (2) - - | 125,895 - - -
------- ------- |-------- -------- -------- --------
Net earnings |
(loss) $ 7,170 $ 1,249 |$106,073 $(35,274)$(88,459)$(24,769)
======== ======= |======== ======== ======== ========
EARNINGS PER SHARE |
Primary: |
Earnings from continuing |
operations $.66 $.10 | * * * *
==== ==== |
Net earnings $.65 $.11 | * * * *
==== ==== |
Fully diluted: |
Earnings from continuing |
operations $.63 $.10 | * * * *
==== ==== |
Net earnings $.61 $.11 | * * * *
==== ==== |
</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 $208,504 | $268,041 $306,611 $316,727
Total assets 246,112 291,182 | 360,277 432,077 472,352
Total financing |
arrangements 127,351 145,685 | 29,546 34,967 205,698
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: Prior period amounts have been restated to reflect certain assets,
liabilities and operating results of First Federal into discontinued
operations (see Note 2 of "Notes to Consolidated Financial Statements").
Effective June 30, 1992, the Company implemented "Fresh Start Reporting"
in connection with confirmation of the plans of reorganization. No
dividends have been paid during the previous five years. See Notes 9
and 13 of "Notes to Consolidated Financial Statements" for discussion
of the Company's reorganization and contingencies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
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.
Under Fresh Start Reporting, the fair value of the Company's
assets and liabilities which remain in continuing operations
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%.
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 $24.1 million, $30.8 million and $37.3
million for 1993, Combined 1992 and 1991, respectively. These
decreases are primarily attributable to lower average balances of
outstanding contracts receivable ($177.4 million for 1993, $223.8
million for Combined 1992 and $268.6 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.
DISCONTINUED OPERATIONS - FIRST FEDERAL
In December 1993, Fairfield entered into a letter of intent (the "Letter
of Intent") to sell the stock (the "Sale") of its wholly owned subsidiary,
First Federal Savings and Loan Association of Charlotte ("First Federal"), to
Security Capital Bancorp ("SecCap"). The term of the Letter of Intent has
been extended on successive occasions, with the current extension running
through March 28, 1994. SecCap and Fairfield have undertaken the preparation
and negotiation of definitive agreements setting forth the terms of the Sale,
but these agreements have not yet been finalized or signed by the parties.
The following discussion of the terms of the Sale is based on the terms of
the Letter of Intent, but reflects changes and supplemental information, as a
result of negotiations with SecCap concerning the terms of the definitive
agreements.
The purchase price, which is to be paid in cash, is approximately $40.3
million, adjusted for earnings of First Federal from October 1, 1993 through
the date of closing, less $1.25 million (the "Purchase Price"). At September
30, 1993, First Federal's consolidated book value was $27.4 million. The amount
of First Federal's net earnings for the period from October 1, 1993 through
December 31, 1993 was approximately $1.2 million. Up to approximately $1.4
million of the Purchase Price is to be retained by SecCap to securitize
Fairfield's obligation to indemnify SecCap 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
of certain real estate, classified loans, joint venture interests and other
assets owned by First Federal (the "Excluded Assets"), subject to the right
of SecCap to elect for First Federal to retain all or part of such assets, and
(b) lot and timeshare contracts receivable and related assets which First
Federal previously acquired from Fairfield (the "Contracts Receivable"), having
a book value less certain negotiated reserves, and a weighted average yield,
at December 31, 1993, of approximately $53.3 million and 11.6%, respectively.
Approximately $2.9 million in net book value of the Excluded Assets are to be
pledged to SecCap, to provide additional security with respect to both the
Litigation Indemnity and the general indemnities under the purchase agreement.
Fairfield has certain rights to substitute collateral in connection with such
securitization, including the right to substitute $0.60 to $0.70 of cash for
every $1.00 of net book value of Excluded Assets so pledged.
Fairfield expects to utilize (a) a portion of the Purchase Price to fund
the purchase of the Excluded Assets and (b) the remaining Purchase Price, plus
proceeds from borrowings under its revolving credit agreements with The First
National Bank of Boston ("FNBB"), to fund the purchase of the Contracts
Receivable. Under Fairfield'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.
Fairfield expects to dispose of certain of the Excluded Assets in one or
more transactions, and otherwise to monetize the remaining Excluded Assets,
following the closing of the sale of First Federal. Any gain resulting from
the sale of First Federal may be reduced by additional write-downs of these
assets, which may be material, depending upon Fairfield's intended method
of disposing of, or monetizing, the Excluded Assets.
The Sale is subject to numerous conditions, including (a) the negotiation
and signature of definitive agreements providing for the Sale, (b) the approval
of the Sale by SecCap's Board of Directors and (c) 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. The sale is not expected to
close before June 1994.
First Federal, which previously constituted a separate reporting
segment, has been accounted for as a discontinued operation and,
accordingly, the consolidated financial statements have been restated
to retroactively reflect, as discontinued operations, the respective
assets and liabilities sold and the results of operations related
thereto.
The following discussion of First Federal's results of
discontinued 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 $15,805 $21,896 $28,208
Interest expense as reported 10,478 14,237 22,402
Fresh start amortization, net 804 (494) -
------- ------- -------
Net interest income, as
adjusted $ 6,131 $ 7,165 $ 5,806
======= ======= =======
Net yield on interest-
earning assets 2.46% 2.70% 1.96%
Average yield on interest-
earning assets 7.43% 8.73% 9.50%
Effect of change in yield
on interest income $(2,329) $(2,256)
Average amount of interest-
earning assets $249,142 $265,481 $296,802
Effect of change in amount
on interest income $(2,340) $(2,781)
Average rate on interest-
bearing liabilities 4.84% 5.88% 7.47%
Effect of change in rate
on interest expense $(2,464) $(4,070)
Average amount of interest-
bearing liabilities $255,709 $272,227 $300,074
Effect of change in amount
on interest expense $(1,171) $(2,326)
</TABLE>
As compared to Combined 1992, average interest-earning assets
decreased $16.3 million in 1993. The reduction in interest-earning
assets is reflective of a $29.3 million decrease in mortgage loans
receivable which was partially offset by a $12.6 million increase in
interest-bearing deposits and investment and mortgage-backed
securities. In 1993, mortgage loans have been affected by significant
increases in prepayments associated with a decrease in prevailing
mortgage rates and First Federal's current policy of selling 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. Interest-bearing liabilities decreased in 1993
by $16.5 million due to a decrease in certificates of deposit totaling
$21.7 million, which was partially offset by a $5.2 million increase
in noncertificate accounts.
Interest-earning assets decreased $31.3 million in Combined 1992
as compared to 1991 which is attributable primarily to (i) a $20
million decrease in mortgage loans receivable and (ii) a $10.2 million
decrease in interest-bearing deposits. Interest-bearing liabilities
decreased $27.8 million due to a decrease in certificates of deposit
totaling $37.9 million, which was 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
Interest expense totaled $14.4 million, $21.5 million, and $29.6
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 ($191.8 million for
1993, $230.5 for Combined 1992 and $264.9 million for 1991), resulting
primarily from asset sales and the conveyance of collateral in lieu of
foreclosure. In addition, interest expense included fees totaling $.6
million and $1.4 million in Combined 1992 and 1991, respectively,
related to the Predecessor Company's reorganization credit facility.
PROVISION FOR INCOME TAXES
As of June 30, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
issued by the Financial Accounting Standards Board. In accordance
with SFAS 109, a deferred tax asset or liability is recognized based
on the estimated future tax effects attributable to temporary
differences and carryforwards. The measurement of deferred tax assets
is reduced, if necessary, by a valuation allowance for the amount of
any tax 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 $45.1 million
from December 31, 1992 to December 31, 1993. This decrease is
primarily attributable to a $42.9 million decrease in loans receivable
resulting primarily from principal payments exceeding origination of
new receivables. 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 Company's relatively high turnover rate in
homes, 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 from $24.8
million at December 31, 1992 to $4.5 million at December 31, 1993.
During 1993, the Company 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 $38.2 million of loan originations. Using
available cash and proceeds from the restructuring of the Company's
debt as described below, the Company used cash (i) to reduce the
outstanding balances of its financing arrangements by $35 million and
(ii) to establish restricted cash accounts totaling $9.3 million
relating to Fairfield Funding Corporation's private placement as
described below. In addition, the Company's cash decreased due to
decreases in other liabilities of $9.1 million, which was partially
offset by increases 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 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 are secured by and payable from a pool of
$91.8 million of contracts receivable purchased from FAC pursuant to
the Receivables Purchase Agreement (the "Agreement") among Fairfield
as originator, FAC, as seller and FFC, as purchaser. Net proceeds
were applied to reduce existing indebtedness, which included repayment
of $54.3 million under FAC's previous revolving credit agreement and
$12.8 million, including interest, of FAC's 16% 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.
Discontinued Operations - First Federal
---------------------------------------
The Company has included the operations of First Federal in
continuing or discontinued operations based on the respective assets
and liabilities to be retained or sold as previously described. 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 cash flow
therefrom will be that of the Company. The following cash flow data
reflects the total cash flow from First Federal's operations.
Cash from operations for First Federal totaled $9.4 million. Cash
provided from 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 - Other
-------------------------------
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 liabilities of discontinued
operations at December 31, 1993, were paid off in conjunction with the
sale of the Arizona Subsidiaries.
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. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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.
ERNST & YOUNG
Little Rock, Arkansas
March 11, 1994
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
December 31,
1993 1992
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,475 $ 24,835
Loans receivable, net 165,575 208,504
Real estate inventories 34,607 30,658
Property and equipment, net 7,527 8,566
Other assets 33,928 18,619
-------- --------
$246,112 $291,182
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Financing arrangements $127,351 $145,685
Deferred revenue 20,599 20,052
Other liabilities 36,192 45,765
Net liabilities of discontinued operations 14,822 42,718
-------- --------
198,964 254,220
-------- --------
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
-------- --------
$246,112 $291,182
======== ========
</TABLE>
See notes to consolidated financial statements.
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 24,089 14,670 | 16,089 37,294
Other 9,596 3,756 | 7,148 7,668
------- ------- | -------- --------
90,966 43,836 | 46,064 101,342
------- ------- | -------- --------
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 3,252 1,253 | 1,166 4,367
Selling 21,850 9,262 | 8,285 21,373
Property management 11,057 4,893 | 4,710 8,655
General and administrative 9,836 6,317 | 6,771 16,403
Interest 14,449 9,984 | 11,559 29,644
Other 4,458 3,326 | 6,770 8,168
------- ------- | ------- --------
80,056 42,023 | 45,654 108,591
------- ------- | ------- --------
Earnings (loss) from continuing |
operations before reorganization |
expenses 10,910 1,813 | 410 (7,249)
Reorganization expenses - - | 14,010 19,884
------- ------- | ------- --------
Earnings (loss) from continuing |
operations before provision |
for income taxes 10,910 1,813 | (13,600) (27,133)
Provision for income taxes 3,600 695 | 154 103
------- -------- | --------- ---------
Earnings (loss) from |
continuing operations 7,310 1,118 | (13,754) (27,236)
Earnings (loss) from |
discontinued operations, |
net of income tax benefits (140) 131 | (6,068) (8,038)
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 $.66 $.10 | * *
==== ==== |
Net earnings $.65 $.11 | * *
==== ==== |
Fully diluted: |
Earnings from continuing |
operations $.63 $.10 | * *
==== ==== |
Net earnings $.61 $.11 | * *
==== ==== |
</TABLE>
*Per share amounts are neither comparable nor meaningful due to reorganization.
See notes to consolidated financial statements.
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.
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 $ 7,310 $ 1,118 | $(13,754) $(27,236)
Adjustments to reconcile |
net earnings (loss) to |
net cash (used in) provided by |
continuing operations: |
Depreciation and |
amortization 1,127 946 | 1,073 2,985
Provision for loan losses 3,252 1,253 | 1,166 4,367
(Earnings) loss from |
unconsolidated affiliates (1,995) - | - 100
------- ------- | -------- -------
Changes in operating assets |
and liabilities, net: |
Restricted cash accounts (9,278) 742 | 123 346
Other (6,660) 2,881 | 19,155 26,458
------- ------- | -------- -------
Net cash (used in) provided |
by operating activities (6,244) 6,940 | 7,763 7,020
------- ------- | -------- --------
|
INVESTING ACTIVITIES: |
Net (purchases) proceeds from sales |
of property and equipment (768) 81 | (738) 63
Principal collections |
on loans 76,826 42,600 | 37,119 61,215
Loans originated |
or acquired (38,242) (11,992) | (10,557) (27,098)
Net cash received from |
unconsolidated affiliates 2,364 1,091 | 379 2,144
Net investment activities of |
discontinued operations (19,262) (14,245) | (16,761) (39,584)
-------- -------- | ------- --------
Net cash provided by (used in) |
investing activities 20,918 17,535 | 9,442 (3,260)
-------- ------- | -------- --------
|
FINANCING ACTIVITIES: |
Proceeds from financing |
arrangements 129,797 664 | 68,855 130,562
Repayments of financing |
arrangements (164,831) (12,062) | (82,439) (138,160)
--------- -------- | -------- ---------
Net cash used in financing |
activities (35,034) (11,398) | (13,584) (7,598)
-------- -------- | -------- --------
Net increase (decrease) in cash |
and cash equivalents (20,360) 13,077 | 3,621 (3,838)
Cash and cash equivalents, |
beginning of period 24,835 11,758 | 8,137 11,975
-------- -------- | -------- ---------
Cash and cash equivalents, |
end of period $ 4,475 $ 24,835 | $ 11,758 $ 8,137
========= ======== | ======== =========
</TABLE>
See notes to consolidated financial statements.
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of Fairfield
Communities, Inc. and its subsidiaries. Significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts in the
consolidated financial statements of prior years have been reclassified to
conform to the 1993 presentation.
Fresh Start Reporting
- ---------------------
In 1990, Fairfield Communities, Inc. and twelve wholly owned subsidiaries
filed voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code. On August 14, 1992, the Bankruptcy Court confirmed
the Seventh Amended and Restated Joint Plans of Reorganization and the Second
Amended and Restated Joint Plans of Reorganization (collectively, the
"Plans").
Unless the context requires otherwise, "Fairfield" means Fairfield
Communities, Inc., and is successor and survivor of the mergers pursuant to
the Plans, "Company" means Fairfield Communities, Inc. and its subsidiaries,
"Predecessor Fairfield" means Fairfield prior to the reorganization and
"Predecessor Company" means Fairfield and its subsidiaries prior to the
reorganization.
The Company has implemented, as of June 30, 1992, the recommended
accounting for entities emerging from reorganization set forth in Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7") issued by the American Institute of Certified
Public Accountants ("Fresh Start Reporting"). Accordingly, the Company's
assets and liabilities were adjusted to reflect their estimated fair values
and the accumulated retained deficit was eliminated. Accordingly, since July
1, 1992, the Company's financial statements have been prepared as if it were a
new reporting entity and a black line separates this financial information
from that of the Predecessor Company since it has not been prepared on a
comparable basis.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
----------------------
Property and equipment are recorded at cost and depreciated
primarily by the straight-line method based on the estimated
useful lives of the assets, ranging from 10 years to 30 years for
buildings and from 2 to 6 years for machinery, fixtures and
equipment. Additions and improvements are capitalized while
maintenance and repairs are expensed as incurred. Asset and
accumulated depreciation accounts are relieved for dispositions
with resulting gains or losses reflected in operations.
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 contingently
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.
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,
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 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.
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.
NOTE 2 - FIRST FEDERAL
----------------------
In December 1993, Fairfield entered into a letter of intent (the "Letter
of Intent") to sell the stock (the "Sale") of its wholly owned subsidiary,
First Federal Savings and Loan Associaiton of Charlotte ("First Federal"), to
Security Capital Bancorp ("SecCap"). The term of the Letter of Intent has
been extended on successive occasions, with the current extension running
through March 28, 1994. SecCap and Fairfield have undertaken the preparation
and negotiation of definitive agreements setting forth the terms of the Sale,
but these agreements have not yet been finalized or signed by the parties. The
following discussion of the terms of the Sale is based on the terms of the
Letter of Intent, but reflects changes and supplemental information, as a
result of negotiations with SecCap concerning the terms of the definitive
agreements.
The purchase price, which is to be paid in cash, is approximately $40.3
million, adjusted for earnings of First Federal from October 1, 1993 through
the date of closing, less $1.25 million (the "Purchase Price"). At September 30,
1993, First Federal's consolidated book value was $27.4 million. The amount
of First Federal's net earnings for the period from October 1, 1993 through
December 31, 1993 was approximately $1.2 million. Up to approximately $1.4
million of the Purchase Price is to be retained by SecCap to securitize
Fairfield's obligation to indemnify SecCap 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
of certain real estate, classified loans, joint venture interests and other
assets owned by First Federal (the "Excluded Assets"), subject to the right
of SecCap to elect for First Federal to retain all or part of such assets,
and (b) lot and timeshare contracts receivable and related assets which
First Federal previously acquired from Fairfield (the "Contracts Receivable"),
having a book value less certain negotiated reserves, and a weighted average
yield, at December 31, 1993, of approximately $53.3 million and 11.6%,
respectively. Approximately $2.9 million in net book value of the Excluded
Assets are to be pledged to SecCap, to provide additional security with respect
to both the Litigation Indemnity and the general indemnities under the purchase
agreement. Fairfield has certain rights to substitute collateral in connection
with such securitization, including the right to substitute $0.60 to $0.70 of
cash for every $1.00 of net book value of Excluded Assets so pledged.
Fairfield expects to utilize (a) a portion of the Purchase Price to fund
the purchase of the Excluded Assets and (b) the remaining Purchase Price, plus
proceeds from borrowings under its revolving credit agreements with The First
National Bank of Boston ("FNBB") (see Note 6), to fund the purchase of the
Contracts Receivable. Under Fairfield'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.
Fairfield expects to dispose of certain of the Excluded Assets in one
or more transactions, and otherwise to monetize the remaining Excluded Assets,
following the closing of the sale of First Federal. Any gain resulting from
the sale of First Federal may be reduced by additional write-downs of these
assets, which may be material, depending upon Fairfield's intended method of
disposing of, or monetizing, the Excluded Assets.
The Sale is subject to numerous conditions, including (a) the negotiation
and signature of definitive agreements providing for the Sale, (b) the approval
of the Sale by SecCap's Board of Directors and (c) 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. The sale is not expected to
close before June 1994.
First Federal, which previously constituted a separate
reporting segment, has been accounted for as a discontinued
operation and, accordingly, the consolidated financial statements
have been restated to retroactively reflect, as discontinued
operations, the respective assets and liabilities sold and the
results of operations related thereto (see Note 11).
NOTE 3 - LOANS RECEIVABLE
-------------------------
Loans receivable consisted of the following (In thousands):
December 31,
1993 1992
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
======== ========
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.
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) (3,259)
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
------- -------
$34,607 $30,658
======= =======
</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)
Subordinated debt - 11,176
-------- --------
$127,351 $145,685
======== ========
</TABLE>
- --------------------------
(1) Included in "Net liabilities of discontinued operations" in 1992
(see Note 11).
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 9.9% $ 13,431 $14,352
Mortgages 9.3% 5,368 14,818
Contracts receivable 7.6% 81,559 1,238
-------- -------
$100,358 $30,408
======== =======
</TABLE>
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 are secured by
and payable from a pool of $91.8 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; 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.
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.
The federal income tax equivalent provision (benefit) is
reflected in the consolidated statements of operations 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>
Continuing operations $3,600 $695 | $154 $103
Discontinued operations (443) (37) | - -
------ ---- | ---- ----
$3,157 $658 | $154 $103
====== ==== | ==== ====
|
Utilization of pre-confirmation |
income tax attributes as a |
direct addition to paid-in |
capital $3,016 $274 | N/A N/A
====== ==== |
</TABLE>
Components of 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>
Current: |
Federal $ - $216 | $ - $ -
State 371 161 | 154 103
------ ---- | ----- ----
371 377 | $154 $103
------ ---- | ===== =====
Deferred: |
Federal 2,846 274 |
State 383 44 |
------ ---- |
3,229 318 |
------ ---- |
$3,600 $695 |
====== ==== |
</TABLE>
- ------------------------------
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) $3,709 $616 | $36,117 $(11,110)
State income taxes, net of |
federal benefit 498 107 | 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 (607) (28) | (142) (420)
------ ---- | -------- ---------
Provision for income taxes $3,600 $695 | $ 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>
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 11). 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.
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 | $ (436) $ 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.
NOTE 11 - 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.
In addition, certain assets and liabilities of First Federal,
which are to be sold, are included in discontinued operations
(see Note 2).
Condensed financial information of discontinued operations is as follows
(In thousands):
<TABLE>
December 31,
1993 1992
<S> <C> <C>
FIRST FEDERAL
Loans receivable, net $157,178 $169,533
Real estate owned 15,322 20,846
Investment and mortgage-backed securities 76,708 51,756
Other 29,681 51,095
-------- --------
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)
-------- --------
OTHER
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)
-------- --------
8,471 2,288
-------- --------
Net liabilities of discontinued operations $(14,822) $(42,718)
======== ========
</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: |
First Federal $18,762 $10,098 | $13,375 $ 30,935
Other 47,737 37,911 | 27,000 72,372
------- ------- | ------- ---------
$66,499 $48,009 | $40,375 $103,307
======= ======= | ======= ========
Allocated interest (1): |
First Federal $10,478 $ 5,439 | $ 8,798 $ 22,403
Other 3,110 2,196 | 2,663 7,109
------- ------- | ------- --------
$13,588 $ 7,635 | $11,461 $ 29,512
======= ======= | ======= ========
Gains (losses) on asset disposals |
- Other $ - $ - | $(7,826) $ 1,580
Operating gains (losses): |
First Federal (140) 131 | 470 (5,544)
Other - - | 1,288 (4,074)
------- ------- | ------- -------
Earnings (loss) from |
discontinued operations $ (140) $ 131 | $(6,068) $ (8,038)
======== ======= | ======= ========
</TABLE>
- ---------------------------
(1) Interest expense is allocated to discontinued operations based on debt
that can be specifically attributed to these operations.
Certain additional information related to discontinued operations is
summarized as follows:
FIRST FEDERAL
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
Allowance 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%.
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.
OTHER
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 liabilities 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.
NOTE 12 - 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 13 - CONTINGENCIES
-----------------------
In June 1992, the Pagosa Lakes Property Owners Association
("PLPOA") filed an adversary proceeding in the Bankruptcy Court
for the Eastern District of Arkansas, Western Division (the
"Bankruptcy Court") asserting equitable ownership or lien
interests in certain recreational amenities, including golf
courses. In March 1994, the Bankruptcy Court issued its decision
upholding Fairfield's ownership of the Pagosa recreational
amenities, subject to a restrictive covenant allowing Pagosa
property owners and their guests to use the recreational
amenities. The time has not yet run for the PLPOA to appeal the
Bankruptcy Court's decision. Fairfield's ability to dispose of
the recreational amenities at Pagosa is restricted until the
claim is finally resolved.
In August 1992, the PLPOA filed an appeal of the Bankruptcy
Court's final order confirming Fairfield's plan of
reorganization. This appeal is pending before the United States
District Court, Eastern District of Arkansas, Western Division.
The basis for the appeal is the PLPOA's position that Fairfield
should have been required to resolicit the plan of reorganization
due to its amendment in accordance with the Bankruptcy Court's
conditional confirmation order to eliminate any recovery for
Fairfield's previous stockholders. The Bankruptcy Court rejected
this argument, finding that the property owner group lacked
standing to raise this issue, and in management's opinion, the
appeal is without merit and moot, since the plan of
reorganization has been substantially implemented. The issues on
appeal have been briefed, but no decision has been rendered.
On or about July 21, 1993 and September 9, 1993, two
lawsuits (the "Recreation Fee Litigation") were filed by 29
individuals and a company against Fairfield in the District Court
of Archuleta County, Colorado. The Recreation Fee Litigation,
which seeks certification as class actions, alleges that
Fairfield and its predecessors in interest wrongfully imposed an
annual recreation fee on 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 14 - 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 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 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------------
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial
instruments at December 31, 1993:
Cash and cash equivalents: The carrying amount reported in
the balance sheet for cash and cash equivalents approximated
its fair value.
Loans receivable: For First Federal's real estate
construction loans, which have a weighted average maturity
of less than one year, fair values approximated the carrying
values. The fair values for First Federal's real estate
mortgage and consumer and other loans are estimated using
(i) discounted cash flow analyses, (ii) interest rates
currently being offered for loans with similar terms to
borrowers of similar credit quality and (iii) prepayment
rates published by the Federal Home Loan Bank. At December
31, 1993, the carrying amount of such loans approximated the
fair value. The estimated fair values of contracts
receivable approximated their carrying amounts based on
prior year third-party valuations and consideration of
market rate fluctuations since that time. The carrying
amounts of accrued interest and Fairfield's mortgages
receivable approximate their fair values.
Investment and mortgage-backed securities: The fair values
for investment and mortgage-backed securities are based on
quoted market prices, where available. If quoted market
prices are not available, fair values based on quoted market
prices of comparable instruments are used. At December 31,
1993, the carrying amounts of these assets approximated the
fair values.
Financing arrangements and debt collateralized principally
by assets of discontinued operations: The carrying amounts
of the Company's borrowings under its revolving credit
agreements and notes payable approximate their fair values
at December 31, 1993. The fair values of Advances from the
Federal Home Loan Bank are estimated using discounted cash
flow analyses, based on rates currently available to First
Federal 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 16 - 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 $16,453 $25,956 $26,722 $21,835
Total expenses 16,126 21,015 22,480 20,435
------- ------- ------- -------
Earnings from continuing operations
before provision for income taxes 327 4,941 4,242 1,400
Provision for income taxes 218 1,624 1,707 51
------- ------- ------- -------
Earnings from continuing operations 109 3,317 2,535 1,349
Earnings (loss) from discontinued
operations (23) 5 (156) 34
------- ------- ------- -------
Net earnings $ 86 $ 3,322 $ 2,379 $ 1,383
======= ======= ======= =======
EARNINGS PER SHARE
Primary:
Earnings from continuing operations $.01 $.30 $.23 $.13
==== ==== ==== ====
Net earnings $.01 $.30 $.21 $.13
==== ==== ==== ====
Fully diluted:
Earnings from continuing operations $.01 $.28 $.22 $.12
==== ==== ==== ====
Net earnings $.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 $20,444 $ 25,620 | $22,986 $20,850
Total expenses 20,325 25,329 | 21,958 20,065
------- -------- | ------- -------
Earnings from continuing operations |
before reorganization expenses |
and provision for income taxes 119 291 | 1,028 785
Reorganization expenses 4,963 9,047 | - -
Provision for income taxes 57 97 | 163 532
------- ------- | ------- -------
Earnings (loss) from |
continuing operations (4,901) (8,853)| 865 253
Earnings (loss) from |
discontinued operations (14) (6,054)| 152 (21)
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 * * | $.08 $.02
| ==== ====
Net earnings * * | $.09 $.02
| ==== ====
Fully diluted: |
Earnings from continuing operations * * | $.07 $.02
| ==== ====
Net earnings * * | $.09 $.02
| ==== ====
</TABLE>
*Per share amounts are not meaningful due to reorganization.
Note: Prior quarter amounts have been restated to reflect certain
operating results of First Federal into discontinued operations (see
Note 2).
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)
Exhibit 23 - Consent of Ernst & Young, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-
K) of Fairfield Communities, Inc. of our report dated March 11, 1994,
included in the 1993 Annual Report to Shareholders of Fairfield Communities,
Inc.
Our audit also included the financial statement schedules of Fairfield
Communities, Inc. listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedules referred to above, 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
March 24, 1994
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 <PAGE>
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. <PAGE>
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 <PAGE>
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 <PAGE>
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 <PAGE>
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 <PAGE>
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 <PAGE>
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 <PAGE>
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 <PAGE>
