<PAGE>
Filed pursuant to Rule 424(b)(3)
SEC File No. 333-39615
[LOGO APPEARS HERE]
FAIRFIELD COMMUNITIES, INC.
11001 Executive Center Drive
Little Rock, Arkansas 72211
(501) 228-2700
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 19, 1997
To the Stockholders of Fairfield Communities, Inc.:
Notice is hereby given, and you are cordially invited to attend, a Special
Meeting of Stockholders (the "Special Meeting") of Fairfield Communities, Inc.
("Fairfield") that will be held at 9:00 a.m. Central Time on December 19, 1997,
at The Capital Hotel, 111 West Markham Street, Little Rock, Arkansas, for the
following purposes:
1. To consider and vote upon a proposal to approve the issuance of up to
5,826,281 shares (the "Issuance of Fairfield Common Stock") of Common
Stock, par value $.01, of Fairfield ("Fairfield Common Stock"). Those
shares are expected to be issued (a) pursuant to the Agreement and Plan
of Merger, dated as of August 8, 1997 (the "Merger Agreement"), between
Fairfield, FCVB Corp., a Florida corporation and wholly owned subsidiary
of Fairfield ("Merger Sub"), and Vacation Break U.S.A., Inc., a Florida
corporation ("Vacation Break"), whereby Merger Sub will be merged (the
"Merger") with and into Vacation Break, and each issued and outstanding
share of common stock, par value $.01, of Vacation Break will be
converted into the right to receive .6075 of a share of Fairfield Common
Stock, (b) upon exercise of existing warrants to purchase Vacation Break
Common Stock to be assumed by Fairfield as contemplated by the Merger
Agreement, and (c) upon exercise of existing options to purchase
Vacation Break Common Stock to be assumed by Fairfield as contemplated
by the Merger Agreement.
2. To consider and vote upon a proposal to amend the Fairfield Certificate
of Incorporation (the "Certificate Amendment") to increase the
authorized number of shares of Fairfield Common Stock to 100,000,000.
This amendment is necessary for Fairfield to complete the Merger and
issue the shares described in the first proposal.
3. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
The Merger, the Merger Agreement, the Issuance of Fairfield Common Stock
and the Certificate Amendment are more fully described in the Joint Proxy
Statement/Prospectus accompanying this notice. A copy of the Merger Agreement
is attached as Appendix A thereto. The Joint Proxy Statement/Prospectus and the
Appendices thereto form a part of this Notice. We urge you to read this
material carefully.
The Board of Directors of Fairfield has approved the Issuance of Fairfield
Common Stock and the Certificate Amendment. The Board of Directors recommends
that Fairfield stockholders vote "FOR" approval of the Issuance of Fairfield
Common Stock and the Certificate Amendment.
A list of stockholders entitled to vote at the Special Meeting will be
available during ordinary business hours at Fairfield's principal executive
offices in Little Rock, Arkansas for at least 10 days prior to the Special
Meeting for examination by any stockholder for any purpose germane to the
Special Meeting.
<PAGE>
The close of business on October 31, 1997 (the "Record Date") has been
fixed as the record date for determining the holders of Fairfield Common Stock
entitled to receive notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof.
The approval of the Issuance of Fairfield Common Stock requires the
affirmative vote of holders of record of a majority of the shares of Fairfield
Common Stock cast on the proposal provided that the total vote cast on the
proposal represents more than 50% of all shares of Fairfield Common Stock
outstanding on the Record Date. The approval of the Certificate Amendment
requires the affirmative vote of holders of record of a majority of the shares
of Fairfield Common Stock outstanding on the Record Date. The approval of the
Issuance of Fairfield Common Stock is conditioned upon the approval of the
Certificate Amendment and the approval of both proposals is a condition to the
closing of the Merger.
It is important that your shares of Fairfield Common Stock are represented
at the Special Meeting, regardless of the number of shares you hold. Whether or
not you plan to attend the Special Meeting, please sign, date and return your
proxy card in the enclosed postage paid envelope as soon as possible. If you
later decide to attend the Special Meeting and vote in person, or if you wish to
revoke your proxy for any reason prior to the vote at the Special Meeting, you
may do so and your proxy will have no further effect. If you attend the Special
Meeting, you may vote in person, if you wish, even though you previously mailed
your proxy.
Very truly yours,
/s/ J. W. McCONNELL
John W. McConnell
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Little Rock, Arkansas
November 10, 1997
<PAGE>
[VACATION BREAK LETTERHEAD]
November 10, 1997
Dear Shareholder:
The Board of Directors cordially invites you to attend a Special Meeting of
Shareholders (the "Special Meeting") of Vacation Break U.S.A., Inc. ("Vacation
Break") to be held at 10:00 a.m. Eastern Time, on December 19, 1997, at the Sea
Gardens Beach and Tennis Resort, 615 N. Ocean Blvd., Pompano Beach, Florida.
At this important Special Meeting, you will be asked to consider and vote
upon a proposal to approve the Agreement and Plan of Merger, dated as of August
8, 1997 (the "Merger Agreement"), between Fairfield Communities, Inc., a
Delaware corporation ("Fairfield"), FCVB Corp., a Florida corporation and wholly
owned subsidiary of Fairfield ("Merger Sub"), and Vacation Break, pursuant to
which, among other things, (i) Merger Sub will be merged (the "Merger") with and
into Vacation Break, and (ii) each issued and outstanding share of common stock,
par value $.01, of Vacation Break ("Vacation Break Common Stock") will be
converted into the right to receive .6075 of a share of common stock, par value
$.01, of Fairfield.
The Merger, the Merger Agreement and the other terms and conditions of the
transactions related to the Merger are more fully described in the accompanying
Joint Proxy Statement/Prospectus. We urge you to review this material
carefully.
The Board of Directors of Vacation Break has unanimously determined that
the Merger and the transactions contemplated by the Merger Agreement are fair to
and in the best interests of the shareholders of Vacation Break, and has
approved the Merger Agreement. The Board of Directors recommends that Vacation
Break's stockholders vote "FOR" adoption of the Merger Agreement.
The approval of the Merger Agreement requires the affirmative vote of
holders of record of a majority of the shares of Vacation Break Common Stock
outstanding on October 31, 1997, the record date for the Special Meeting. Ralph
P. Muller, Chairman of the Board of Directors and Chief Executive Officer of
Vacation Break, R&A Partnership, Ltd., a limited partnership controlled by Mr.
Muller, and Kevin Sheehan, President of Vacation Break (collectively, the
"Principal Stockholders"), have entered into a Principal Stockholders Agreement,
dated as of August 8, 1997, with Fairfield and Merger Sub, whereby the Principal
Stockholders have agreed to vote all of the shares of Vacation Break Common
Stock beneficially owned by them for approval of the Merger Agreement. As of the
Record Date, Mr. Muller, Mr. Sheehan and their affiliates (including R&A)
were entitled to vote 6,425,598 shares of Vacation Break Common Stock, which
represented approximately 74.1% of the shares of Vacation Break Common Stock
outstanding on that date. Therefore, it is expected that the Merger Agreement
will be approved by the stockholders of Vacation Break irrespective of whether
or the manner in which the other holders of Vacation Break Common Stock vote.
Mr. Muller's and Mr. Sheehan's obligation to vote in favor of such matter is
subject to their obligations to discharge faithfully their duties as directors
or officers of Vacation Break; provided, however, they will be obligated to vote
for approval of the Merger Agreement unless the Board of Directors of Vacation
Break terminates the Merger Agreement.
<PAGE>
It is important that your shares of Vacation Break Common Stock are
represented at the Special Meeting, regardless of the number of shares you hold.
Whether or not you plan to attend the Special Meeting, please sign, date and
return your proxy card in the enclosed postage paid envelope as soon as
possible. If you later decide to attend the Special Meeting and vote in person,
or if you wish to revoke your proxy for any reason prior to the vote at the
Special Meeting, you may do so and your proxy will have no further effect. If
you attend the Special Meeting, you may vote in person, if you wish, even though
you previously mailed your proxy.
Very truly yours,
/s/ RALPH P. MULLER
Ralph P. Muller
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
<PAGE>
VACATION BREAK U.S.A., INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 19, 1997
To the Shareholders of Vacation Break U.S.A., Inc.:
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Vacation Break U.S.A., Inc. ("Vacation Break") will be held at
10:00 a.m. Eastern Time on December 19, 1997, at the Sea Gardens Beach and
Tennis Resort, 615 N. Ocean Blvd., Pompano Beach, Florida, for the following
purposes:
1. To consider and vote upon a proposal to approve the Agreement and Plan
of Merger, dated as of August 8, 1997 (the "Merger Agreement"), between
Fairfield Communities, Inc., a Delaware corporation ("Fairfield"), FCVB
Corp., a Florida corporation and wholly owned subsidiary of Fairfield
("Merger Sub"), and Vacation Break, pursuant to which, among other
things, (i) Merger Sub will be merged (the "Merger") with and into
Vacation Break, and (ii) each issued and outstanding share of common
stock, par value $.01, of Vacation Break ("Vacation Break Common Stock")
will be converted into the right to receive .6075 of a share of common
stock, par value $.01, of Fairfield.
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
Information regarding the matters to be acted upon at the Special Meeting
is contained in the Joint Proxy Statement/Prospectus accompanying this notice.
A copy of the Merger Agreement is attached as Appendix A thereto. The Joint
Proxy Statement/Prospectus and the Appendices thereto form a part of this
Notice. A list of shareholders entitled to vote at the Special Meeting will be
available during ordinary business hours at Vacation Break's principal executive
offices in Ft. Lauderdale, Florida, for at least 10 days prior to the Special
Meeting for examination by any shareholder for any purpose germane to the
Special Meeting.
The Board of Directors of Vacation Break has fixed the close of business on
October 31, 1997 (the "Record Date") as the record date for determining the
holders of Vacation Break Common Stock entitled to receive notice of, and to
vote at, the Special Meeting and any adjournments or postponements thereof. Only
the holders of record of the Vacation Break Common Stock as of the Record Date
are entitled to vote at the Special Meeting or any adjournments or postponements
thereof.
The adoption of the Merger Agreement requires the affirmative vote of
holders of record of a majority of the shares of Vacation Break Common Stock
outstanding on the Record Date for the Special Meeting. Ralph P. Muller,
Chairman of the Board of Directors and Chief Executive Officer of Vacation
Break, R&A Partnership, Ltd., a limited partnership controlled by Mr. Muller,
and Kevin Sheehan, President of Vacation Break (collectively, the "Principal
Stockholders"), have entered into a Principal Stockholders Agreement, dated as
of August 8, 1997, with Fairfield and Merger Sub, whereby the Principal
Stockholders have agreed to vote all of the shares of Vacation Break Common
Stock beneficially owned by them for approval of the Merger Agreement. As of
the Record Date, Mr. Muller, Mr. Sheehan and their affiliates (including R&A)
were entitled to vote 6,425,598 shares of Vacation Break Common Stock, which
represented approximately 74.1% of the shares of Vacation Break Common Stock
outstanding on that date. Therefore, it is expected that the Merger Agreement
will be approved irrespective of whether or the manner in which the other
holders of Vacation Break Common Stock vote. Mr. Muller's and Mr. Sheehan's
obligation to vote in favor of such matter is subject to their obligations to
discharge faithfully their duties as a director or officer of Vacation Break;
provided, however, they will be obligated to vote for approval of the Merger
Agreement unless the Board of Directors of Vacation Break terminates the Merger
Agreement.
<PAGE>
It is important that your shares of Vacation Break Common Stock are
represented at the Special Meeting, regardless of the number of shares you hold.
Whether or not you plan to attend the Special Meeting, please sign, date and
return your proxy card in the enclosed postage paid envelope as soon as
possible. If you later decide to attend the Special Meeting and vote in person,
or if you wish to revoke your proxy for any reason prior to the vote at the
Special Meeting, you may do so and your proxy will have no further effect. If
you attend the Special Meeting, you may vote in person, if you wish, even though
you previously mailed your proxy.
By Order of the Board of Directors,
/s/ RALPH P. MULLER
Ralph P. Muller
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Fort Lauderdale, Florida
November 10, 1997
<PAGE>
Rule 424(b)(3)
File Number 333-39615
JOINT PROXY STATEMENT OF
FAIRFIELD COMMUNITIES, INC.
AND
VACATION BREAK U.S.A., INC.
SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD ON DECEMBER 19, 1997
_____________________________________
PROSPECTUS OF
FAIRFIELD COMMUNITIES, INC.
5,826,281 Shares of Common Stock
_____________________________________
This Joint Proxy Statement/Prospectus is being furnished to (i) all holders
of common stock, par value $.01 per share ("Fairfield Common Stock"), of
Fairfield Communities, Inc., a Delaware corporation ("Fairfield"), and (ii) all
holders of common stock, par value $.01 per share ("Vacation Break Common
Stock"), of Vacation Break U.S.A., Inc., a Florida corporation ("Vacation
Break"), in connection with the solicitation of proxies by the respective Boards
of Directors of the two companies (the "Companies") for use at the respective
Special Meetings of Stockholders of Fairfield (including any adjournments or
postponements thereof, the "Fairfield Special Meeting") and of Vacation Break
(including any adjournments or postponements thereof, the "Vacation Break
Special Meeting," and, together with the Fairfield Special Meeting, the "Special
Meetings"), each to be held on December 19, 1997.
On August 8, 1997, Fairfield, FCVB Corp., a Florida corporation and wholly
owned subsidiary of Fairfield ("Merger Sub"), and Vacation Break entered into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among
other things, (i) Merger Sub will be merged with and into Vacation Break (the
"Merger") and (ii) each issued and outstanding share of Vacation Break Common
Stock will be converted into the right to receive .6075 (the "Exchange Ratio")
of a share of Fairfield Common Stock. No fractional shares of Fairfield Common
Stock will be issued and cash will be paid in lieu of any fractional shares. A
copy of the Merger Agreement is attached hereto as Appendix A.
At the Fairfield Special Meeting, holders of Fairfield Common Stock are
being asked to approve the issuance of up to 5,826,281 shares of Fairfield
Common Stock (the "Issuance of Fairfield Common Stock"). Those shares are
expected to be issued (i) pursuant to the Merger Agreement, (ii) upon exercise
of existing warrants to purchase Vacation Break Common Stock to be assumed by
Fairfield pursuant to the Supplemental Warrant Agreement to be entered into
among Fairfield, Josephthal Lyon & Ross Incorporated ("Josephthal") and
Cruttenden Roth Incorporated (the "Supplemental Warrant Agreement") as
contemplated by the Merger Agreement, and (iii) upon exercise of existing
options to purchase Vacation Break Common Stock (the "Assumed Options") to be
assumed by Fairfield as contemplated by the Merger Agreement. Fairfield's
authorized shares of Fairfield Common Stock that are available for issuance are
not sufficient to issue the requisite number of shares for the Issuance of
Fairfield Common Stock. Consequently, holders of Fairfield Common Stock are also
being asked to approve an amendment to the Fairfield Certificate of
Incorporation (the "Certificate Amendment") to increase the number of authorized
shares of Fairfield Common Stock to 100,000,000. The approval of the Issuance of
Fairfield Common Stock requires the affirmative vote of holders of record of a
majority of the shares of Fairfield Common Stock cast on the proposal provided
that the total vote cast on the proposal represents more than 50% of all shares
of Fairfield Common Stock outstanding on October 31, 1997, the record date for
the Special Meetings (the "Record Date"). The approval of the Certificate
Amendment requires the affirmative vote of holders of record of a majority of
the shares of Fairfield Common Stock outstanding on the Record Date. THE
APPROVAL OF THE ISSUANCE OF FAIRFIELD COMMON STOCK IS CONDITIONED UPON THE
APPROVAL OF THE CERTIFICATE AMENDMENT AND THE APPROVAL OF BOTH PROPOSALS (THE
"FAIRFIELD APPROVAL") IS A CONDITION TO THE CLOSING OF THE MERGER.
At the Vacation Break Special Meeting, holders of Vacation Break Common
Stock are being asked to approve the Merger Agreement. The approval of the
Merger Agreement requires the affirmative vote (the "Vacation Break
<PAGE>
Approval," and, together with the Fairfield Approval, the "Stockholder
Approvals") of the holders of record of a majority of the shares of Vacation
Break Common Stock outstanding on the Record Date. Ralph P. Muller, Chairman of
the Board of Directors and Chief Executive Officer of Vacation Break, R&A
Partnership, Ltd., a limited partnership controlled by Mr. Muller ("R&A"), and
Kevin Sheehan, President of Vacation Break (collectively, the "Principal
Stockholders"), have entered into a Principal Stockholders Agreement (the
"Principal Stockholders Agreement"), dated August 8, 1997, with Fairfield and
Merger Sub, whereby the Principal Stockholders have agreed to vote all of the
shares of Vacation Break Common Stock beneficially owned by them for the
approval of the Merger Agreement. As of the Record Date, the Principal
Stockholders were entitled to vote 6,425,598 shares of Vacation Break Common
Stock, which represented approximately 74.1% of the shares of Vacation Break
Common Stock outstanding on that date. Therefore, it is expected that the Merger
Agreement will be approved by the stockholders of Vacation Break irrespective of
whether or the manner in which the other holders of Vacation Break Common Stock
vote. Mr. Muller's and Mr. Sheehan's obligation to vote in favor of such matter
is subject to their obligations to discharge faithfully their duties as
directors or officers of Vacation Break; provided, however, they will be
obligated to vote for the approval of the Merger Agreement unless the Board of
Directors of Vacation Break terminates the Merger Agreement. See "The Special
Meetings --Share Ownership of Management."
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Fairfield filed as part of a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the registration of up to 5,826,281 shares of Fairfield Common Stock
issuable to holders of Vacation Break Common Stock in connection with the
Merger.
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS THAT STOCKHOLDERS SHOULD CONSIDER PRIOR TO VOTING AT THE SPECIAL
MEETINGS.
The Fairfield Common Stock is listed for trading on the New York Stock
Exchange, Inc. (the "NYSE") under the symbol FFD. The Vacation Break Common
Stock is listed on the Nasdaq National Market System (the "Nasdaq") under the
symbol VBRK. On November 7, 1997, the last trading day prior to the date of this
Joint Proxy Statement/Prospectus, (i) the closing sale price of Fairfield Common
Stock as reported on the NYSE Composite Transaction Tape was $43 5/16 per share
and (ii) the closing sale price of Vacation Break Common Stock as reported on
the Nasdaq was $25 5/16 per share.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of Fairfield and Vacation Break on or
about November 10, 1997.
__________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
__________________________________
The date of this Joint Proxy Statement/Prospectus is November 10, 1997.
<PAGE>
TABLE OF CONTENTS
PAGE
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AVAILABLE INFORMATION....................................................(iv)
FORWARD-LOOKING STATEMENTS...............................................(iv)
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... (v)
SUMMARY.................................................................. 1
The Companies.................................................... 1
The Special Meetings............................................. 1
The Merger....................................................... 3
COMPARATIVE STOCK PRICES................................................. 12
COMPARATIVE PER SHARE DATA............................................... 13
RISK FACTORS............................................................. 14
Risks Related to the Merger...................................... 14
Timeshare Industry Operating Risks............................... 15
Risks Associated with Acquisitions and New Development........... 15
Regulation of Marketing and Sales of VOIs........................ 15
Pending State Enforcement Proceedings............................ 16
Pending Litigation............................................... 16
Risks Associated with Financing; Hedging Activities.............. 16
Impact of Economic Cycles........................................ 17
Risks Associated with Customer Default........................... 17
Possible Environmental Liabilities............................... 17
Compliance with Laws Governing Access............................ 17
Uninsured Loss; Natural Disasters................................ 18
Competition...................................................... 18
Concentration in Florida Market.................................. 18
Applicability of Federal Securities Laws to the Sale of VOIs..... 18
Anti-Takeover Matters............................................ 19
THE SPECIAL MEETINGS..................................................... 19
Date, Time and Place............................................. 19
Matters to be Considered at the Special Meetings................. 19
Record Date; Stock Entitled to Vote; Quorum...................... 19
Votes Required................................................... 20
Share Ownership of Management.................................... 20
Voting of Proxies................................................ 20
Revocability of Proxies.......................................... 21
Solicitation of Proxies.......................................... 21
THE MERGER............................................................... 22
General.......................................................... 22
Structure of the Merger.......................................... 22
Merger Consideration............................................. 22
Effective Time................................................... 22
Background of the Merger......................................... 22
Reasons for the Merger; Recommendations of the
Boards of Directors............................................ 26
Opinions of Financial Advisors................................... 29
(i)
<PAGE>
PAGE
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Certain Federal Income Tax Consequences.......................... 36
Anticipated Accounting Treatment................................. 37
Management After the Merger...................................... 37
Interests of Certain Persons in the Merger....................... 38
Certain Executive Compensation and Other Employee-
Related Matters in Connection with the Merger.................. 38
Indemnification.................................................. 38
OTHER TERMS OF THE MERGER AND THE MERGER AGREEMENT....................... 39
General.......................................................... 39
Conversion of Shares; Procedures for Exchange of
Certificates; Fractional Shares................................ 39
Conditions to the Consummation of the Merger..................... 40
Termination...................................................... 41
Termination Fee.................................................. 42
No Solicitation.................................................. 42
Conduct of Business Pending Merger............................... 43
Amendment and Waiver............................................. 46
Expenses......................................................... 46
Representations and Warranties................................... 46
Principal Stockholders Agreement................................. 46
Escrow Agreement................................................. 49
Stock Exchange Listing........................................... 49
Resale of Fairfield Common Stock................................. 49
Stockholders' Rights of Appraisal................................ 49
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............. 51
APPROVAL OF THE CERTIFICATE AMENDMENT.................................... 57
Introduction..................................................... 57
Vote Required.................................................... 57
Purpose.......................................................... 57
MANAGEMENT OF FAIRFIELD.................................................. 58
DESCRIPTION OF FAIRFIELD CAPITAL STOCK................................... 60
General.......................................................... 60
Common Stock..................................................... 60
Preferred Stock.................................................. 60
Rights Agreement................................................. 60
Delaware Law Anti-Takeover Provisions............................ 61
Transfer Agent and Registrar..................................... 61
COMPARISON OF STOCKHOLDER RIGHTS......................................... 61
Rights Agreement................................................. 61
Stockholders' Meetings and Voting................................ 62
Dividends........................................................ 62
Limitation of Liability and Indemnification...................... 63
INFORMATION REGARDING VACATION BREAK..................................... 63
Business Overview................................................ 63
History of Vacation Break........................................ 64
Administrative and Operating Facilities.......................... 65
Vacation Break's Resorts......................................... 65
Environmental Matters............................................ 67
Employees........................................................ 68
Legal Proceedings................................................ 68
(ii)
<PAGE>
PAGE
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Executive Officers............................................... 69
Executive Compensation........................................... 70
Certain Relationships and Related Transactions................... 72
SHARE OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF
VACATION BREAK......................................................... 74
SELECTED CONSOLIDATED FINANCIAL DATA OF VACATION BREAK................... 76
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF VACATION BREAK............................ 77
Introduction..................................................... 77
Results Of Operations............................................ 78
Liquidity and Capital Resources.................................. 84
EXPERTS.................................................................. 85
LEGAL MATTERS............................................................ 86
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF VACATION BREAK............. F-1
REPORT OF INDEPENDENT ACCOUNTANTS........................................ F-2
NOTES TO FISCAL YEAR END CONSOLIDATED FINANCIAL STATEMENTS............... F-7
APPENDIX A - Agreement and Plan of Merger................................ A-1
APPENDIX B - Opinion of Stephens & Co.................................... B-1
APPENDIX C - Opinion of Montgomery Securities............................ C-1
(iii)
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FAIRFIELD OR
VACATION BREAK. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH IT IS NOT LAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF FAIRFIELD OR VACATION BREAK SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
Fairfield and Vacation Break are each subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith file reports, proxy statements and other
information with the SEC. Fairfield has filed with the SEC the Registration
Statement under the Securities Act with respect to the Fairfield Common Stock to
be issued to holders of Vacation Break Common Stock in connection with the
Merger. The Registration Statement and the exhibits thereto, as well as the
reports, proxy statements and other information filed by Fairfield and Vacation
Break with the SEC, may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at Suite
1300, Seven World Trade Center, New York, New York 10048, and at The Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material also can be obtained from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The SEC
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
Such reports, proxy and information statements and other information may be
found on the SEC's Web site address, http://www.sec.gov. In addition, the
Fairfield Common Stock is listed on the NYSE, and material filed by Fairfield
may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York
10005. The Vacation Break Common Stock is listed on the Nasdaq National Market
System and material filed by Vacation Break may be inspected at the offices of
the Nasdaq National Market System, 1735 K Street, N.W., Washington, D.C. 20006.
Reference is made to the Registration Statement and the exhibits thereto for
further information.
Statements contained in this Joint Proxy Statement/Prospectus, or in any
document incorporated in this Joint Proxy Statement/Prospectus by reference, as
to the provisions of any contract or other document referred to herein or
therein are qualified in all respects by reference to the copy of such contract
or other document filed as an exhibit to the Registration Statement or such
other document incorporated herein by reference.
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus (including the documents incorporated
by reference herein) contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995), including
(without limitation) statements with respect to anticipated future operating and
financial performance, growth and acquisition opportunities and other similar
forecasts and statements of expectation relating to Fairfield, Merger Sub and
Vacation Break, as applicable. When used in this Joint Proxy
Statement/Prospectus, words such as "anticipates," "believes," "estimates,"
"expects," "intends," "should" and variations of these words and similar
expressions, as they relate to Fairfield, Merger Sub, Vacation Break, or the
managements of any of them, are intended to identify forward-looking statements.
Forward-looking statements made by Fairfield or Vacation Break and their
respective managements are based on estimates, projections and beliefs of the
managements of Fairfield or Vacation Break, as well as assumptions made at the
time of such statements by and information then currently available to the
managements of Fairfield or Vacation Break, as applicable, and are not
guarantees of future performance. Fairfield and Vacation Break each disclaims
any obligation to update or revise any forward-looking statement based on the
occurrence of future events, the receipt of new information or otherwise.
(iv)
<PAGE>
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by Fairfield or Vacation
Break and their respective managements as a result of a number of risks,
uncertainties and assumptions relating to the operations and results of
operations of Fairfield following the Merger. Representative examples of these
factors include (without limitation) general industry and economic conditions;
interest rate trends; regulatory changes; cost of capital and capital
requirements; availability of real estate properties; competition from national
hospitality companies and other competitive factors and pricing pressures;
shifts in customer demands; changes in operating expenses, including employee
wages, commission structures, benefits and training; economic cycles; the
continued availability of financing in the amounts and at the terms necessary to
support Fairfield's future business, assumed cost savings and other synergistic
benefits of the Merger; the success achieved or problems encountered in
integrating the operations of Vacation Break into Fairfield and each of the
factors identified in the section "Risk Factors" set forth in this Joint Proxy
Statement/Prospectus. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC by Fairfield (SEC File No. 1-
8096) pursuant to the Exchange Act are incorporated by reference in this Joint
Proxy Statement/Prospectus:
1. Fairfield's Annual Report on Form 10-K as amended by Forms 10-K/A for
the year ended December 31, 1996;
2. Fairfield's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1997 and June 30, 1997; and
3. The description of Fairfield Common Stock contained in Fairfield's
Registration Statements on Form 8-A (Commission file No. 1-8096).
All documents and reports filed by Fairfield pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the date of its Special Meeting will be deemed
to be incorporated by reference in this Joint Proxy Statement/Prospectus and to
be a part hereof from the dates of filing of such documents or reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein will be deemed to be modified or superseded for purposes of
this Joint Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded will not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO THE INFORMATION INCORPORATED HEREIN) ARE
AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER OF
CAPITAL STOCK OF FAIRFIELD OR VACATION BREAK, TO WHOM THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST, IN THE CASE OF
DOCUMENTS RELATING TO FAIRFIELD, TO FAIRFIELD COMMUNITIES, INC., 11001 EXECUTIVE
CENTER DRIVE, LITTLE ROCK, ARKANSAS 72211, (501) 228-2700, ATTENTION: INVESTOR
RELATIONS OR, IN THE CASE OF DOCUMENTS RELATING TO VACATION BREAK, TO VACATION
BREAK U.S.A., INC., 6400 N. ANDREWS AVENUE, PARK PLAZA, SUITE 200, FT.
LAUDERDALE, FLORIDA 33309 (954) 351-8500, ATTENTION: SECRETARY. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
DECEMBER 12, 1997.
(v)
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE OR
INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. REFERENCE IS
MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. STOCKHOLDERS ARE URGED TO READ
THIS JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR
ENTIRETY.
THE COMPANIES
Fairfield........... Fairfield is one of the largest vacation ownership
companies in the United States in terms of property owners
and vacation units constructed. Fairfield's 15 resorts are
located in 11 states; five resorts are in destination
areas with popular vacation attractions and 10 regional
resorts are in scenic locations. Fairfield's primary
business is selling vacation ownership interests ("VOIs"),
commonly known as timeshares, primarily through its
innovative points-based vacation system, Fairshare
Plus(R). Fairfield also offers financing for VOI
purchasers through its wholly owned subsidiary, Fairfield
Acceptance Corporation. Fairfield's principal executive
offices are located at 11001 Executive Center Drive,
Little Rock, Arkansas 72211, and its telephone number is
(501) 228-2700.
Vacation Break...... Vacation Break develops, markets, operates and finances
VOIs in premium resort properties in Florida and engages
in other leisure-oriented business activities. The VOIs
offered by Vacation Break consist of undivided fee
interests, which provide owners with the exclusive right
to use a vacation residence in perpetuity, typically for a
one-week period each year. Vacation Break sells fully-
furnished VOIs in its own resort properties in South and
Central Florida. Vacation Break's principal executive
offices are located at 6400 N. Andrews Avenue, Park Plaza,
Suite 200, Ft. Lauderdale, Florida 33309, and its
telephone number is (954) 351-8500.
THE SPECIAL MEETINGS
Date, Time and Place. The Fairfield Special Meeting will be held at The Capital
Hotel, 111 West Markham Street, Little Rock, Arkansas at
9:00 a.m. Central Time on December 19, 1997. The Vacation
Break Special Meeting will be held at the Sea Gardens
Beach and Tennis Resort, 615 N. Ocean Blvd., Pompano
Beach, Florida at 10:00 a.m. Eastern Time on
December 19, 1997.
Matters to be
Considered at the
Special Meetings..... At the Fairfield Special Meeting, holders of Fairfield
Common Stock are being asked to approve the Issuance of
Fairfield Common Stock and to approve the Certificate
Amendment. At the Vacation Break Special Meeting, holders
of Vacation Break Common Stock are being asked to approve
the Merger Agreement. See "The Special Meetings --Matters
to be Considered at the Special Meetings," "The Merger"
and "Other Terms of the Merger and the Merger Agreement."
Record Date.......... Only holders of record of Fairfield Common Stock and
Vacation Break Common Stock at the close of business on
October 31, 1997 (the "Record Date") are entitled to
receive notice of and to vote at the Fairfield Special
Meeting or the Vacation Break Special Meeting,
respectively. See "The Special Meetings --Record Date;
Stock Entitled to Vote; Quorum."
1
<PAGE>
Votes Required....... The approval of the Issuance of Fairfield Common Stock
requires the affirmative vote of holders of record of a
majority of the shares of Fairfield Common Stock cast on
the proposal provided that the total vote cast on the
proposal represents more than 50% of all shares of
Fairfield Common Stock outstanding on the Record Date. The
approval of the Certificate Amendment requires the
affirmative vote of holders of record of a majority of the
shares of Fairfield Common Stock outstanding on the Record
Date. THE APPROVAL OF THE ISSUANCE OF FAIRFIELD COMMON
STOCK IS CONDITIONED UPON THE APPROVAL OF THE CERTIFICATE
AMENDMENT AND THE APPROVAL OF BOTH PROPOSALS IS A
CONDITION TO THE CLOSING OF THE MERGER. See "The Special
Meetings --Votes Required."
The approval of the Merger Agreement requires the
affirmative vote of holders of record of a majority of the
shares of Vacation Break Common Stock outstanding on the
Record Date. See "The Special Meetings --Votes Required."
Holders of Fairfield Common Stock or Vacation Break Common
Stock, as the case may be, as of the Record Date are
entitled to one vote per share on each matter to be voted
on at the applicable Special Meeting.
Security Ownership
of Management and
Others............... At the close of business on the Record Date, directors and
executive officers of Fairfield and their affiliates
beneficially owned 2,534,552 shares of Fairfield Common
Stock, which represented approximately 14.3% of the shares
of Fairfield Common Stock outstanding on that date, and
were entitled to vote 1,762,052 shares of Fairfield Common
Stock, which represented approximately 10.4% of the shares
of Fairfield Common Stock outstanding on that date. Each
such director and executive officer has indicated his or
her present intention to vote, or cause to be voted, the
Fairfield Common Stock owned by him or her for approval of
the Issuance of Fairfield Common Stock and for approval of
the Certificate Amendment.
The Principal Stockholders (Ralph P. Muller, R&A, and
Kevin Sheehan) have entered into the Principal
Stockholders Agreement with Fairfield and Merger Sub,
whereby the Principal Stockholders have agreed to vote all
of the shares of Vacation Break Common Stock beneficially
owned by them for approval of the Merger Agreement. As of
the Record Date, the Principal Stockholders beneficially
owned approximately 76.1% of the Vacation Break Common
Stock outstanding on that date and were entitled to vote
6,425,598 shares of Vacation Break Common Stock, which
represented approximately 74.1% of the shares of Vacation
Break Common Stock outstanding on that date. Therefore, it
is expected that the Merger Agreement will be approved
irrespective of whether or the manner in which the other
holders of Vacation Break Common Stock vote. Mr. Muller's
and Mr. Sheehan's obligation to vote in favor of such
matter is subject to their obligations to discharge
faithfully their duties as directors or officers of
Vacation Break; provided, however, they will be obligated
to vote for approval of the Merger Agreement unless the
Board of Directors of Vacation Break terminates the Merger
Agreement. See "The Special Meetings--Votes Required."
2
<PAGE>
THE MERGER
The Merger.......... At the effective time of the Merger (the "Effective
Time"), Merger Sub, which has recently been formed as a
wholly-owned subsidiary of Fairfield for purposes of
effecting the Merger, will merge with and into Vacation
Break, with Vacation Break as the surviving corporation in
the Merger. Thereafter, Vacation Break will be a wholly-
owned subsidiary of Fairfield. A copy of the Merger
Agreement is set forth as Appendix A to this Joint Proxy
Statement/Prospectus.
The Merger will become effective at such time as the
Articles of Merger have been duly accepted for filing by
the Florida Department of State (or at such later time as
Fairfield and Vacation Break may agree and specify in the
Articles of Merger). The filing of the Articles of Merger
will occur as soon as practicable but no later than the
second business day after satisfaction or waiver of the
conditions to the consummation of the Merger set forth in
the Merger Agreement unless another date is agreed to in
writing by Fairfield, Merger Sub and Vacation Break (the
"Closing Date").
Conversion of Shares. At the Effective Time, each outstanding share of Vacation
Break Common Stock (other than shares owned by Fairfield,
Vacation Break or any of their subsidiaries) will be
converted into the right to receive .6075 of a fully paid
and nonassessable share of Fairfield Common Stock, except
that cash will be paid in lieu of fractional shares of
Fairfield Common Stock. See "The Merger --Merger
Consideration" and "Other Terms of the Merger and the
Merger Agreement--Conversion of Shares; Procedures for
Exchange of Certificates; Fractional Shares."
Recommendations of
the Boards of
Directors............ All of the members of the Board of Directors of Fairfield
(the "Fairfield Board") present at the meeting to consider
the Merger Agreement unanimously approved the Issuance of
Fairfield Common Stock and the Certificate Amendment and
recommends that Fairfield stockholders vote "FOR" both the
Issuance of Fairfield Common Stock and the Certificate
Amendment. The Board of Directors of Vacation Break (the
"Vacation Break Board") unanimously determined that the
Merger and the transactions contemplated by the Merger
Agreement are fair to and in the best interests of the
stockholders of Vacation Break, has approved the Merger
Agreement and recommends that Vacation Break stockholders
vote "FOR" approval of the Merger Agreement. See "The
Merger --Reasons for the Merger; Recommendations of the
Boards of Directors."
Opinions of
Financial
Advisors............. On August 8, 1997, Stephens, Inc. ("Stephens") rendered
its opinion to the Fairfield Board and subsequently
confirmed its prior opinion by delivery of its written
opinion dated the date of this Joint Proxy
Statement/Prospectus (the "Stephens Opinion") that the
Exchange Ratio was fair from a financial point of view to
Fairfield and, accordingly, to the holders of Fairfield
Common Stock. A copy of the Stephens Opinion, which sets
forth the assumptions and qualifications made, matters
considered and limitations on the review by Stephens in
rendering its opinion, is attached as Appendix B to this
Joint Proxy Statement/Prospectus, is incorporated herein
by reference and should be read carefully in its entirety.
Fairfield has agreed to pay fees to Stephens for its
services in connection with the Merger, all of which
(except for out-of-pocket expenses) are contingent upon
consummation of the Merger. See "The Merger --Opinions of
Financial Advisors."
3
<PAGE>
On July 23, 1997, Montgomery Securities ("Montgomery")
rendered its oral opinion to the Vacation Break Board
(subsequently confirmed as of August 8, 1997) that the
consideration to be received by the stockholders of
Vacation Break pursuant to the merger is fair to such
stockholders from a financial point of view, as of the
date of such opinion (which opinion has been reissued as
of the date of this Joint Proxy Statement/Prospectus). A
copy of the full text of the written opinion of
Montgomery, which sets forth a description of the
assumptions and qualifications made, matters considered
and limitations on the review undertaken by Montgomery, is
attached as Appendix C to this Joint Proxy
Statement/Prospectus, is incorporated herein by reference
and should be read carefully in its entirety. Vacation
Break has agreed to pay fees to Josephthal and Montgomery
for their services in connection with the Merger, all of
which (except for out-of-pocket expenses) are contingent
upon consummation of the Merger. See "The Merger --
Opinions of Financial Advisors."
Certain Federal
Income Tax
Consequences......... The Merger is intended to be a tax-free reorganization as
a result of which no gain or loss will be recognized by
Vacation Break stockholders, except in respect of cash
received by holders of Vacation Break Common Stock in lieu
of fractional shares of Fairfield Common Stock. It is a
condition to the consummation of the Merger that Fairfield
and Vacation Break receive an opinion of Greenberg Traurig
Hoffman Lipoff Rosen & Quentel, P.A., counsel to Vacation
Break, to the effect that, among other things, the Merger
will constitute a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). See "The Merger --Certain Federal
Income Tax Consequences" and "Other Terms of the Merger
and the Merger Agreement --Conditions to the Consummation
of the Merger."
Anticipated
Accounting
Treatment............ The Merger is expected to be accounted for as a "pooling
of interests" in accordance with generally accepted
accounting principles. It is a condition to the
consummation of the Merger that Fairfield and Vacation
Break receive letters from their respective independent
auditors, Ernst & Young LLP and Coopers & Lybrand L.L.P.,
to the effect that the Merger will qualify for pooling-of-
interests accounting treatment. See "The Merger --
Anticipated Accounting Treatment."
Dividend Policy...... It is anticipated that Fairfield will continue its
existing policy of not paying cash dividends on the
Fairfield Common Stock. In addition, Fairfield's and
certain of Vacation Break's credit facilities prohibit any
payment of dividends.
Interests of Certain
Persons in the
Merger............... Certain directors and executive officers of Vacation Break
have interests in the Merger that are different from, or
in addition to, the interests of stockholders of Vacation
Break generally. Such interests relate to or arise from,
among other things, the terms of the Merger Agreement
providing for the appointment of Ralph P. Muller, the
Chairman of the Board and Chief Executive Officer of
Vacation Break, to the Fairfield Board, the assumption of
existing stock options and other rights granted to
employees and directors of Vacation Break, including
executive officers, the indemnification of existing
directors and officers of Vacation Break, and the
assumption of existing warrants granted to Josephthal and
Cruttenden Roth Incorporated. Michael J. Kollender, a
director of Vacation Break, is a Senior Vice President -
Investment Banking of Josephthal, which has served as a
financial advisor to Vacation Break and has received
service fees therefrom. In addition, such interests relate
to or arise from the terms of the Principal Stockholders
Agreement providing for Fairfield to enter into a
4
<PAGE>
registration rights agreement for the registration under
the Securities Act of the shares of Fairfield Common Stock
to be received by the Principal Stockholders or their
permitted transferees pursuant to the Merger, and for
Fairfield and Vacation Break to seek to obtain the release
by the applicable lender of certain guarantees by Mr.
Muller (the only individual who granted such guarantees)
of indebtedness of Vacation Break and to indemnify him for
any loss under those guarantees. See "The Merger --
Interests of Certain Persons in the Merger," "--Certain
Executive Compensation and Other Employee-Related Matters
in Connection with the Merger" and "--Indemnification."
Conditions to the
Merger............... The obligations of Fairfield and Vacation Break to
consummate the Merger are subject to various conditions,
including obtaining the requisite Stockholder Approvals;
obtaining requisite regulatory approvals from certain
governmental authorities; the absence of legal restraints
or prohibitions preventing the consummation of the Merger;
the absence of certain litigation, investigations and
proceedings; the absence of material adverse changes with
respect to the other party; the effectiveness of the
Registration Statement of which this Joint Proxy
Statement/Prospectus is a part; approval for listing on
the NYSE of the shares of Fairfield Common Stock to be
issued pursuant to the Merger; the representations and
warranties of the other party contained in the Merger
Agreement being materially true; the performance by the
other party in all material respects of all obligations
contained in the Merger Agreement; the receipt of an
opinion of counsel to Vacation Break in respect of certain
federal income tax consequences of the Merger; and the
receipt of independent auditors' letters to the effect
that the Merger qualifies for pooling-of-interests
accounting treatment. See "Other Terms of the Merger and
the Merger Agreement --Conditions to the Consummation of
the Merger."
Regulatory Approvals. Fairfield and Vacation Break are not aware of any
regulatory requirements that must be complied with or
approvals that must be obtained in connection with the
consummation of the Merger.
Termination of the
Merger Agreement..... Subject to certain limitations, the Merger Agreement is
subject to termination at the option of either Fairfield
or Vacation Break if the Merger is not consummated on or
before December 31, 1997, and prior to such time upon the
occurrence of certain events. The Merger Agreement may
also be terminated by the mutual written consent of
Fairfield and Vacation Break. Under certain circumstances,
Vacation Break may be required to pay to Fairfield a fee
in the amount of $7.5 million (the "Termination Fee") upon
the termination of the Merger Agreement. See "Other Terms
of the Merger and the Merger Agreement --Termination" and
"--Termination Fee."
Principal
Stockholders
Agreement............ Concurrently with the execution and delivery of the Merger
Agreement, Fairfield and Merger Sub entered into the
Principal Stockholders Agreement with the Principal
Stockholders pursuant to which, among other things, the
Principal Stockholders have agreed, subject to certain
limitations, (i) to vote all of the shares of Vacation
Break Common Stock beneficially owned by them for approval
of the Merger Agreement at the Vacation Break Stockholders
Meeting and (ii) to indemnify Fairfield and its
subsidiaries, including the Surviving Corporation, against
75% of any losses and liabilities, and 25% of certain
legal expenses, in excess of the reserve for the
Indemnified Matter (as defined below), if any, that is
reflected in Vacation Break's consolidated financial
statements at June 30, 1997, arising out of certain of the
matters that are the subject of the
5
<PAGE>
pending legal proceedings initiated by a former vendor
which are described in Note 6 to the financial statements
of Vacation Break for the quarter ended June 30, 1997 set
forth elsewhere herein (see "Index to Consolidated
Financial Statements of Vacation Break"), and two
additional pending legal proceedings (each, an
"Indemnified Matter"). The Principal Stockholders'
indemnity obligations are limited to $7.0 million and are
the several obligations of Mr. Muller and R&A, as a group,
and Mr. Sheehan to the extent of 80% and 20%,
respectively, of any indemnifiable loss. See "Other Terms
of the Merger and the Merger Agreement --Principal
Stockholders Agreement."
Escrow Agreement..... As security for the indemnity provided by the Principal
Stockholders under the Principal Stockholders Agreement,
the Principal Stockholders will place in escrow shares of
Fairfield Common Stock the Principal Stockholders would
otherwise receive in the Merger having an aggregate value
of $7.0 million on the closing date of the Merger (the
"Holdback Shares"). The Holdback Shares will be the sole
source of payment of the Principal Stockholders' indemnity
obligations. The escrow of the Holdback Shares will be
established with a title company or financial institution
reasonably acceptable to Fairfield (the "Escrow Agent"),
pursuant to an escrow agreement (the "Escrow Agreement").
The procedure for the satisfaction of any claims for
indemnification pursuant to the Principal Stockholders
Agreement will be governed by the Principal Stockholders
Agreement and the Escrow Agreement. See "Other Terms of
the Merger and the Merger Agreement --Principal
Stockholders Agreement" and "--Escrow Agreement."
Resale of
Fairfield Common
Stock................ The Fairfield Common Stock issued pursuant to the Merger
will not be subject to any restrictions on transfer
arising under the Securities Act, except for shares issued
to any Vacation Break stockholder who may be deemed to be
an "affiliate" of Fairfield or Vacation Break for purposes
of Rule 145 under the Securities Act or for purposes of
qualifying the Merger for pooling-of-interests accounting
treatment.
Pursuant to the Merger Agreement, holders of 5% or more of
Vacation Break Common Stock, their family members and
affiliated persons of Vacation Break, in connection with
the opinion of counsel to Vacation Break regarding the
U.S. federal income tax consequences of the Merger (see
"The Merger --Certain Federal Income Tax Consequences")
will be required to agree not to sell, transfer or
otherwise dispose of for a period of one year after the
Effective Date, their proportionate share of the number of
shares of Fairfield Common Stock to be issued in the
Merger (exclusive of Holdback Shares) equal to (i) 50% of
the total number of those shares reduced by (ii) all or
part of those shares issued to the public stockholders of
Vacation Break.
Pursuant to the Principal Stockholders Agreement,
Fairfield and the Principal Stockholders have agreed to
enter into a Registration Rights Agreement at the
Effective Time. Under the Registration Rights Agreement,
and subject to the conditions and limitations set forth
therein, the Principal Stockholders or their permitted
transferees will be entitled to require Fairfield, at any
time after Fairfield has publicly announced or filed with
the SEC the results of 30 days of combined operations of
Fairfield and Vacation Break (a "Combined Operations
Filing"), to effect the registration under the Securities
Act of the shares of Fairfield Common Stock received by
the Principal Stockholders pursuant to the Merger, in
accordance with the provisions of the Securities Act for
an offering to be made on a delayed or continuous basis
and to use reasonable efforts to keep such registration
continuously effective for up to three years. In addition,
6
<PAGE>
pursuant to the Registration Rights Agreement, and subject
to the conditions and limitations set forth therein, the
Principal Stockholders or their permitted transferees will
also have certain "piggyback" registration rights to
require Fairfield to include their shares in any
registration of Fairfield Common Stock under the
Securities Act which Fairfield intends to effect for its
benefit. See "Other Terms of the Merger and the Merger
Agreement --Resale of Fairfield Common Stock."
Appraisal and
Dissenters' Rights... Under the Florida Business Corporation Act ("FBCA"), the
holders of Vacation Break Common Stock are not entitled to
appraisal rights in connection with the approval of the
Merger Agreement and the transactions contemplated
thereby. See "Other Terms of the Merger and the Merger
Agreement--Stockholders' Rights of Appraisal." The
transactions contemplated by the Merger Agreement, the
Issuance of Fairfield Common Stock and the Certificate
Amendment do not give rise to any appraisal or dissenters'
rights to holders of Fairfield Common Stock.
7
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA OF FAIRFIELD
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain selected consolidated historical
financial and certain other data of Fairfield. The balance sheet data of
Fairfield as of December 31, 1995 and 1996 and operating data for each of the
years ended December 31, 1994, 1995, and 1996 have been derived from the audited
financial statements of Fairfield, which are incorporated by reference in this
Joint Proxy Statement/Prospectus, and should be read in conjunction therewith
(see "Incorporation of Certain Documents by Reference"). The balance sheet data
of Fairfield as of December 31, 1992, 1993 and 1994 and the operating data for
the six months ended December 31, 1992 and for the year ended December 31, 1993
have been derived from audited financial statements which are not included in
this Joint Proxy Statement/Prospectus. The operating and balance sheet data of
Fairfield as of and for the six months ended June 30, 1996 and 1997 have been
derived from the unaudited financial statements of Fairfield and, in the opinion
of Fairfield's management, reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the information set forth
herein. The interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal and short-term variations. The
selected consolidated historical financial data should be read in conjunction
with "Item 7 --Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and notes thereto, which are
contained in Fairfield's annual report on Form 10-K for the year ended December
31, 1996 incorporated herein by reference.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
------------ ---------------------------------------------- ----------------------
1992(a) 1993 1994 1995 1996 1996 1997
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues:
Vacation ownership, net........ $ 15,255 $ 33,472 $ 53,085 $ 85,460 $114,592 $ 51,112 $ 70,169
Lots, net...................... 1,704 7,399 7,981 7,817 8,735 4,267 4,637
Resort management.............. 5,043 9,779 10,206 13,178 14,644 6,956 8,075
Interest....................... 14,670 24,089 20,366 19,111 19,994 9,523 10,958
Other.......................... 7,062 14,270 13,709 15,209 14,513 6,432 7,273
Gain on sale of First
Federal, net.................. -- -- 5,200 -- -- -- --
Savings and loan
operations.................... 10,099 18,762 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
53,833 107,771 110,547 140,775 172,478 78,290 101,112
-------- -------- -------- -------- -------- -------- --------
Expenses:
Cost of sales:
Vacation ownership........... 3,705 9,275 14,958 23,838 29,249 12,892 17,497
Lots......................... 532 1,705 1,855 1,970 2,068 942 1,212
Provision for loan losses...... 1,253 3,252 4,430 6,505 5,390 2,731 3,150
Selling........................ 9,612 20,715 31,176 50,738 63,243 28,364 36,255
Resort management.............. 4,791 9,960 8,784 11,730 12,593 5,826 7,305
General and
administrative................ 6,317 9,390 10,456 11,844 15,223 7,122 8,130
Interest....................... 9,984 14,449 10,528 8,562 6,757 3,565 2,476
Other.......................... 5,727 9,353 13,213 12,550 13,461 5,595 6,297
Savings and loan
operations.................... 10,005 19,345 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
51,926 97,444 95,400 127,737 147,984 67,037 82,322
-------- -------- -------- -------- -------- -------- --------
Earnings before provision
for income taxes................ 1,907 10,327 15,147 13,038 24,494 11,253 18,790
Provision for income taxes....... 658 3,157 2,878 5,009 9,631 4,421 7,488
-------- -------- -------- -------- -------- -------- --------
Net earnings..................... $ 1,249 $ 7,170 $ 12,269 $ 8,029 $ 14,863 $ 6,832 $ 11,302
======== ======== ======== ======== ======== ======== ========
Net earnings per share (b)....... $ .08 $ .45 $ .77 $ .51 $ .91 $ .42 $ .63
Weighted average shares
outstanding (b)
(in thousands).................. 15,961 15,817 15,864 15,880 16,367 16,105 17,928
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
------------ ---------------------------------------------- ----------------------
1992(a) 1993 1994 1995 1996 1996 1997
------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT
PERIOD END)
Loans receivable, net........... $381,844 $167,465 $139,810 $139,674 $152,069 $141,277 $170,161
Total assets.................... 586,700 245,073 224,726 215,518 253,799 223,354 265,003
Total financing
arrangements................... 180,812 112,581 111,943 86,982 58,110 79,556 61,124
Stockholders' equity............ 36,962 47,148 66,935 81,227 134,299 91,607 147,459
OTHER DATA
Net cash provided by
(used in)
Operating activities.......... $ 6,842 $ 9,500 $ 12,927 $ 8,654 $ 36,716 $ 14,405 $ 22,411
Investing activities.......... 45,070 12,661 (5,253) 2,061 (21,562) (6,267) (31,702)
Financing activities.......... (34,577) (78,607) 1,492 (22,261) (10,241) (7,342) 5,373
</TABLE>
__________________
(a) Effective June 30, 1992, Fairfield implemented "Fresh Start Reporting" in
connection with the confirmation of its plan of reorganization.
(b) Reflects the three-for-two split in the form of a stock dividend effective
on July 15, 1997.
9
<PAGE>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF VACATION BREAK
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain selected consolidated historical
financial data of Vacation Break and its consolidated subsidiaries, and is based
on the consolidated financial statements and selected financial data of Vacation
Break, including the notes thereto, which are set forth elsewhere in this Joint
Proxy Statement/Prospectus, and should be read in conjunction therewith (see
"Index to Consolidated Financial Statements of Vacation Break"). Interim
unaudited data for the six months ended June 30, 1996 and 1997 reflect, in the
opinion of management of Vacation Break, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of such data.
Results for the interim periods ended June 30, 1996 and 1997 are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole. The selected consolidated historical financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Vacation Break" and the financial
statements and notes thereto for the year ended December 31, 1996, set forth
elsewhere herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Vacation Break" and "Index to
Consolidated Financial Statements of Vacation Break."
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Vacation ownership interests........ $ -- $ 20,583 $ 27,644 $ 40,291 $ 80,020 $ 48,826 $ 50,979
Resort operations and other......... 1,671 4,203 7,602 9,086 12,343 7,547 5,892
Interest earned on mortgages
receivable........................ -- 871 2,508 4,704 8,657 3,733 5,884
Commissions earned on marketing
agreements........................ 14,385 12,629 8,839 4,502 1,721 1,069 --
------- ------- ------- -------- -------- -------- --------
Total Revenues........................ 16,056 38,286 46,593 58,583 102,741 61,175 62,755
Cost of units sold - VOIs............. -- 5,729 6,076 9,500 22,136 13,871 14,623
Sales and marketing costs - VOIs...... -- 5,070 5,413 12,446 34,683 18,749 20,718
Total costs and operating expenses.... 15,322 28,073 35,056 49,538 90,909 50,775 53,602
Operating Income...................... 734 10,213 11,537 9,045 11,832 10,400 9,153
Net income............................ 666 10,423 12,283 6,053 7,240 6,427 5,094
Pro forma net income (a).............. 199 5,676 7,765 5,845
Pro forma net income per share (a).... $ 0.03 $ 0.87 $ 1.19 $ 0.90
Net income per share (b).............. $ 0.82 $ 0.73 $ 0.57
Pro forma weighted average number
of common shares outstanding (in
thousands)........................... 6,500 6,500 6,500 6,525
Weighted average number of
common shares outstanding (in
thousands)........................... 8,843 8,756 8,885
BALANCE SHEET DATA (AT PERIOD END):
Total assets.......................... $ 21,173 $ 32,146 $ 55,886 $107,092 $138,480 $130,247 $158,030
Total liabilities..................... $ 25,301 $ 31,097 $ 44,231 $ 87,833 $110,653 $103,379 $124,983
Stockholders' equity (deficit)........ $ (4,128) $ 1,049 $ 11,655 $ 19,259 $ 27,827 $ 26,868 $ 33,047
</TABLE>
__________________
(a) Effective November 1, 1995, Vacation Break terminated all S Corporation
elections. The effect of these conversions to C Corporations was the
recognition of a deferred tax provision of $3,090,000 in the quarter ended
December 31, 1995 in the historical financial statements. Pro forma net
income reflects the effect on historical statement of operations data,
assuming the companies had been treated as C Corporations rather than as S
Corporations for income tax purposes, and assuming that combined federal and
state effective income tax rates aggregate 37.7% for 1992 and 38.6% for
1993, 1994 and 1995.
(b) The dilutive effect of common stock equivalents for the computation of
earnings per share is less than 3% for the six months ended June 30, 1996.
For the six months ended June 30, 1997, the use of common stock equivalents
was anti-dilutive. For the year ended December 31, 1996 the fully diluted
net income per share was $0.80.
10
<PAGE>
FAIRFIELD COMMUNITIES, INC.
UNAUDITED PRO FORMA COMBINED SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain unaudited pro forma combined
selected financial data for Fairfield, after giving effect to the Merger, which
is expected to be accounted for as a pooling of interests. For a description of
pooling-of-interests accounting with respect to the Merger and certain other
accounting matters, see "The Merger --Anticipated Accounting Treatment." The
unaudited pro forma combined selected financial data set forth below has been
prepared from, should be read in conjunction with, and is qualified in its
entirety by reference to, historical consolidated financial statements and notes
thereto of Fairfield and Vacation Break appearing elsewhere in this Joint Proxy
Statement/Prospectus or which is incorporated by reference in this Joint Proxy
Statement/Prospectus (see "Incorporation of Certain Documents by Reference").
Certain reclassifications have been made to the unaudited historical financial
statements to conform to the presentations expected to be used by the merged
companies. The unaudited pro forma combined selected financial data gives
effect to the Merger as if it had been consummated, with respect to statement of
earnings data, at the beginning of periods presented, or, with respect to
balance sheet data, as of the dates presented. As a result of the Merger, the
merged companies will incur certain transition costs, currently estimated at
$11.0 million ($8.4 million, net of tax), in connection with consummating the
transaction and integrating the operations of Fairfield and Vacation Break;
however, because these charges are nonrecurring, they have not been reflected in
the pro forma condensed combined statements of earnings. The unaudited pro
forma combined selected financial data does not give effect to the anticipated
cost savings expected to result from the merger. The unaudited pro forma
combined selected financial data has been included for illustrative purposes
only and is not necessarily indicative of the results of operations or financial
position that would have occurred had the Merger been consummated at the dates
indicated, nor is it necessarily indicative of future results of operations or
financial position of the merged companies.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------------- --------------
1994 1995 1996 1997
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
OPERATING DATA
Revenues:
Vacation ownership, net.................... $ 80,729 $ 125,751 $ 194,612 $ 121,148
Resort management.......................... 17,808 22,264 26,987 13,967
Interest................................... 22,874 23,815 28,651 16,842
Other...................................... 30,679 27,691 25,132 11,990
Gain on sale of First Federal, net......... 5,200 -- -- --
----------- ----------- ----------- -----------
157,290 199,521 275,382 163,947
----------- ----------- ----------- -----------
EXPENSES
Vacation ownership......................... 21,034 33,338 51,385 32,120
Provision for loan losses.................. 5,109 8,030 7,827 4,958
Selling.................................... 36,267 64,528 100,679 57,373
Resort management.......................... 16,639 21,375 25,418 12,782
General and administrative................. 20,029 21,610 25,466 15,681
Interest, net.............................. 11,687 10,521 10,754 5,038
Other...................................... 19,691 17,911 18,410 9,155
----------- ----------- ----------- -----------
130,456 177,313 239,939 137,107
----------- ----------- ----------- -----------
Earnings before provision for income taxes... 26,834 22,208 35,443 26,840
Provision for income taxes (a)............... 6,800 8,334 13,340 10,444
----------- ----------- ----------- -----------
Net earnings................................. $ 20,034 $ 13,874 $ 22,103 $ 16,396
=========== =========== =========== ===========
NET EARNINGS PER SHARE....................... $ 1.01 $ 0.70 $ 1.02 $ 0.70
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING.......... 19,812,522 19,843,285 21,739,667 23,325,844
=========== =========== =========== ===========
BALANCE SHEET DATA (AT PERIOD END)
Loans receivable, net........................ $ 162,114 $ 185,098 $ 225,098 $ 260,263
Total assets................................. 280,612 320,112 386,071 416,496
Total financing arrangements................. 130,720 117,763 113,295 126,594
Stockholders' equity......................... 74,072 100,486 162,126 172,132
</TABLE>
__________________
(a) Effective November 1, 1995, Vacation Break terminated all S Corporation
elections. The provision for income taxes reflects the effect on the
historical statement of earnings, assuming the companies had been treated as
C Corporations rather than as S Corporations for income tax purposes, and
assuming that combined federal and state effective income tax rates
aggregate 38.6% for 1994 and 1995.
11
<PAGE>
COMPARATIVE STOCK PRICES
Fairfield Common Stock has been listed on the NYSE since December 20, 1995,
and before that date was listed on the Nasdaq. Vacation Break Common Stock has
been listed on the Nasdaq since December 21, 1995. The following table sets
forth the high and low sale prices per share of Fairfield Common Stock as
reported on the NYSE Composite Transaction Tape and Nasdaq and of Vacation Break
Common Stock as reported on the Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
FAIRFIELD VACATION BREAK
COMMON STOCK (a) COMMON STOCK
------------------------ ----------------------
CALENDAR QUARTER HIGH LOW HIGH LOW
-------- --------- -------- --------
<S> <C> <C> <C> <C>
1995
First Quarter.............................. $ 4 1/16 $ 3 $ -- $ --
Second Quarter............................. 4 3 1/2 -- --
Third Quarter.............................. 5 1/2 3 11/16 -- --
Fourth Quarter............................. 5 1/2 3 15/16 5 3/8 (b) 5 (b)
1996
First Quarter.............................. 6 3/16 4 5/16 8 7/8 5 1/4
Second Quarter............................. 10 3/16 5 3/4 13 1/4 6 1/2
Third Quarter.............................. 14 7/16 8 13/16 13 1/2 9 1/4
Fourth Quarter............................. 17 3/16 12 1/4 20 6
1997
First Quarter.............................. 20 9/16 15 13/16 22 8 1/8
Second Quarter............................. 23 1/4 15 1/4 10 1/4 4 3/4
Third Quarter.............................. 40 7/8 24 5/8 24 1/16 8 3/4
Fourth Quarter (through November 7, 1997).. 46 3/16 38 1/4 29 5/8 21
</TABLE>
____________________
(a) Adjusted to reflect the three-for-two stock split in the form of a stock
dividend effective on July 15, 1997.
(b) Price for the period of December 21, 1995, the date on which Vacation Break
Common Stock was first listed on the Nasdaq, through December 31, 1995.
On August 8, 1997, the last trading day prior to the public announcement of
the Merger Agreement, the closing sale price of Fairfield Common Stock, as
reported on the NYSE Composite Transaction Tape, was $32 5/8 per share and the
closing sale price of Vacation Break Common Stock, as reported on the Nasdaq,
was $14 per share. The pro forma equivalent per share value of the Vacation
Break Common Stock on August 8, 1997, was $19.82 per share. The pro forma
equivalent per share value of Vacation Break Common Stock on any date equals the
closing sale price of Fairfield Common Stock on such date, as reported on the
NYSE Composite Transaction Tape, multiplied by the Exchange Ratio.
On November 7, 1997, the last trading day prior to the date of this Joint
Proxy Statement/Prospectus, the closing sale price of Fairfield Common Stock, as
reported on the NYSE Composite Transaction Tape, was $43 5/16 per share and the
closing sale price of Vacation Break Common Stock, as reported on the Nasdaq,
was $25 5/16 per share ($26.31 on a pro forma equivalent per share basis).
Stockholders are urged to obtain current quotations for the market prices
of Fairfield Common Stock and Vacation Break Common Stock. No assurance can be
given as to the market price of Fairfield Common Stock or Vacation Break Common
Stock at the Effective Time.
12
<PAGE>
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table presents, at the dates and for the periods indicated,
on an unaudited basis, certain comparative financial information relating to (i)
historical per share data for Fairfield and Vacation Break, (ii) pro forma
combined per share data giving effect to the Merger and (iii) pro forma
equivalent per share data for Vacation Break Common Stock. No cash dividends on
Fairfield Common Stock or Vacation Break Common Stock have been paid by
Fairfield or Vacation Break, respectively, during the respective periods. The
information presented in this table should be read in conjunction with the
historical consolidated financial statements and notes thereto of Fairfield and
Vacation Break, and is not necessarily indicative of future combined earnings or
financial position or of combined earnings or financial position that would have
been reported had the Merger been completed at the beginning of the respective
periods or as of the dates for which such unaudited pro forma information is
presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, SIX MONTHS
-------------------------------------------- ENDED
1994 1995 1996 JUNE 30, 1997
----------- ----------- ----------- -------------
FAIRFIELD-HISTORICAL (a)
<S> <C> <C> <C> <C>
Weighted average shares outstanding.......... 15,863,772 15,879,555 16,367,394 17,927,964
Net earnings per share....................... $ 0.77 $ 0.51 $ 0.91 $ 0.63
Book value per share......................... $ 7.97 $ 8.69
VACATION BREAK-HISTORICAL (b)
Weighted average shares outstanding.......... 6,500,000 6,524,658 8,843,247 8,885,399
Net earnings per share....................... $ 1.19 $ 0.90 $ 0.82 $ 0.57
Book value per share......................... $ 3.24 $ 3.84
PRO FORMA COMBINED
Weighted average shares outstanding (c)...... 19,812,522 19,843,285 21,739,667 23,325,844
Net earnings per share....................... $ 1.01 $ 0.70 $ 1.02 $ 0.70
Book value per share......................... $ 7.34 $ 7.75
VACATION BREAK PRO FORMA PER
SHARE EQUIVALENTS
Weighted average shares outstanding.......... 6,500,000 6,524,658 8,843,247 8,885,399
Net earnings per share (d)................... $ 0.61 $ 0.43 $ 0.62 $ 0.43
Book value per share (d)..................... $ 4.46 $ 4.71
</TABLE>
____________________
(a) Reflects the three-for-two stock split in the form of a stock dividend
effective on July 15, 1997.
(b) Historical information for Vacation Break prior to 1996 is presented on a
pro forma basis reflecting a 65,000-to-1 stock split effective December
1995 and assuming that certain companies of Vacation Break had been treated
as C Corporations rather than as S Corporations for income tax purposes,
and assuming that combined federal and state effective income tax rates
aggregate 38.6% for 1994 and 1995.
(c) Includes the shares of Fairfield Common Stock to be issued in connection
with the Merger, which calculation is based on an exchange rate of .6075
shares of Fairfield Common Stock for each weighted average share of
Vacation Break Common Stock outstanding.
(d) Pro forma per share equivalent data of Vacation Break was computed by
multiplying the pro forma combined per share data by the exchange rate of
.6075.
13
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY
BY THE HOLDERS OF FAIRFIELD COMMON STOCK AND THE HOLDERS OF VACATION BREAK
COMMON STOCK IN CONNECTION WITH THE MATTERS TO BE VOTED UPON AT THE SPECIAL
MEETINGS. EACH OF THE FOLLOWING FACTORS MAY HAVE A MATERIAL ADVERSE EFFECT ON
FAIRFIELD'S OPERATIONS, FINANCIAL RESULTS, FINANCIAL CONDITION, LIQUIDITY,
MARKET VALUATION OR MARKET LIQUIDITY IN FUTURE PERIODS.
RISKS RELATED TO THE MERGER
UNCERTAINTY AS TO FUTURE FINANCIAL RESULTS. Fairfield believes that the
Merger with Vacation Break will offer opportunities for long-term efficiencies
in operations that should positively affect future results of the combined
operations of Fairfield and Vacation Break. However, the Merger may adversely
affect Fairfield's financial performance in 1997 and future years until such
time as Fairfield is able to realize the positive effect of opportunities for
long-term efficiencies in operations. In addition, the combined companies will
be more complex and diverse than Fairfield individually, and the combination and
continued operation of their distinct business operations will present difficult
challenges for Fairfield's management due to the increased time and resources
required in the management effort. While management and the Fairfield Board
believe that the combination can be effected in a manner which will realize the
value of the companies, there can be no assurances as to the effect of the
Merger.
Following the Merger, in order to maintain and increase profitability, the
combined companies will need to successfully integrate and streamline
overlapping functions. Fairfield and Vacation Break have different systems and
procedures in many operational areas which must be rationalized and integrated.
There can be no assurance that integration will be successfully accomplished.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separate organizations. The integration of certain
operations following the Merger will require the dedication of management
resources which may temporarily distract attention from the day-to-day business
of the combined companies. Failure to effectively accomplish the integration of
the companies' operations could have an adverse effect on Fairfield's results of
operations and financial condition.
EXCHANGE RATIO. The Exchange Ratio was determined through arm's-length
negotiations between Fairfield and Vacation Break based, in part, upon the
relative market prices of the Fairfield Common Stock and the Vacation Break
Common Stock at the time it was agreed upon. The Exchange Ratio will not be
adjusted for any fluctuations in the market prices of the Fairfield Common Stock
or the Vacation Break Common Stock that may occur before or after the Effective
Time. Although Vacation Break has the right to terminate the Merger Agreement
on the date that is 2 business days prior to the Closing Date if the closing
price on such date for a share of Fairfield Common Stock as reported on the NYSE
Composite Transaction Tape is less than $19 3/4, this right is subject to the
limitation that if on that date the Standard and Poor's Composite Index of 500
Stocks has decreased since the date of the Merger Agreement, the percentage
decrease in the price of Fairfield Common Stock since the date of the Merger
Agreement must be 20% greater than the percentage decrease of such index. See
"Other Terms of the Merger and the Merger Agreement --Termination."
Accordingly, the market price of shares of Fairfield Common Stock received
pursuant to the Merger could be significantly less than the market price of
Fairfield Common Stock at the time the Exchange Ratio was established.
MERGER AND RELATED EXPENSES. Transaction costs relating to the negotiation
of, preparation for, and consummation of the Merger and the anticipated
combination of certain operations of Fairfield and Vacation Break will result in
a one-time charge to Fairfield's earnings of approximately $11.0 million in the
quarter in which the Merger is consummated (expected to be the fourth quarter of
1997). This charge is expected to include the fees and expenses payable to
financial advisors, legal fees and other transaction expenses related to the
Merger. In addition, there can be no assurance that Fairfield will not incur
additional charges in subsequent quarters to reflect costs associated with the
Merger and the integration of Fairfield's and Vacation Break's operations.
SHARES ELIGIBLE FOR PUBLIC SALE. Sales of substantial amounts of Fairfield
Common Stock in the public market after the consummation of the Merger could
adversely affect prevailing market prices. The shares of Fairfield Common Stock
to be issued in the Merger to the Principal Stockholders, pursuant to the
Principal Stockholders Agreement, and other affiliates of Vacation Break will be
eligible for sale upon the close of business on the date on which results
covering at least 30 days of combined operations of Fairfield and Vacation Break
have been published in a public filing or announcement subject to certain
limitations under the Securities Act and certain tax representations applicable
to affiliates of Vacation
14
<PAGE>
Break. The remainder of the shares of Fairfield Common Stock to be issued in the
Merger will be eligible for immediate sale in the public market.
ACCOUNTING TREATMENT. The Merger is expected to be accounted for by the
pooling-of-interests method of accounting. Under this method of accounting, the
recorded assets and liabilities of Fairfield and Vacation Break will be carried
forward to Fairfield at their historical recorded amounts after addressing any
conformity issues; net income of Fairfield after the Merger will include the net
income of Fairfield and Vacation Break for the entire fiscal year in which the
Merger occurs, and the historical reported net income of Fairfield and Vacation
Break for prior periods will be combined and restated as net income of Fairfield
after addressing any conformity issues. It is a condition to the obligations of
each of Fairfield and Vacation Break to effect the Merger that they receive
letters from each of their independent auditors to the effect that the Merger
will qualify for pooling-of-interests accounting treatment. No assurance can be
given, however, that Fairfield will waive the foregoing condition and effect the
Merger if pooling-of-interests accounting is not available. If pooling-of-
interests accounting treatment is not available, the purchase method of
accounting would be applicable. Under the purchase method, the book value of
Vacation Break's assets and liabilities would be adjusted to their fair values,
which could result in future higher costs of sales, thereby adversely affecting
Fairfield's earnings. Additionally, the excess of the purchase price over the
fair value of Vacation Break's assets would be capitalized and expensed, which
would also materially and adversely affect Fairfield's earnings.
TIMESHARE INDUSTRY OPERATING RISKS
Fairfield's and Vacation Break's business is subject to all of the
operating risks inherent in the timeshare industry. These risks include an
oversupply of timeshare units, a reduction in demand for timeshare units,
changes in travel and vacation patterns, changes in governmental regulations of
the timeshare industry and increases in construction costs or taxes, as well as
negative publicity concerning the industry. The timeshare industry is highly
fragmented, containing a large number of developers. In the past the timeshare
industry as a whole has experienced a negative image as a result of various
developers employing high pressure sales and marketing tactics, constructing low
quality units and engaging in other potentially misleading practices.
Consequently, negative publicity with respect to any one or more developers in
the timeshare industry could have a disproportionate effect on all of the
developers in the industry.
RISKS ASSOCIATED WITH ACQUISITIONS AND NEW DEVELOPMENT
A principal component of Fairfield's strategy is to acquire and develop new
destination resorts. Fairfield's future growth and financial success will
depend upon a number of factors, including its ability to identify attractive
resort acquisition and development opportunities, consummate the acquisition or
development of such resorts on favorable terms, profitably sell VOIs at such
resorts, and successfully integrate the newly acquired or developed resorts into
Fairfield's sales and marketing programs. Fairfield's ability to execute its
growth strategy depends to a significant degree on the existence of attractive
resort acquisition and development opportunities and its ability to obtain
additional debt and equity capital and to fund such acquisitions and
development. There can be no assurance that Fairfield will be successful with
respect to such factors.
REGULATION OF MARKETING AND SALES OF VOIS
The marketing and sales of VOIs and other operations are subject to
extensive regulation by the federal government and by the states in which
Fairfield's and Vacation Break's resorts are located and in which the VOIs are
marketed and sold. The federal government and many states have adopted specific
laws and regulations regarding the sale of timeshares, telemarketing and certain
of Fairfield's and Vacation Break's other activities. Fairfield and Vacation
Break believe that they are in substantial compliance with all laws and
regulations to which they are currently subject. However, there is no clear
guidance regarding the scope and interpretation of the registration requirements
of various state laws regulating certain types of timeshare marketing and sales
programs. As part of managing its compliance program, and in anticipation of
the Merger, Vacation Break has begun to register its resorts for VOI sales in
additional jurisdictions, consistent with Fairfield's practices. There can be no
assurance that the costs of compliance in the applicable states will not be
substantial.
In addition, no assurance can be given that the cost of complying with laws
and regulations in all jurisdictions in which Fairfield and Vacation Break
desire to conduct sales would not be significant, would not impair the cost-
effectiveness of its marketing programs, or that Fairfield and Vacation Break
are in fact in compliance with all applicable laws and regulations. If
Fairfield and Vacation Break are not in substantial compliance with applicable
laws and regulations, among
15
<PAGE>
other consequences, they could be subject to regulatory actions and purchasers
of VOIs could have certain rescission rights. In addition, there can be no
assurance that laws and regulations (including existing interpretations thereof)
applicable to Fairfield and Vacation Break in any specific jurisdiction will not
be revised or that other laws or regulations will not be adopted which could
increase Fairfield's and Vacation Break's cost of compliance or prevent
Fairfield or Vacation Break from selling VOIs or conducting other operations in
such jurisdiction. In particular, Fairfield has become more reliant on the use
of telemarketing based marketing programs and substantially all of Vacation
Break's marketing programs are dependent on telemarketing. Regulation of and
laws governing the use of telemarketing has grown in the recent past and
additional laws and regulations governing these activities may be adopted in the
future. Any failure to comply with any applicable law or regulation, or any
increases in the costs of compliance could have a material adverse effect on
Fairfield or Vacation Break.
PENDING STATE ENFORCEMENT PROCEEDINGS
The Attorneys General of two states (Michigan and Vermont) have pending
litigation and other actions against Vacation Break relating to its marketing of
vacation packages alleging that Vacation Break violated the consumer protection
or telemarketing laws of such states. Vacation Break is actively attempting to
settle these proceedings with each of the states, and is engaged in settlement
discussions with each of them. As of September 30, 1997, Vacation Break settled
proceedings with the counties of Napa and Ventura, California and the States of
California, Maryland, New York, Connecticut, Massachusetts, Texas, North
Carolina, West Virginia, New Mexico, Wisconsin, Minnesota, Illinois and
Washington primarily relating to the same marketing practice as the pending
proceedings. In connection with such settlements (excluding the counties of
Napa and Ventura, California and the States of California and Maryland),
Vacation Break has agreed to provide a fund of up to $225,000 to satisfy claims
from eligible consumers who submit a written request for a refund within a 60
day period of time. The marketing practice in question involves a prior direct
mail campaign and telemarketing. The issues raised concern whether the
solicitations of a vacation package properly disclosed that the offers required
the vacation package to be purchased, or whether, if applicable, a tour of a
timeshare resort was required in connection with the purchase of the vacation
package. In addition, Vacation Break also agreed to pay the states an aggregate
of $332,500 in reimbursement of their investigative costs and related fees.
Fairfield has the right to terminate the Merger Agreement if before the Closing
Date all of the pending proceedings, other than the Vermont proceedings, have
not been dismissed or settled on substantially the same terms as, or terms no
less favorable than, the terms previously approved by Fairfield. See "Other
Terms of the Merger and the Merger Agreement --Termination." Vacation Break does
not anticipate that the legal and settlement costs it expects to incur will have
a material impact on Vacation Break's results of operations, liquidity or
financial condition. However, there can be no assurance that settlement of the
pending proceedings can be reached on terms acceptable to Vacation Break, or at
all, or that additional states will not commence similar proceedings.
Accordingly, future legal and settlement costs incurred, or fines assessed if
settlement cannot be reached, could be substantially greater than expected.
PENDING LITIGATION
Fairfield has certain lawsuits pending against it, as described in Note 9
of the Notes to Consolidated Financial Statements in Fairfield's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997, incorporated by
reference herein. Vacation Break has a lawsuit pending against it as described
in Note 24 of the Notes to Fiscal Year End Consolidated Financial Statements and
Note 6 of the Notes to Interim Period Consolidated Condensed Financial
Statements of Vacation Break included elsewhere herein. There can be no
assurance that those lawsuits or any other litigation pending against Fairfield
or Vacation Break previously disclosed will not be decided adversely and, if
decided adversely, will not have a material adverse effect on the financial
condition, liquidity or results of operations of Fairfield or Vacation Break,
respectively, or the combined companies after the consummation of the Merger.
RISKS ASSOCIATED WITH FINANCING; HEDGING ACTIVITIES
Fairfield and Vacation Break offer financing to buyers of VOIs at their
respective resorts, which bears interest at fixed rates and is collateralized by
a first mortgage on, or retention of title under an installment sales contract
for, the underlying VOI. Fairfield and its wholly owned finance subsidiary,
Fairfield Acceptance Corporation ("FAC"), have revolving credit facilities to
finance Fairfield's contracts receivable. Vacation Break has entered into
agreements with three lenders to finance its contracts receivable. Fairfield's
and Vacation Break's current credit facilities which finance contracts
receivable are, and are expected to continue to be, at variable interest rates.
Fairfield and Vacation Break presently believe they have adequate borrowing
availability under their respective credit facilities. However, any significant
increase in
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interest rates on Fairfield's or Vacation Break's loans or in prepayment rates
on their contracts receivable could have an adverse effect on the profitability
of Fairfield's or Vacation Break's portfolio of contracts receivable or the
future availability of borrowings under their credit facilities or their ability
to obtain future financing. Fairfield attempts to retain borrowing availability
under its revolving credit facility by periodically selling contracts receivable
to FAC and uses the proceeds from these sales to reduce the outstanding balance
under its revolving credit facility. FAC and its subsidiaries periodically
securitize such receivables through financings with third parties. The proceeds
from the securitization transactions are then used to reduce the balances of
FAC's revolving credit facility. However, there can be no assurance that
Fairfield and FAC will be able to successfully continue such securitizations,
and any failure to continue such securitizations could result in Fairfield and
FAC having insufficient borrowing availability under their credit facilities to
maintain their operations at current levels. In connection with certain of FAC's
securitization transactions issued with variable interest rates, FAC has sought
to limit its exposure to possible future increases in interest rates by
purchasing interest rate caps. No assurance can be given that FAC will be able
to obtain interest rate caps or other hedging instruments in connection with
future securitization transactions or that the cost associated with interest
rate caps or other hedging instruments will not increase FAC's operating costs.
IMPACT OF ECONOMIC CYCLES
Any substantial downturn in economic conditions or any significant price
increases related to the travel and tourism industry could significantly depress
discretionary consumer spending and have a material adverse effect on
Fairfield's and Vacation Break's business. Any such economic conditions,
including inflation, may also affect the future availability of attractive
financing rates for Fairfield, Vacation Break or their customers and may
materially adversely affect Fairfield's and Vacation Break's business.
Inflation may also affect Fairfield's and Vacation Break's income derived from
sales of vacation packages to the extent that Fairfield's and Vacation Break's
costs of providing vacation packages increases from the time that the vacation
package is sold until the time that the vacation is taken. Furthermore, adverse
changes in general economic conditions may adversely affect the collectability
of Fairfield's and Vacation Break's loans to VOI purchasers.
RISKS ASSOCIATED WITH CUSTOMER DEFAULT
Fairfield and Vacation Break bear the risk of defaults by purchasers of
VOIs. Because VOIs are vacation homes and not primary residences, purchasers of
VOIs who finance a portion of the purchase price present a greater risk of
default than typical borrowers under home mortgages. Private mortgage insurance
or its equivalent is not readily available to cover VOIs. If a purchaser of a
VOI defaults on the loan made by Fairfield or Vacation Break to finance the
purchase of such interest during the early part of the repayment schedule, the
associated marketing costs other than certain sales commissions are not
recoverable and they must be incurred again after the VOI has been returned to
Fairfield's or Vacation Break's inventory for resale. Commissions paid in
connection with the sale of VOIs may be recoverable from sales personnel upon
default in accordance with contractual arrangements with Fairfield or Vacation
Break, depending upon the amount of time that has elapsed between the sale and
the default and the number of payments made prior to such default. Although
Fairfield and Vacation Break in many cases may have recourse against sales
agents for commissions paid, no assurance can be given that any commissions will
be fully recovered in the event of purchaser defaults.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations,
the current or previous owner, manager or operator of real property may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in, or emanating from, such property, as well as
related costs of investigation and property damage. Such laws often impose such
liability without regard to whether the owner, manager or operator knew of, or
was responsible for, the presence of such hazardous or toxic substances.
Fairfield and Vacation Break believe that they are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances, but no assurance can be given that hazardous or
toxic substances will not be found on their properties or properties that they
previously owned or may acquire.
COMPLIANCE WITH LAWS GOVERNING ACCESS
A number of state and federal laws, including the Fair Housing Act and the
Americans with Disabilities Act, impose requirements related to access and use
by disabled persons of a variety of public accommodations and facilities.
Although Fairfield and Vacation Break believe that their resorts are
substantially in compliance with these laws, Fairfield and Vacation
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Break may incur additional costs of complying with such laws. The ultimate
amount of the cost of compliance with such legislation is not currently
ascertainable, and, while such costs are not expected to have a material effect
on Fairfield and Vacation Break, such costs could be substantial.
UNINSURED LOSS; NATURAL DISASTERS
There are certain types of losses (such as losses arising from acts of war)
that are not generally insured because they are either uninsurable or not
economically insurable and for which Fairfield and Vacation Break do not have
insurance coverage. Should an uninsured loss or a loss in excess of insured
limits occur, Fairfield and Vacation Break could lose their capital invested in
a resort, as well as the anticipated future revenues from such resort, and would
continue to be obligated on any mortgage indebtedness or other obligations
related to the resort. Moreover, if the property owners association fails to
adequately insure the units, any uninsured or underinsured casualty may affect
the collectability of the contracts receivable related to those units. In
addition, Fairfield's and Vacation Break's resorts could suffer significant
damage as a result of hurricanes, earthquakes, floods and other natural
disasters. Any such damage, as well as adverse weather conditions generally,
could reduce Fairfield's and Vacation Break's ability to sell VOIs at their
resorts.
COMPETITION
As Fairfield develops destination resorts, Fairfield may experience
significant competition for qualified personnel, favorable sites and customers
at those resorts from other entities engaged in the business of resort
development, sales and operation, including VOI ownership, condominiums, hotels
and motels. Many well-known lodging, hospitality and entertainment companies
have begun to develop and sell VOIs in resort properties. While many of those
companies have targeted a more narrow market segment than Fairfield's historical
market segment, there can be no assurance that Fairfield and those companies
will not compete more broadly at destination locations. In such event,
Fairfield will be required to compete with companies that may have significantly
greater resources.
All of the resort properties developed or under development by Vacation
Break or in which Vacation Break sells VOIs are located in south and central
Florida, and it is anticipated that Vacation Break's activities will continue to
be concentrated in Florida following the Merger. There are many hotels and
other vacation resorts in Florida which provide competitive alternatives to the
purchase of a VOI in one of Vacation Break's resort properties.
CONCENTRATION IN FLORIDA MARKET
Fairfield currently has one resort property under development in Florida,
and, as noted under "--Competition" above, all of Vacation Break's resort
properties are located in Florida. Accordingly, following the Merger, based on
1996 operations, approximately 50% of the combined businesses of Fairfield and
Vacation Break will be concentrated in the Florida market. The Companies
believe that certain fundamental aspects of Florida as a location for resort
properties (including climate, quality of life, and opportunities for sports and
leisure activities) have contributed and, following the Merger, will continue to
contribute to the Companies' abilities to sell VOIs. The Florida market is one
of the largest markets for VOI sales in the United States. However, Florida is
also one of the most competitive markets for VOI sales. In addition,
historically, natural disasters and media coverage of crimes committed in
Florida have had significant adverse effects on tourism in Florida.
Accordingly, there can be no assurance that the Florida market will continue to
be favorable for VOI sales or that the businesses of the Companies will not be
adversely affected by their concentration in the Florida market.
APPLICABILITY OF FEDERAL SECURITIES LAWS TO THE SALE OF VOIS
It is possible that the VOIs sold by Fairfield or Vacation Break may be
deemed to be securities as defined in Section 2(1) of the Securities Act. If the
VOIs were determined to be securities for that purpose, their sale would require
registration under the Securities Act of 1933, as amended (the "Securities
Act"). Neither Fairfield nor Vacation Break has registered the sale of VOIs
under the Securities Act and neither of them intends to do so in the future. If
the sale of VOIs were found to have violated the registration provisions of the
Securities Act, purchasers of VOIs would have the right to rescind their
purchases of those VOIs. If a substantial number of purchasers sought rescission
and were successful, Fairfield's or Vacation Break's, as the case may be,
business, results of operations and financial condition could be materially
adversely affected.
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ANTI-TAKEOVER MATTERS
Fairfield is subject to various factors that could have the effect of
making it more difficult for a party to acquire control of Fairfield, which
could adversely affect the market price of the Fairfield Common Stock.
Fairfield's Certificate of Incorporation grants the Fairfield Board the
authority to issue up to 5,000,000 shares of preferred stock, par value $.01 per
share ("Fairfield Preferred Stock"), having such rights, preferences and
privileges as designated by the Fairfield Board without stockholder approval.
The rights of the holders of the Fairfield Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Fairfield
Preferred Stock that may be issued in the future. In addition, Fairfield has
adopted a Rights Agreement which provides for the issuance of a 2/3 right (a
"Right") for each outstanding share of Fairfield Common Stock. The Rights
entitle the holder to purchase, under certain circumstances, one one-hundredth
of a share of Fairfield's Series A Junior Participating Preferred Stock at
$25.00 per share. The Rights may have the effect of discouraging an unsolicited
takeover proposal. Section 203 of the DGCL is also applicable to Fairfield and
contains provisions that restrict certain business combinations with interested
stockholders. Section 203 may have the effect of inhibiting a non-negotiated
merger or other business combination involving Fairfield.
THE SPECIAL MEETINGS
DATE, TIME AND PLACE
FAIRFIELD. The Fairfield Special Meeting will be held at The Capital
Hotel, 111 West Markham Street, Little Rock, Arkansas at 9:00 a.m. Central Time
on December 19, 1997.
VACATION BREAK. The Vacation Break Special Meeting will be held at the Sea
Gardens Beach & Tennis Resort, 615 N. Ocean Blvd., Pompano Beach, Florida at
10:00 a.m. Eastern Time on December 19, 1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETINGS
FAIRFIELD. At the Fairfield Special Meeting, holders of record of
Fairfield Common Stock are being asked to approve the Issuance of Fairfield
Common Stock and to approve the Certificate Amendment. See "The Merger," "Other
Terms of the Merger and the Merger Agreement" and "Approval of the Certificate
Amendment." THE FAIRFIELD BOARD HAS APPROVED THE ISSUANCE OF FAIRFIELD COMMON
STOCK AND THE CERTIFICATE AMENDMENT. THE FAIRFIELD BOARD RECOMMENDS THAT
FAIRFIELD STOCKHOLDERS VOTE "FOR" BOTH THE ISSUANCE OF FAIRFIELD COMMON STOCK
AND THE CERTIFICATE AMENDMENT.
VACATION BREAK. At the Vacation Break Special Meeting, holders of record
of Vacation Break Common Stock are being asked to approve the Merger Agreement.
See "The Merger" and "Other Terms of the Merger and the Merger Agreement." THE
VACATION BREAK BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE FAIR TO AND IN THE BEST
INTERESTS OF THE STOCKHOLDERS OF VACATION BREAK, AND HAS APPROVED THE MERGER
AGREEMENT. THE VACATION BREAK BOARD RECOMMENDS THAT VACATION BREAK
STOCKHOLDERS VOTE "FOR" THE MERGER AGREEMENT.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
FAIRFIELD. Only holders of record of Fairfield Common Stock at the close of
business on the Record Date are entitled to receive notice of and to vote at the
Fairfield Special Meeting. On the Record Date, 16,991,605 shares of Fairfield
Common Stock were issued and outstanding and held by approximately 2,422 holders
of record. A majority of the shares of Fairfield Common Stock issued and
outstanding and entitled to vote on the Record Date must be represented in
person or by proxy at the Fairfield Special Meeting in order for a quorum to be
present for purposes of voting on the approval of the Issuance of Fairfield
Common Stock and approval of the Certificate Amendment. In the event that a
quorum is not present at the Fairfield Special Meeting, it is expected that such
meeting will be adjourned or postponed to solicit additional proxies. The
persons named as proxies by a Fairfield stockholder may propose and vote for one
or more such adjournments or postponements; provided, however, that no proxy
that is voted against any proposal will be voted in favor of any such
adjournment or postponement. Holders of record of Fairfield Common Stock on the
Record Date are each entitled to one vote per share on each matter to be voted
on at the Fairfield Special Meeting.
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VACATION BREAK. Only holders of record of Vacation Break Common Stock at
the close of business on the Record Date are entitled to notice of and to vote
at the Vacation Break Special Meeting. On the Record Date, 8,676,214 shares of
Vacation Break Common Stock were issued and outstanding and held by
approximately 27 holders of record. A majority of the shares of Vacation Break
Common Stock issued and outstanding and entitled to vote on the Record Date must
be represented in person or by proxy at the Vacation Break Special Meeting in
order for a quorum to be present for purposes of voting on the approval of the
Merger Agreement. In the event that a quorum is not present at the Vacation
Break Special Meeting, it is expected that such meeting will be adjourned or
postponed to solicit additional proxies. The persons named as proxies by a
Vacation Break stockholder may propose and vote for one or more such
adjournments or postponements; provided, however, that no proxy that is voted
against approval of the Merger Agreement will be voted in favor of any such
adjournment or postponement. Holders of record of Vacation Break Common Stock on
the Record Date are each entitled to one vote per share on each matter to be
voted on at the Vacation Break Special Meeting.
VOTES REQUIRED
FAIRFIELD. The approval of the Issuance of Fairfield Common Stock requires
the affirmative vote of holders of record of a majority of the shares of
Fairfield Common Stock cast on the proposal provided that the total vote cast on
the proposal represents more than 50% of all shares of Fairfield Common Stock
outstanding on the Record Date. The approval of the Certificate Amendment
requires the affirmative vote of holders of record of a majority of the shares
of Fairfield Common Stock outstanding on the Record Date. THE APPROVAL OF THE
ISSUANCE OF FAIRFIELD COMMON STOCK IS CONDITIONED UPON THE APPROVAL OF THE
CERTIFICATE AMENDMENT AND THE APPROVAL OF BOTH PROPOSALS IS A CONDITION TO THE
CLOSING OF THE MERGER.
VACATION BREAK. The adoption of the Merger Agreement requires the
affirmative vote of holders of record of a majority of the shares of Vacation
Break Common Stock outstanding on the Record Date. Pursuant to the Principal
Stockholders Agreement, the Principal Stockholders have agreed to vote all of
the shares of Vacation Break Common Stock beneficially owned by them for
approval of the Merger Agreement. As of the Record Date, the Principal
Stockholders beneficially owned approximately 76.1% of the Vacation Break Common
Stock outstanding on that date, and were entitled to vote 6,425,598 shares of
Vacation Break Common Stock, which represented approximately 74.1% of the shares
of Vacation Break Common Stock outstanding on that date. Therefore, it is
expected that the Merger Agreement will be approved irrespective of whether or
the manner in which the other holders of Vacation Break Common Stock vote. Mr.
Muller's and Mr. Sheehan's obligation to vote in favor of such matter is subject
to their obligations to discharge faithfully their duties as directors or
officers of Vacation Break; provided, however, they will be obligated to vote
for approval of the Merger Agreement unless the Vacation Break Board terminates
the Merger Agreement.
SHARE OWNERSHIP OF MANAGEMENT
At the close of business on the Record Date, directors and executive
officers of Fairfield and their affiliates beneficially owned 2,534,552 shares
of Fairfield Common Stock, which represented approximately 14.3% of the shares
of Fairfield Common Stock outstanding on such date, and were entitled to vote
1,762,052 shares of Fairfield Common Stock, which represented approximately
10.4% of the shares of Fairfield Common Stock outstanding on such date. Each
such director and executive officer has indicated his or her present intention
to vote, or cause to be voted, the Fairfield Common Stock owned by him or her
for the approval of the Issuance of Fairfield Common Stock and the Certificate
Amendment.
At the close of business on the Record Date, directors and executive
officers of Vacation Break and their affiliates beneficially owned 6,843,598
shares of Vacation Break Common Stock, which represented approximately 78.9% of
the shares of Vacation Break Common Stock outstanding on such date, and were
entitled to vote 6,432,598 shares of Vacation Break Common Stock, which
represented approximately 74.1% of the shares of Vacation Break Common Stock
outstanding on such date. For a description of the obligations of Messrs.
Muller and Sheehan to vote, or cause to be voted, the Vacation Break Common
Stock beneficially owned by them for approval of the Merger Agreement, see
"--Votes Required."
VOTING OF PROXIES
Shares represented by all properly executed proxies received in time for
the Special Meetings will be voted at such Special Meetings in the manner
specified by the holders thereof. At the Fairfield Special Meeting, properly
executed proxies that do not contain voting instructions will be voted in favor
of the Issuance of Fairfield Common Stock and the approval
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of the Certificate Amendment. At the Vacation Break Special Meeting, properly
executed proxies that do not contain voting instructions will be voted in favor
of the approval of the Merger Agreement.
Shares of Fairfield Common Stock or Vacation Break Common Stock represented
at the applicable Special Meeting but not voting, including shares of Fairfield
Common Stock or Vacation Break Common Stock, as the case may be, for which
proxies have been received, but with respect to which holders of shares have
abstained on any matter, will be treated as present at the applicable Special
Meeting for purposes of determining the presence or absence of a quorum for the
transaction of all business.
For voting purposes at the Special Meetings, only shares affirmatively
voted in favor of a proposal (including properly executed proxies not containing
voting instructions) will be counted as favorable votes for such proposal. The
failure to submit a proxy (or to vote in person) or the abstention from voting
will have the same effect as a vote against the Certificate Amendment and, if
holders of less than a majority of the shares of Fairfield Common Stock
outstanding on the Record Date vote in respect of that proposal, the Issuance of
Fairfield Common Stock. In addition, under the applicable rules of the NYSE and
the Nasdaq, brokers who hold shares in street name for customers who are the
beneficial owners of such shares are prohibited from giving a proxy to vote such
customers' shares in the absence of specific instructions from such customers
("broker nonvotes"). Accordingly, broker nonvotes will also have the same
effect as abstention.
The persons named as proxies by a Fairfield or Vacation Break stockholder
may propose and vote for one or more adjournments or postponements of the
applicable Special Meeting, including, without limitation, adjournments to
permit further solicitations of proxies in favor of any proposal; provided,
however, that no proxy that is voted against a proposal will be voted in favor
of any such adjournment or postponement.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed Fairfield or Vacation Break form of
proxy does not preclude a stockholder from voting in person. A stockholder may
revoke a proxy at any time prior to its exercise by filing with the Secretary of
Fairfield (in the case of a Fairfield stockholder) or the Secretary of Vacation
Break (in the case of a Vacation Break stockholder) a duly executed revocation
of proxy by submitting a duly executed proxy bearing a later date or by
appearing at the applicable Special Meeting and voting in person at such Special
Meeting. Attendance at the relevant Special Meeting will not, in and of itself,
constitute revocation of a proxy.
SOLICITATION OF PROXIES
Fairfield and Vacation Break will share equally the cost of printing and
mailing this Joint Proxy Statement/Prospectus and the applicable fees associated
with the filing of this Joint Proxy Statement/Prospectus with the SEC. In
addition to solicitation by mail, the directors, officers and employees of each
Company and its subsidiaries may solicit proxies from stockholders of such
Company by telephone or telegram or in person. Arrangements will also be made
with brokerage houses and other custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of stock held of
record by such persons. Fairfield and Vacation Break will reimburse such
custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses
in connection therewith.
Morrow & Co., Inc. will assist in the solicitation of proxies by Fairfield
and will receive customary fees of $5,500 for its services plus reimbursement of
its expenses.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
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THE MERGER
GENERAL
The Fairfield Board and the Vacation Break Board have approved the Merger
Agreement, which provides for the Merger to occur at the Effective Time, with
Vacation Break continuing as the surviving corporation and a wholly owned
subsidiary of Fairfield. This section of the Joint Proxy Statement/Prospectus
describes certain material aspects of the proposed Merger and the Merger
Agreement. The description of the Merger and the Merger Agreement contained in
this Joint Proxy Statement/Prospectus does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached hereto as Appendix A and which is incorporated herein by reference.
All stockholders of Fairfield and Vacation Break are urged to read carefully the
Merger Agreement in its entirety.
STRUCTURE OF THE MERGER
Subject to the terms and conditions of the Merger Agreement and in
accordance with the FBCA, at the Effective Time, Merger Sub will merge with and
into Vacation Break. Vacation Break will be the surviving corporation in the
Merger, and will continue its corporate existence under Florida law as a wholly
owned subsidiary of Fairfield. The Vacation Break Articles, as in effect
immediately prior to the Effective Time, will be amended and restated to read in
their entirety to be substantially the same as the Articles of Incorporation of
Merger Sub and as so amended and restated, will be the Articles of Incorporation
of the Surviving Corporation. The Vacation Break By-laws, as in effect
immediately prior to the Effective Time, will be amended and restated to read in
their entirety to be substantially the same as the By-laws of Merger Sub, and as
so amended and restated, will be the By-laws of the Surviving Corporation.
MERGER CONSIDERATION
Upon consummation of the Merger, each outstanding share of Vacation Break
Common Stock, other than shares owned by Fairfield or Vacation Break or any
subsidiary of Fairfield or Vacation Break, will be converted into the right to
receive .6075 of a fully paid and nonassessable share of Fairfield Common Stock.
See "Other Terms of the Merger and the Merger Agreement --Conversion of Shares;
Procedures for Exchange of Certificates; Fractional Shares." The Exchange Ratio
was determined through arm's-length negotiations between Fairfield and Vacation
Break.
Any shares of Vacation Break Common Stock owned immediately prior to the
Effective Time by Fairfield, Vacation Break or any of their subsidiaries will be
canceled. As of the date of this Joint Proxy Statement/Prospectus, Fairfield
and its subsidiaries do not own, and have agreed not to acquire, any shares of
Vacation Break Common Stock.
EFFECTIVE TIME
The Effective Time will be the time the Articles of Merger have been
accepted for filing by the Florida Department of State (or such later time as is
agreed upon by Fairfield and Vacation Break and specified in such Articles of
Merger). The filing of the Articles of Merger will occur as soon as practicable
but no later than the second business day after satisfaction or waiver of the
conditions to the consummation of the Merger set forth in the Merger Agreement
unless another date is agreed to in writing by Vacation Break and Fairfield.
See "Other Terms of the Merger and the Merger Agreement --Conditions to the
Consummation of the Merger."
BACKGROUND OF THE MERGER
One of the announced elements of Fairfield's growth strategy has been to
pursue acquisitions of other timeshare operations that would complement
Fairfield's operations. In evaluating such opportunities, Fairfield considers
the expected financial benefits, quality and location of resorts, property owner
base, quality of contracts receivable, experience of sales personnel, marketing
capabilities and other factors.
In November 1996, Vacation Break announced that it had entered into an
agreement and plan of merger (as amended in March 1997) with various companies
owned or controlled by James E. Lambert. While that merger was pending, on
March 14, 1997, it was disclosed that the Attorneys General of a number of
states and two California counties, had initiated litigation and other actions
alleging that Vacation Break's practices in marketing vacation packages violated
certain consumer protection laws. On April 23, 1997, Vacation Break announced
that the agreement and plan of merger with Lambert's
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companies had been terminated by mutual agreement of the parties. Vacation Break
had determined through its due diligence investigations of Lambert's companies
that the merger was unlikely to provide the benefits and synergies originally
anticipated. Additionally, the provisions of settlements with the state
regulators which Vacation Break anticipates might have had a more adverse effect
on the operations of Lambert's companies than on the operations of Vacation
Break. Vacation Break's stock price, which had risen on the announcement of the
merger, had dropped significantly after the disclosure of the litigation and the
termination of the merger agreement.
After the termination of the merger with Lambert's companies, the Vacation
Break Board reviewed alternative courses of action to maximize stockholder
value. The Vacation Break Board, with the assistance of Josephthal and its
other advisors, considered acquiring other properties for development as
timeshare resorts, acquiring other timeshare companies, instituting a stock
repurchase program, and entering into a merger or sale transaction. Vacation
Break's Board ultimately rejected each of such alternative courses of action due
to the fact that Vacation Break had insufficient excess capital and that use of
Vacation Break Common Stock was not deemed an acceptable means of financing in
light of the Vacation Break Board's belief that the Vacation Break Common Stock
was significantly undervalued. In addition, pursuit of such alternative courses
of action would not have addressed Vacation Break's interest in finding a
suitable successor to its current chief executive officer.
At the meeting of the American Resort Development Association, an industry
convention held during the last week of April 1997, Fairfield's President and
Chief Executive Officer, John W. McConnell, met with Mr. Muller, and certain of
Vacation Break's senior executives to explore a possible business combination of
Vacation Break with Fairfield. However, Mr. McConnell indicated that it would
not be appropriate to continue their preliminary discussions until Vacation
Break had made substantial progress in resolving certain litigation and other
state actions noted above which had been disclosed on March 14, 1997.
No further discussions were held until after Vacation Break resolved the
California actions by agreeing to a stipulated judgment entered in the Superior
Court of California on June 6, 1997. Mr. McConnell contacted Mr. Muller and
arranged for a meeting, which occurred in Atlanta, Georgia on June 10, 1997, and
was attended by Mr. McConnell, Mr. Muller and Mr. Henry Cairo, Chief Operating
Officer and Chief Financial Officer of Vacation Break. Messrs. Muller and Cairo
informed Mr. McConnell of the terms of the California settlement, and advised
him that they believed the remaining state actions were likely to be resolved on
substantially similar terms. They also reiterated Vacation Break's interest in
exploring a possible business combination with Fairfield if an acceptable
exchange ratio could be agreed upon. At that meeting they discussed possible
alternatives and accounting treatments of possible business combinations. They
agreed that any business combination should be a stock transaction effected by
means of a tax free reorganization. Mr. Muller indicated that an appropriate
exchange ratio would require a value of not less than $15 per share for Vacation
Break Common Stock or, based on then-current values, approximately one share
(before adjustment to give effect to Fairfield's stock split effected on July
15, 1997) of Fairfield Common Stock for each two shares of Vacation Break Common
Stock. On the basis of these discussions, Mr. McConnell agreed to arrange a
further analysis of Vacation Break's value and, if appropriate, discuss
informally with the members of the Fairfield Board the concept of a possible
merger with Vacation Break.
Following the June 10, 1997 meeting, Fairfield retained Stephens Inc. to
act as its financial advisor to evaluate on a preliminary basis the possible
acquisition of Vacation Break. Representatives of Stephens and Fairfield
reviewed Vacation Break's financial statements, analyzed Vacation Break's
operations and considered issues relating to valuation. Vacation Break also
provided to Fairfield additional information concerning the state actions and
other pending litigation on June 25, 1997. Mr. McConnell informally discussed
the possible acquisition of Vacation Break, including the proposed exchange
ratio of approximately $15 per share, with members of the Fairfield Board and
was advised to proceed with preliminary negotiations concerning a business
combination with Vacation Break.
On July 8, 1997, Mr. McConnell telephoned Mr. Muller to advise him that,
based on Fairfield's preliminary valuation work, Fairfield was willing to pursue
further discussions regarding a business combination with Vacation Break at an
exchange ratio with a value in the $15 per share range. Mr. Muller advised Mr.
McConnell that Vacation Break had retained Josephthal and Montgomery Securities
to contact a number of hospitality and other companies to solicit their interest
in acquiring Vacation Break. Mr. McConnell advised Mr. Muller that Fairfield
would not participate in a bidding contest for Vacation Break and both parties
agreed that procedure would likely risk harming Vacation Break's business and,
by adding to the uncertainty caused by the previously abandoned merger with Mr.
Lambert's companies, possibly result in Vacation Break losing some of its best
qualified personnel. Such concerns are particularly applicable in personnel
intensive businesses like Vacation Break's where corporate uncertainty may cause
employees to pursue what they perceive to be more
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stable work environments, may invite competitors to intensify efforts to lure
sales and marketing personnel or may foster low morale among employees. Vacation
Break experienced increased employee turnover during its negotiations with
Lambert's companies and, given that the majority of its sales and marketing
staff are not party to employment agreements, the Vacation Break Board was
sensitive to any increase in the risk of losing key personnel and the
corresponding business disruption that would likely occur. Mr. Muller telephoned
Mr. McConnell on July 9, 1997, and advised that Vacation Break had determined to
explore a transaction with Fairfield prior to soliciting other offers.
On July 9, 1997, Montgomery Securities sent Mr. McConnell an outline of
certain key terms for the possible merger of Vacation Break with Fairfield and
Mr. Sheehan sent Mr. McConnell a proposed confidentiality agreement. The
outline called for a stock-for-stock merger, tax-free to Vacation Break's
stockholders, and included a condition that the transaction qualify for pooling-
of-interest accounting treatment. During the three-day period of July 9-11, a
number of conversations occurred between Mr. McConnell and other Fairfield
representatives and Mr. Muller and other representatives of Vacation Break
concerning the proposed transaction, with the primary point of discussion being
the proposed value of the exchange ratio. Mr. McConnell sent Mr. Sheehan a
document and information request on July 11, 1997, so that material could be
assembled in advance of the arrival of Fairfield's representatives on July 14,
1997, and Jones, Day, Reavis & Pogue ("Jones Day"), Fairfield's outside counsel,
forwarded a mutual confidentiality agreement to Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A., Vacation Break's outside counsel. On July 14, 1997, a
mutual confidentiality agreement between the two Companies was signed.
On July 14-16, 1997, a total of 12 members of Fairfield's senior management
conducted due diligence investigations of Vacation Break in Fort Lauderdale,
meeting with their counterparts in the Vacation Break organization to exchange
information and review assembled documents. On July 15, 1997, in response to an
increase in Vacation Break's stock's trading price and volume, Vacation Break
issued a press release indicating that it was engaged in preliminary merger
discussions. On July 15 and July 16, 1997, Mr. McConnell, other senior
executives of Fairfield and a representative of Stephens met with Mr. Muller,
other senior executives of Vacation Break and representatives of Vacation
Break's financial advisors to discuss pricing and other issues. On July 16,
1997, the stock exchange ratio of .6075 and the right for Vacation Break to
terminate the transaction in the event of a 20% or more decline in Fairfield's
stock price, in excess of any drop in a broad based market index, were agreed
upon in principle subject to resolution of the state actions and various other
issues and confirmation of various operational, financial, and legal
assumptions.
On July 16, 1997, representatives of Vacation Break provided Fairfield with
a due diligence request for information, in anticipation of the arrival of
Vacation Break representatives in Little Rock, Arkansas for a due diligence
review of Fairfield on July 17 and 18, 1997. Representatives of Vacation Break
and its financial advisors reviewed assembled documents and held discussions
with their Fairfield counterparts on July 17 and 18, 1997.
During the following three-week period, financial, legal, accounting, and
management representatives of Fairfield and Vacation Break and their legal and
financial advisors conferenced on various occasions to conduct additional due
diligence reviews of the Companies, to discuss the financial, structural, legal
and other terms of the potential merger and to negotiate the terms of the
Merger Agreement, the Principal Stockholders Agreement, Escrow Agreement and
Registration Rights Agreement. The discussions were conducted on a
substantially continuous basis, culminating in an agreement on the terms of the
potential transaction on August 8, 1997.
On July 23, 1997, special meetings were held of Fairfield's and Vacation
Break's Boards of Directors to provide information to their respective Directors
concerning the status of merger discussions and to solicit guidance from the
Directors concerning issues under negotiation. The presentations to and
discussions by the Fairfield Board were wide ranging and detailed and included,
among other things, (i) a presentation by Fairfield's senior management prepared
with the assistance of Stephens of an overview and valuation of Vacation Break,
PRO FORMA financial projections, an exchange ratio analysis, an analysis of
comparable public vacation ownership companies and an analysis of comparable
acquisition transactions, (ii) the results of the due diligence review of
Vacation Break, (iii) the state regulatory actions and certain other litigation
and contingent liabilities of Vacation Break, (iv) personnel issues associated
with the management of Vacation Break, (v) the opportunities associated with the
possible business combination with Vacation Break, including possible synergies
and marketing advantages which might be realized, (vi) the various risks and
costs associated with the possible business combination, (vii) the likely
reaction of the markets and Fairfield's stockholders to the proposed business
combination with Vacation Break, (viii) the projected accretive effect of the
transaction, (ix) Vacation Break's product inventory and (x) a review of
discussions with representatives of Vacation Break regarding the terms of the
potential business combination. Stephens presented its analysis of the proposed
business combination, the financial benefits to Fairfield, the
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likely stock market reactions to a business combination with Vacation Break, and
advised that, based on then-current information but subject to completion of due
diligence and finalization of the Merger Agreement, it believed that the merger
would be fair to Fairfield from a financial point of view.
The Vacation Break Board discussed and reviewed certain aspects of the
proposed business combination with Fairfield, including the potential legal
restrictions placed on shares of Fairfield Common Stock to be received by
certain Vacation Break stockholders upon consummation of the proposed business
combination as well as more general matters concerning whether the timing of
such a transaction was in the best interests of the stockholders of Vacation
Break. The Vacation Break Board further reviewed and discussed (i) Vacation
Break's due diligence review of Fairfield, (ii) benefits to Vacation Break and
its stockholders from a business combination with Fairfield, including greater
liquidity for its stockholders, improved market position, enhanced marketing and
sales capacity, access to new markets, a quality senior management team, an
improved balance sheet and overall superior access to additional capital, (iii)
the benefits a merger with Vacation Break would afford Fairfield in terms of
marketing and geographic diversity, (iv) the effect on Vacation Break's
personnel, (v) any structural impediments, including integration with
Fairfield's Fairshare Plus system, and (vi) Josephthal's and Montgomery's review
of the potential business combination with Fairfield, along with alternative
courses of action, including pursuing another sale or merger of Vacation Break.
After a review and discussion of each of the potential alternative courses of
action, the Vacation Break Board directed its advisors to determine whether
other potential merger candidates or acquirors, some of whom had been approached
directly and others of whom had only been approached indirectly, would in fact
have any interest at that time in merging with or acquiring Vacation Break.
Josephthal and Montgomery reviewed with the Vacation Break Board various
possible transaction partners and discussed that such partners were not likely
to offer, and as of such time gave no indication that they would offer, a
transaction on terms superior to those proposed by Fairfield under present
circumstances, in light of Vacation Break's recent experiences. The Vacation
Break Board received indirect confirmation that no alternative suitable merger
candidate was likely to emerge when it did not receive any solicitations or
offers subsequent to its July 15, 1997 press release stating that it was engaged
in preliminary merger discussions. The Vacation Break Board believes that
because such discussions were not governed by a lock-up agreement and were
disclosed as being only preliminary in nature, prospective bidders would presume
that Vacation Break was open to inquiries, notwithstanding the fact that
Vacation Break is closely held by insiders.
During the period from July 20 through August 8, 1997, representatives of
Fairfield and Vacation Break continued to negotiate the terms of the Merger
Agreement and other related agreements. During this period the major items that
were discussed at various times included (A) the representations and warranties,
(B) the covenants pending the closing, (C) Vacation Break's rights to terminate
the agreement and the related termination fee and payment requirement, (D) the
limited indemnification of Fairfield by the Principal Stockholders for the
Indemnified Matters, (E) ongoing indemnification of Vacation Break's officers
and directors and maintenance of directors' and officers' insurance coverage by
Fairfield following the closing, (F) the agreement of the Principal Stockholders
to vote their shares in favor of the business combination, (G) the proposed
grant of registration rights to the Principal Stockholders with respect to the
shares of Fairfield Common Stock they would receive as a result of the proposed
merger, (H) waiver of certain severance pay provisions by Messrs. Muller and
Sheehan and other executive officer employment arrangements, including non-
competition covenants by Messrs. Muller and Sheehan, (I) Fairfield's termination
rights, (J) the responsibility for payment of certain costs and fees associated
with the merger, (K) matters relating to stock options and warrants previously
issued by Vacation Break and the fee agreed to be paid to its financial
advisors, (L) the requirement that necessary consents be obtained, and (M) the
release, investment and collateral provisions of the Escrow Agreement.
On August 8, 1997, special meetings of the Boards of Directors of Fairfield
and Vacation Break were held to consider for approval the proposed business
combination and the terms of the proposed Merger Agreement and other related
agreements, and, in Fairfield's case (a) a proposed amendment of Fairfield's
certificate of incorporation to increase the number of authorized shares of
Fairfield Common Stock from 25 million to 100 million, in order to provide
sufficient authorized shares of Fairfield Common Stock to issue in connection
with the proposed business combination with Vacation Break and for other
corporate purposes, and (b) to consider recommending to Fairfield's stockholders
for approval (i) the issuance of stock in connection with the proposed business
combination with Vacation Break and (ii) the amendment of Fairfield's
certificate of incorporation to increase its share capital.
All but one of Fairfield's Directors participated in the August 8 Fairfield
Board of Directors meeting and representatives of Stephens and Jones Day
participated in the meeting. The proposed merger agreement and other related
agreements, in substantially final form, were provided to Fairfield's Directors
in advance of the meeting. At the meeting, the Board reviewed the terms of the
proposed merger, including the final resolution of various of the matters listed
above,
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and were updated concerning the ongoing due diligence investigations of Vacation
Break, including the litigation matters subject to indemnification, with advice
of Fairfield's outside counsel, and the status of the state regulatory actions.
Mr. McConnell presented a financial overview of the possible benefits and risks
of the merger. The representative of Stephens presented their opinion that the
Exchange Ratio in the proposed business merger with Vacation Break would be fair
from a financial point of view. Following discussion, the Directors attending
the meeting unanimously approved the terms of the merger agreement and the other
related agreements, the proposed amendment to Fairfield's certificate of
incorporation to increase the share capital of Fairfield and resolved to
recommend to Fairfield's stockholders for approval the issuance of stock in
connection with the proposed merger and the amendment of Fairfield's certificate
of incorporation to increase its share capital.
At its August 8 special meeting, the Vacation Break Board discussed the
proposed final terms of the Merger Agreement and whether the terms contained
therein were in the best interests of Vacation Break's stockholders. The
Vacation Break Board focused primarily on the results of Vacation Break's due
diligence investigations, the proposed exchange ratio and the timetable and
mechanics of the proposed exchange of shares, and further reviewed various other
elements of the Merger, including the closing conditions and restrictions on
Vacation Break's operations pending closing. After concluding such review, and
upon receipt from Montgomery of its opinion that the consideration to be
received in the Merger was fair to Vacation Break stockholders from a financial
point of view, the Vacation Break Board authorized senior management to execute
the Merger Agreement and certain related documents.
The Merger Agreement and the other related agreements and documents were
signed after the close of business on August 8, 1997, and a joint public
announcement of the proposed merger was made on August 10, 1997. Based on the
closing sale price of the Fairfield Common Stock on August 8, 1997, as reported
on the NYSE Composite Transaction Tape of $32 5/8, the Exchange Ratio valued a
share of Vacation Break Common Stock at $19.82 on that date. See "Comparative
Stock Prices."
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
RECOMMENDATIONS OF THE FAIRFIELD BOARD. THE MEMBERS OF THE FAIRFIELD BOARD
PRESENT AT THE MEETING TO CONSIDER THE MERGER AGREEMENT FOUND, BASED ON THE
MATERIAL FACTORS SET FORTH BELOW, THAT THE MERGER IS IN THE BEST INTERESTS OF
FAIRFIELD AND ITS STOCKHOLDERS AND UNANIMOUSLY APPROVED THE MERGER AND THE
ISSUANCE OF FAIRFIELD COMMON STOCK AND THE CERTIFICATE AMENDMENT. THE FAIRFIELD
BOARD RECOMMENDS THAT FAIRFIELD STOCKHOLDERS VOTE "FOR" ISSUANCE OF FAIRFIELD
COMMON STOCK AND THE CERTIFICATE AMENDMENT.
The decision of the Fairfield Board to approve the Merger and recommend the
approval by holders of Fairfield Common Stock of the Issuance of Fairfield
Common Stock and the Certificate Amendment was based upon the following material
factors:
. The Fairfield Board's understanding of the conditions of the timeshare
industry in the United States, the strategic options available to
Fairfield, and the likelihood of future consolidation in the timeshare
industry in the United States, all of which were viewed as favoring growth
through acquisitions such as the Merger.
. The Fairfield Board's consideration of Fairfield's strategic plan and the
belief that Fairfield's ability to pursue its plan would be enhanced by the
Merger. The Fairfield Board viewed the Merger as advancing certain
announced elements of Fairfield's growth strategy -the acquisition of other
timeshare operations that complement Fairfield's operations and the
expansion of operations in destination locations such as central and south
Florida. This growth is expected to enhance Fairfield's ability to pursue
further growth and, thus, maintain a dominant position in the timeshare
industry.
. The Fairfield Board's consideration of the business, operations, financial
position, prospects and personnel of Fairfield and Vacation Break,
indicated that the Merger would enable Fairfield to achieve rapid growth
with trained personnel.
. The Fairfield Board's consideration of information regarding the business
and financial prospects of Fairfield and Vacation Break, including
potential synergies, indicated that the operations of each would
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complement the other and the Merger would facilitate reductions in overall
financing costs for the combined operations.
. The Fairfield Board's consideration of the terms of the Merger Agreement,
the Principal Stockholders Agreement and the other agreements in relation
to Vacation Break's assets and the historical stock prices of Vacation
Break and Fairfield and other factors. The terms of the Merger Agreement,
including the fixed Exchange Ratio, were viewed as reasonable in relation
to the potential recovery in the market price of Vacation Break Common
Stock that was anticipated to result if Vacation Break successfully settled
the pending state enforcement proceedings. The terms of the Principal
Stockholders Agreement were viewed as affording additional protection
against the contingencies relating to the Indemnified Matters.
. The Fairfield Board's consideration of the fact that the Exchange Ratio was
not subject to adjustment based on changes in market prices of Fairfield
Common Stock was regarded positively in relation to the potential recovery
in the market price of Vacation Break Common Stock if Vacation Break
successfully settled the pending state enforcement proceedings.
. The Fairfield Board's consideration of the strategic fit of Vacation
Break's portfolio of resort properties, which are concentrated in the
central and south Florida market, with Fairfield's more geographically
diverse portfolio of resort properties, and the potential for expansion in
the south Florida market, which is one of the most favorable destination
markets.
. The Fairfield Board's consideration of the expectation that, based on the
Exchange Ratio, the Merger would be accretive to holders of Fairfield
Common Stock on an earnings basis in the first full fiscal year following
the Effective Time.
. The Fairfield Board's belief that the transaction would be accomplished on
a tax-free basis for federal income tax purposes (other than cash received
in lieu of fractional shares) and accounted for as a pooling-of-interests
transaction.
. The Fairfield Board's consideration of the willingness of the Principal
Stockholders to vote their shares of Vacation Break Common Stock to approve
the Merger Agreement, which is expected to minimize the risk that the
Merger would not be consummated due to lack of approval by Vacation Break
stockholders.
. The Fairfield Board's consideration of presentations by, and discussions
with, senior executives of Fairfield and representatives of Stephens and
Jones Day, counsel to Fairfield, regarding the terms of the Merger
Agreement, the Principal Stockholders Agreement and the other agreements
and transactions contemplated thereby, and the results of the management's
due diligence review, which allowed the Fairfield Board the opportunity to
further evaluate the foregoing factors.
. The Fairfield Board's receipt of Stephens' opinion described below that, as
of August 8, 1997 (which opinion has been reissued as of the date of this
Joint Proxy Statement/Prospectus), the Exchange Ratio was fair from a
financial point of view to Fairfield and, accordingly, to the holders of
Fairfield Common Stock.
The foregoing discussion of the information and factors considered and
given weight by the Fairfield Board includes the material factors given
significant consideration but is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the Fairfield Board did not find it practicable to and did not attempt to rank
or assign relative weights to the foregoing factors. In addition, individual
members of the Fairfield Board may have given different weights to different
factors.
RECOMMENDATION OF THE VACATION BREAK BOARD. THE VACATION BREAK BOARD HAS
UNANIMOUSLY DETERMINED THAT THE MERGER AND OTHER TRANSACTIONS CONTEMPLATED BY
THE MERGER AGREEMENT ARE FAIR TO AND IN THE BEST INTERESTS OF THE STOCKHOLDERS
OF VACATION BREAK, AND HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT
VACATION BREAK STOCKHOLDERS VOTE "FOR" ADOPTION OF THE MERGER AGREEMENT.
The decision of the Vacation Break Board to approve the Merger Agreement
and recommend the adoption thereof by holders of Vacation Break Common Stock was
based upon the following material factors each of which helped the
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Vacation Break Board determine that the Merger was in the best interests of the
Vacation Break stockholders and the last five of which helped the Vacation Break
Board determine that the Merger was fair to the Vacation Break stockholders:
. The Vacation Break Board's understanding of the conditions in the timeshare
industry in the United States, the strategic options available to Vacation
Break, the likelihood of future consolidation in the timeshare industry in
the United States and the limitations placed on Vacation Break's ability to
take advantage of such opportunities following the termination in April
1997 of the Agreement and Plan of Merger that Vacation Break had entered
into with various companies owned or controlled by James E. Lambert.
. The Vacation Break Board's consideration of the business, operations,
financial position, prospects and personnel of Vacation Break and
Fairfield.
. The Vacation Break Board's consideration of information regarding the
business and financial prospects of Vacation Break and Fairfield.
. The Vacation Break Board's consideration of the depth and the strength of
Fairfield's senior management.
. The Vacation Break Board's consideration of the strategic fit of Vacation
Break's portfolio of resort properties, which are concentrated in the
central and south Florida market, with Fairfield's more geographically
diverse portfolio of resort properties, and the potential for expansion in
the south Florida market.
. The Vacation Break Board's consideration of the fact that the Fairfield
Common Stock is more widely traded than the Vacation Break Common Stock in
part because Vacation Break Common Stock is more closely held by directors
and executive officers of Vacation Break and that, accordingly, the
conversion of shares of Vacation Break Common Stock into shares of
Fairfield Common Stock would be expected to result in increased liquidity
for former holders of Vacation Break Common Stock.
. The Vacation Break Board's belief that the combined Companies would benefit
from certain potential economies of scale and operational synergies,
including potential reductions in general and administrative costs and
reduced costs of financing installment sales of VOIs, with fewer
restrictions imposed by the lender as compared to Vacation Break's current
financing. The Vacation Break Board believes that the terms of the Merger
are fair to Vacation Break stockholders due in part to the expectation that
said economies of scale and operational synergies will have an accretive
effect on Fairfield's earnings in the first full fiscal year following the
Effective Time.
. The Vacation Break Board's consideration of the ability of holders of
Vacation Break Common Stock to participate in the potential benefits of the
combined companies based on the Exchange Ratio. The Vacation Break Board
believes that the fixed Exchange Ratio established under the terms of the
Merger permits the Vacation Break stockholders to experience the full
benefit of any market appreciation that may occur with respect to the
Fairfield Common Stock as a result of the anticipated benefits of the
Merger.
. The Vacation Break Board's belief that the transaction would be
accomplished on a tax-free basis for federal income tax purposes (other
than cash received in lieu of fractional shares), which maximizes the value
and fairness of the Merger consideration recieved by the Vacation Break
stockholders due to the fact that such consideration is not taxed upon the
consummation of the Merger, and accounted for as a pooling-of-interests
transaction.
. The Vacation Break Board's consideration of presentations, and discussions
with senior executives of Vacation Break and representatives of Greenberg
Traurig Hoffman Lipoff Rosen and Quentel, P.A., Josephthal and Montgomery
Securities, regarding the terms of the Merger Agreement and the results of
the management's due diligence review. The Vacation Break Board considered
the net benefits to be derived by the Vacation Break stockholders due to
the terms and consequent effects of the Merger, as supported by Vacation
Break management's diligence review, in determining that the Merger is fair
to Vacation Break stockholders.
. The Vacation Break Board's receipt of Montgomery's opinion that, as of the
date of the August 8, 1997 Board meeting (which opinion has been reissued
as of the date of this Joint Proxy Statement/Prospectus), the consideration
to be received by the stockholders of Vacation Break pursuant to the Merger
is fair to the holders of Vacation Break Common Stock from a financial
point of view, as of the date of such opinion.
The foregoing discussion of the information and factors considered and
given weight by the Vacation Break Board includes the material factors given
significant consideration but is not intended to be exhaustive. In view of the
variety of
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factors considered in connection with its evaluation of the Merger, the Vacation
Break Board did not find it practicable to and did not attempt to rank or assign
relative weights to the foregoing factors. In addition, individual members of
the Vacation Break Board may have given different weights to different factors.
OPINIONS OF FINANCIAL ADVISORS
FAIRFIELD. Fairfield retained Stephens to act as a financial advisor in
connection with the Merger. On August 8, 1997, Stephens rendered to the
Fairfield Board its verbal opinion, which was later confirmed in writing, that,
as of such date and based upon and subject to the factors and assumptions
included in its presentation to the Fairfield Board, the Exchange Ratio was fair
from a financial point of view to Fairfield and, accordingly, to the holders of
Fairfield Common Stock. Stephens subsequently delivered its written opinion
dated August 8, 1997 (which has been reissued as of the date of this Joint Proxy
Statement/Prospectus) (the "Stephens Opinion") that, as of such date and based
upon and subject to the factors and assumptions set forth in such written
opinion, the Exchange Ratio was fair from a financial point of view to Fairfield
and, accordingly, to the holders of Fairfield Common Stock. The full text of
the Stephens Opinion, which sets forth the assumptions made, matters considered,
qualifications and limitations on the review undertaken by Stephens, is attached
as Appendix B to this Joint Proxy Statement/Prospectus and is incorporated
herein by reference. The summary of the Stephens Opinion set forth in this
Joint Proxy Statement/Prospectus is qualified in its entirety by reference to
the full text of such opinion. No limitations were imposed by the Fairfield
Board upon Stephens with respect to investigations made or procedures followed
by Stephens in rendering the Stephens Opinion.
The Stephens Opinion was provided to the Fairfield Board for its
information and is directed only to the fairness from a financial point of view
of the Exchange Ratio to Fairfield and, accordingly, to the holders of Fairfield
Common Stock and does not constitute a recommendation to any Fairfield
stockholder as to how such stockholder should vote at the Fairfield Special
Meeting. The Exchange Ratio was determined through negotiations between
Fairfield and Vacation Break and was approved by the Fairfield Board. The
Stephens Opinion is based upon market, economic, financial and other conditions
as they existed and could be evaluated as of the date of the Stephens Opinion.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Stephens Opinion or the presentation made by
Stephens to the Fairfield Board. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analysis which should be
considered and the application of those methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to partial analysis
or summary description. In arriving at its opinion, Stephens determined the
most appropriate methods of financial analysis, which are summarized below, but
did not attribute any particular weight to any analysis or factor considered by
it, but rather made qualitative judgments as to the significance and relevance
of each such analysis and factor. Accordingly, Stephens believes that its
analyses must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, would create an incomplete view of
the process underlying its opinion.
In performing its analyses, Stephens assumed that existing industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Fairfield or Vacation
Break would not vary materially from existing conditions. Any estimates
contained in the analyses performed by Stephens are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Additionally, estimates of the value
of businesses or securities do not purport to be appraisals or to reflect the
prices at which such businesses or securities might actually be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty. In addition, as described above, the opinion of Stephens delivered
to the Fairfield Board on August 8, 1997 and Stephens's presentation to the
Fairfield Board were among several factors taken into consideration by the
Fairfield Board in making its determination to approve the Merger Agreement.
Consequently, Stephens' analyses described below should not be viewed as
determinative of the decision of the Fairfield Board to approve the Merger.
In arriving at its opinion, Stephens, among other things, reviewed certain
publicly available business and financial information relating to each of
Fairfield and Vacation Break, as well as the Merger Agreement. Stephens also
reviewed certain other information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities, prospects and margins of
Vacation Break and Fairfield, as well as the cost savings and related expenses,
synergies and other merger benefits expected to result from the Merger, in each
case furnished to it by Vacation Break and Fairfield. Stephens also met with
members of senior management of Vacation Break and Fairfield concerning their
respective businesses, prospects and the cost savings and related expenses,
synergies and other merger benefits expected to result from the Merger.
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Stephens reviewed the historical market prices and trading activity for the
Vacation Break Common Stock and the Fairfield Common Stock and compared them
with those of certain publicly traded companies that it deemed to be reasonably
similar to Vacation Break and Fairfield, respectively. Stephens also compared
the historical and projected results of operations of Vacation Break and
Fairfield with those of certain companies that it deemed to be reasonably
similar to Vacation Break and Fairfield, respectively. In addition, Stephens
reviewed the financial terms of certain other business combinations that it
deemed relevant. Stephens reviewed such other financial studies and analyses
and performed such other investigations and took into account such other matters
as it deemed necessary, including its assessment of general economic, market and
monetary conditions.
In connection with its review, Stephens relied on the accuracy and
completeness of all information supplied or otherwise made available to Stephens
by Vacation Break and Fairfield, and Stephens did not independently verify such
information or undertake an independent appraisal of the assets or liabilities
of Vacation Break or Fairfield. With respect to the financial forecasts,
including the projected margins, and the information related to the cost savings
and related expenses, synergies and other merger benefits expected to result
from the Merger furnished by Vacation Break and Fairfield, Stephens assumed that
such forecasts and information were reasonably prepared and reflected the best
currently available estimates and judgments of the management of Vacation Break
or Fairfield as to the expected future financial performance of Vacation Break
or Fairfield, as the case may be, as well as such savings, expenses, synergies
and other benefits. In addition, Stephens assumed that the Merger will qualify
for pooling-of-interests accounting treatment in accordance with generally
accepted accounting principles and as a tax-free reorganization for United
States federal income tax purposes. The Stephens Opinion is necessarily based
upon market, economic, financial and other conditions as they existed and could
be evaluated as of the date of such opinion.
The following is a summary of the analyses performed by Stephens in
connection with the preparation of the opinion dated August 8, 1997 of Stephens
and presented to the Fairfield Board on that date.
COMPARABLE PUBLIC COMPANY ANALYSIS. Stephens compared certain publicly
available financial and operating data and projected financial performance of
selected publicly traded companies with similar financial operating data and
projected financial performance of each of Fairfield (based on estimates
provided by Fairfield management) and Vacation Break (based on estimates
provided by Vacation Break management). The companies chosen by Stephens as
reasonably similar to both Fairfield and Vacation Break included: Signature
Resorts, Inc., Silverleaf Resorts, Inc., and Vistana, Inc., which became public
companies in August 1996, June 1997, and February 1997, respectively
(collectively the "Comparable Companies"). The Comparable Companies may differ
from Fairfield and Vacation Break in several respects, including their relative
market value, leverage ratios and growth rates of long-term earnings.
Stephens determined multiples for the Comparable Companies of share price
to estimated 1997 and estimated 1998 earnings per share. An analysis of the
multiples for the Comparable Companies produced the following results: share
price to estimated 1997 earnings per share yielded a range of 13.7x to 28.0x,
with a mean of 21.8x (with Fairfield at 26.1x and Vacation Break at 13.7x); and
share price to estimated 1998 earnings per share yielded a range of 11.4x to
21.7x, with a mean of 17.6x (with Fairfield at 21.7x and Vacation Break at
11.4x). Stephens observed that Vacation Break's multiples were the lowest among
the comparable public companies and Fairfield's were the highest. Accordingly,
these analyses supported Stephens' opinion.
Stephens considered the companies utilized in the above analysis to be
reasonably similar to Fairfield and Vacation Break because each participates in
the timeshare industry; however, none of these companies is identical to
Fairfield or Vacation Break. Accordingly, an analysis of the results of the
foregoing is not purely mathematical. Rather, it involves complex
considerations and judgments concerning differences in historical and projected
financial and operating characteristics of the Comparable Companies and other
factors that could affect the public trading value of the Comparable Companies
or Company to which they are being compared. In addition, the multiples of
share price to estimated earnings per share for the Comparable Companies were
based on projections prepared by research analysts using only publicly available
information and mean estimates. Accordingly, such estimates may or may not
prove to be accurate.
ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS. Stephens
reviewed certain publicly available information regarding the three business
combinations involving timeshare companies for which detailed information was
publicly available, all of which were announced since September 23, 1996
(collectively, the "Comparable Transactions"). The Comparable Transactions, in
reverse chronological order of public announcement, were the following: the
acquisition of
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LSI Group Holdings, PLC by Signature Resorts, Inc.; the acquisition of
Plantation Resorts Group, Inc. by Signature Resorts, Inc.; and the acquisition
of AVCOM International, Inc. by Signature Resorts, Inc.
Stephens then compared the prices paid in the Comparable Transactions in
terms of, among other things, the transactional value (defined as offer value
(defined as offer price per share multiplied by shares and in-the-money options
outstanding) plus preferred equity at liquidation value plus short-term debt
plus long-term debt plus minority interest less cash and marketable securities
less exercisable option proceeds) as a multiple of last twelve months ("LTM")
revenue. An analysis of the multiples for the Comparable Transactions of the
transaction value to LTM revenues yielded a range of 1.7x to 2.7x, with a mean
of 2.4 (with the combined consideration in the Merger at 2.4x). Stephens
observed that the implied multiples for the Merger were within the ranges for
the Comparable Transactions. Accordingly, this analysis supported Stephens'
opinion.
STOCK TRADING HISTORY AND RELATIVE PRICE RATIO ANALYSIS. Stephens reviewed
the history of the trading prices for the Fairfield Common Stock and the
Vacation Break Common Stock in relation to each other, and the relationship
between changes in such relative values and the Exchange Ratio, including the
historical relative price ratios (the closing price of Vacation Break Common
Stock divided by the closing price of Fairfield Common Stock) during the period
from January 19, 1996 (approximately four weeks after the date the Vacation
Break Common Stock commenced trading on the Nasdaq) through August 7, 1997. The
relative price ratio was 1.2736 on January 19, 1996 and decreased to a ratio of
0.4358 on August 7, 1997 due to the 148.9% increase in the price of Vacation
Break Common Stock over this period versus the 627.4% increase in the price of
Fairfield Common Stock over the same period. During the entire period, the high
was 1.6694 and the low was 0.3203. This compares to the Exchange Ratio of
0.6075. Stephens noted the upward trend in the price of the Vacation Break
Common Stock since Vacation Break's July 15, 1997 press release stating that it
was in preliminary merger discussions, and that the ratio was 0.4327 at 4 weeks
and 0.4161 at 1 day prior to such announcement. Accordingly, this analysis
supported Stephens' opinion as the Exchange Ration represented an appropriate
premium to the relative ration prior to announcement and represented a ratio
which was significantly lower than historical highs.
STOCK PRICE PREMIUM ANALYSIS. Stephens also reviewed the offer price per
share in 25 recently announced acquisitions with an overall transaction value
between $100 million and $200 million. Stephens analyzed the historical trading
prices of the common stock of the acquiror and the target in relation to each
other at 4 weeks, 1 week and 1 day prior to the public announcement of each
acquisition. Based on these historical prices, Stephens derived the implied
stock price premium at each of the foregoing periods prior to announcement for
these twenty five acquisitions. The average implied stock price premiums were
30.0% at 4 weeks prior to announcement; 26.5% at 1 week prior to announcement
and 22.2% at 1 day prior to announcement. The implied stock premium for
Vacation Break Common Stock for the comparable periods was 46.0%, 24.7% and
41.6% respectively. The excess of the implied stock premium for Vacation Break
Common Stock over the average implied premiums was not viewed as a material
variance from the average stock premiums, in light of the fluctuations in price
of the Vacation Break Common Stock attributed to the termination of the proposed
merger with the companies controlled by James Lambert and Vacation Break's July
15, 1997 press release concerning its involvement in preliminary merger
negotiations.
CONTRIBUTION ANALYSIS. Stephens analyzed the relative contribution of each
of Fairfield and Vacation Break to the pro forma combined results of Fairfield
and its subsidiaries (including Vacation Break), based upon certain "base case"
assumptions and projections of the managements of Fairfield and Vacation Break
for the 1997 fiscal year. This analysis indicated that Vacation Break's
contribution to the 1997 pro forma combined results of Fairfield and its
subsidiaries would be 25.7% of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), 24.1% of earnings before interest and taxes, 27.5% of
pretax income and 27.5% of net income. On a pro forma basis giving effect to
the Merger, the existing stockholders of Fairfield would beneficially own 75.8%
of the Fairfield Common Stock, which is comparable to Fairfield's contribution
to the total combined entity as detailed above. Accordingly, this analysis
supported Stephens' opinion.
PRO FORMA MERGER CONSEQUENCES ANALYSIS. Stephens analyzed certain pro
forma effects resulting from the Merger. This analysis, based upon certain
assumptions and projections of the managements of Fairfield and Vacation Break,
showed pro forma earnings per share accretion/dilution for both the "base case"
and an "upside case." The additional factors considered in the upside case were
increased usage of vacation packages, improved product mix and certain potential
reductions in general and administrative expenses. The analysis showed pro
forma earnings per share dilution for 1997 and accretion for 1998 and 1999,
respectively. Accordingly, this analysis supported Stephens' opinion.
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Stephens provided the results of each of the foregoing analyses to the
Fairfield Board for its consideration, including the Stock Price Premium
Analysis. Each of the analyses supported Stephens Opinion other than the Stock
Price Premium Analysis, which Stephens did not view as a material variance.
Consequently, the Fairfield Board viewed Stephens' opinion in its entirety and
did not attempt to independently weight any of the analyses.
Pursuant to a letter agreement dated July 21, 1997, Fairfield agreed to pay
Stephens $750,000 upon the closing of the Merger. Fairfield also agreed to
reimburse Stephens for all reasonable out-of-pocket expenses, including the
reasonable fees and expenses of its legal counsel, and to indemnify Stephens and
certain related persons and entities for certain liabilities, including
liabilities under securities laws, related to or arising out of its engagement.
Fairfield retained Stephens based upon Stephens's experience and expertise.
Stephens is a nationally recognized investment banking and advisory firm.
Stephens, as part of its investment banking business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. Stephens has, in the past,
provided financial advisory and financing services to Fairfield, including
acting as underwriter in connection with Fairfield's equity offering completed
in November, 1996, and has received customary fees for the rendering of such
services. In the ordinary course of its business, Stephens and its affiliates
may actively trade the securities of Fairfield and Vacation Break for their own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
VACATION BREAK. Pursuant to an engagement letter dated July 2, 1997,
Vacation Break retained Josephthal, along with Montgomery, both of which are
nationally recognized investment banking firms, to act as Vacation Break's
financial advisors in connection with the consideration by Vacation Break of the
Merger. Josephthal and Montgomery, as part of their investment banking
activities, are regularly engaged in the valuation of businesses and their
securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
Josephthal has served as Vacation Break's principal financial advisor and
investment banker since Vacation Break's initial public offering in December
1995. Subsequent to Vacation Break's terminated merger with the Lambert
companies, the commencement of the multi-state actions and the MRG&L litigation,
Vacation Break together with Josephthal evaluated and discussed numerous options
to increase stockholder value. After reviewing all of the considerations set
forth in "Background of the Merger," the sale or merger of Vacation Break was
deemed to be the most suitable approach.
The Vacation Break Board, recognizing Josephthal's extensive knowledge of
Vacation Break's needs, requested that Josephthal lead the efforts to consummate
such a transaction. Josephthal recommended to the Vacation Break Board that the
inclusion of Montgomery as a co-advisor would enhance the chance of a successful
sale/merger. Montgomery has a significant client and information base in the
hospitality and vacation ownership businesses which provided a base of data with
which to review the fairness of the offered consideration as described below.
The Vacation Break Board agreed to engage both Josephthal and Montgomery as co-
advisors under the conditions enumerated in the engagement letter including the
performance based compensation structure.
The roles of Josephthal and Montgomery in the Merger consisted principally
of the following:
1. Served as co-negotiators on Vacation Break's behalf with representatives
of Fairfield.
2. Evaluated numerous financial and strategic issues relating to the Merger
and advised Vacation Break on appropriate courses of action, negotiation
posture and potential resolutions of outstanding issues.
3. Assisted in coordinating Vacation Break's due diligence response to
Fairfield's inquiries.
4. Advised Vacation Break on its due diligence of Fairfield.
5. Reviewed and extensively commented on all documentation relating to the
Merger.
6. Advised and consulted with Vacation Break on issues relating to managing
and operating Vacation Break during the period of time between the
announcement and the closing of the Merger.
On July 23, 1997, Montgomery delivered to the Board of Directors of
Vacation Break its oral opinion, subsequently confirmed as of August 8, 1997
(which opinion has been reissued as of the date of this Joint Proxy
Statement/Prospectus), that the consideration to be received by the stockholders
of Vacation Break pursuant to the Merger was fair to such stockholders, from a
financial point of view, as of that date. The amount of such consideration was
determined pursuant
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to negotiations between Vacation Break and Fairfield and not pursuant to
recommendations of Montgomery. No limitations were imposed by Vacation Break on
Montgomery with respect to the investigations made or procedures followed in
rendering its opinion.
THE FULL TEXT OF MONTGOMERY'S WRITTEN OPINION TO THE BOARD OF DIRECTORS OF
VACATION BREAK IS ATTACHED HERETO AS APPENDIX C AND IS INCORPORATED HEREIN BY
REFERENCE. THE FOLLOWING SUMMARY OF MONTGOMERY'S OPINION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. MONTGOMERY'S OPINION IS
DIRECTED TO THE BOARD OF DIRECTORS OF VACATION BREAK AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER OF VACATION BREAK OR FAIRFIELD AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER. MONTGOMERY'S OPINION
ADDRESSES ONLY THE FINANCIAL FAIRNESS OF THE CONSIDERATION TO BE PAID TO THE
STOCKHOLDERS OF VACATION BREAK AND DOES NOT ADDRESS THE RELATIVE MERITS OF THE
MERGER OR ANY ALTERNATIVES TO THE MERGER, VACATION BREAK'S UNDERLYING DECISION
TO PROCEED WITH OR EFFECT THE MERGER OR ANY OTHER ASPECT OF THE MERGER. IN
FURNISHING ITS OPINION, MONTGOMERY DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE
MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, OR THAT ITS OPINION
CONSTITUTES A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF THE
SECURITIES ACT, AND STATEMENTS TO SUCH EFFECT ARE INCLUDED IN THE TEXT OF
MONTGOMERY'S WRITTEN OPINION.
In connection with its opinion, Montgomery performed a variety of financial
and comparative analyses, of which the material analyses are described below.
The summary of such analyses contained in this paragraph and in this section,
which does not purport to be a complete description of the analyses underlying
Montgomery's opinion, sets forth the analyses performed and factors considered
by Montgomery in connection with its opinion. In preparing its opinion,
Montgomery, among other things: (i) reviewed certain publicly available
financial and other data with respect to Vacation Break and Fairfield, including
the consolidated financial statements for recent years and interim periods to
March 31, 1997 for each of Vacation Break and Fairfield, the consolidated
condensed financial statements for Vacation Break contained in the press release
prepared by Vacation Break and announced on July 28, 1997, and certain other
relevant financial and operating data relating to Vacation Break and Fairfield
made available to Montgomery from published sources and from the internal
records of Vacation Break and Fairfield; (ii) reviewed the financial terms and
conditions of the August 8, 1997 draft of the Merger Agreement, provided to
Montgomery by Vacation Break; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for, Vacation
Break Common Stock and Fairfield Common Stock; (iv) compared Vacation Break and
Fairfield from a financial point of view with certain other companies in the
timeshare resort industry which Montgomery deemed to be relevant; (v) considered
the financial terms, to the extent publicly available, of selected recent
business combinations of companies in the timeshare resort industry which
Montgomery deemed to be comparable, in whole or in part, to the Merger; (vi)
reviewed and discussed with representatives of the management of Vacation Break
and Fairfield certain information of a business and financial nature regarding
Vacation Break and Fairfield, furnished to Montgomery by them, including
financial forecasts and related assumptions of Vacation Break prepared by
management of Vacation Break ("Vacation Break Forecasts") and earnings
statements of Fairfield obtained by Montgomery from a third party research
report as adjusted with the consent of the management of Vacation Break after
discussions with the management of each of Fairfield and Vacation Break
("Fairfield Estimates"); and (vii) made inquiries regarding and discussed the
Merger and the Merger Agreement and other matters related thereto with Vacation
Break's counsel.
In connection with its review, Montgomery assumed and relied upon the
accuracy and completeness of the foregoing information and did not assume any
responsibility for independent verification of such information. Upon the
advice of Vacation Break management and with the consent of Vacation Break's
Board of Directors, Montgomery assumed for purposes of its opinion that the
Vacation Break Forecasts have been reasonably prepared on bases reflecting the
best available estimates and judgments of the management of Vacation Break at
the time of preparation as to the future financial performance of Vacation
Break, and that the Vacation Break Forecasts and Fairfield Estimates provide a
reasonable basis upon which Montgomery could form its opinion. Vacation Break
does not publicly disclose internal management forecasts of the type provided to
Montgomery by the management of Vacation Break in connection with Montgomery's
review of the Merger. Such forecasts were not prepared with a view toward
public disclosure. In addition, such forecasts were based upon numerous
variables and assumptions that are inherently uncertain, including, without
limitation, factors related to general economic and competitive conditions.
Accordingly, actual results could vary significantly from those set forth in
such forecasts. Montgomery has assumed no liability for such forecasts.
Montgomery also assumed that there have been no material changes in Vacation
Break's or Fairfield's respective assets, financial condition, results of
operations, business or prospects since the respective dates of their last
financial statements made available to Montgomery. Montgomery relied on advice
of counsel and independent accountants to Vacation Break as to all legal and
financial reporting matters with respect to Vacation Break, the Merger and the
Merger Agreement. Montgomery assumed that the Merger will be consummated in a
manner that complies in all respects with the applicable provisions of the
Securities Act, the Exchange
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Act and all other applicable federal and state statutes, rules and regulations.
In addition, Montgomery did not assume responsibility for making an independent
evaluation, appraisal or physical inspection of the assets or liabilities
(contingent or otherwise) of Vacation Break or Fairfield, nor was Montgomery
furnished with any such appraisals. Montgomery was informed by Vacation Break,
and assumed, that the Merger will be recorded as a pooling of interests under
generally accepted accounting principles. Finally, Montgomery's opinion is based
on economic, monetary and market and other conditions as in effect on, and the
information made available to Montgomery as of, July 23, 1997. Such conditions
include, without limitation, the condition of the U.S. stock markets,
particularly in the time-share resort industry, interest rates and the current
level of economic activity.
Montgomery also assumed, with the consent of Vacation Break's management,
that the Merger will be consummated in accordance with the terms described in
the Merger Agreement, without any amendments thereto, and without waiver by
Vacation Break of any of the conditions to its obligations thereunder.
Set forth below is a brief summary of the report presented by Montgomery to
Vacation Break's Board of Directors on July 23, 1997 in connection with its
opinion.
COMPARABLE COMPANY ANALYSIS. Based on public and other available
information, Montgomery calculated the multiples of aggregate value (defined as
equity value plus net debt) to LTM EBITDA and estimated 1997 and 1998 EBITDA,
and the multiples of equity value to 1996 net income and 1997 and 1998 estimated
net income, for six resort companies in the timeshare resort industry,
specifically Fairfield Communities, Inc., ILX Inc., Mego Financial Corp.,
Signature Resorts, Inc., Silverleaf Resorts, Inc., and Vistana, Inc. (the
"Comparable Resort Companies"). Silverleaf Resorts, Inc. became a public
company in June 1997. These Comparable Resort Companies may differ from
Fairfield and Vacation Break in several respects, including their relative
market value, leverage ratios and growth rates of long-term earnings. Such
analysis indicated the following multiples of aggregate value: a range of 7.2x
to 15.0x LTM EBITDA, with a mean of 12.1x; 7.2x to 15.0x estimated 1997 EBITDA,
with a mean of 12.1x; and a range of 8.0x to 11.4x estimated 1998 EBITDA, with a
mean of 9.7x. Such analysis also indicated the following multiples of equity
value: a range of 21.0x to 35.0x 1996 net income, with a mean of 30.0 x; a range
of 7.8x to 26.8x estimated 1997 net income with a mean of 17.6x; and a range of
11.2x to 22.8x estimated 1998 net income, with a mean of 17.0x. Montgomery
noted that such multiples indicated an implied aggregate valuation range for
Vacation Break, based on Vacation Break's statement of operations, of $224.3 to
$281.2 million, which Montgomery considered appropriate to reduce to a range of
$133.9 to $224.3 million. Montgomery also noted that such multiples indicated
an implied equity valuation range for Vacation Break, based on Vacation Break's
statement of operations, of $162.2 to $219.0 million, which Montgomery
considered appropriate to reduce to a range of $71.7 to $162.2 million.
Montgomery's considerations were based on the historically low trading multiples
of Vacation Break's stock in comparison with its peers and other factors that
have negatively affected the operations of Vacation Break, including certain
lawsuits.
COMPARABLE TRANSACTION ANALYSIS. Montgomery reviewed the consideration
paid in three acquisitions of timeshare companies that have been announced since
1996, specifically Signature's acquisitions of AVCOM, Plantation Resorts and LSI
Group (the "Comparable Transactions"). The Comparable Transactions represent
the only mergers of timeshare companies during the past two years for which
there was significant publicly available information. Montgomery analyzed the
aggregate value of the consideration paid in such transactions as a multiple of
the target companies' LTM revenues and LTM EBITDA. Such analysis yielded the
following multiples: 1.7x to 2.5x LTM revenues, with a mean of 2.1x; and 7.8x to
10.4x LTM EBITDA, with a mean of 9.1x. Montgomery noted that such multiples
indicated an implied aggregate valuation range for Vacation Break of $170.0 to
$228.2 million, and an implied equity valuation range of $107.8 to $166.1
million.
No other company or transaction used in the comparable company or
comparable transactions analysis as a comparison is identical to Vacation Break,
Fairfield or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies to which Vacation Break and the Merger are being compared.
DISCOUNTED CASH FLOW ANALYSIS. Montgomery performed a discounted cash flow
analysis to the financial forecasts through fiscal year 2007 of Vacation Break,
prepared for 1997 and 1998 by Vacation Break and thereafter by Montgomery based
on assumptions provided by Vacation Break and with approval of the management of
Vacation Break. In conducting its analysis, Montgomery first calculated the
estimated future streams of free cash flows that Vacation Break would produce
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through 2007. Second, Montgomery estimated Vacation Break's terminal value at
the end of fiscal year 2007 by applying a range of multiples and focusing on
multiples of 8.0 to 9.0 to the estimated fiscal 2007 EBITDA of Vacation Break.
Such cash flow streams and terminal values were discounted to present values by
applying a range of rates and focusing on discount rates from 14% to 15%, chosen
to reflect reasonable ranges of the cost of capital to Vacation Break. This
analysis indicated an imputed aggregate valuation range of Vacation Break of
$170.1 to 201.3 million.
PREMIUMS PAID ANALYSIS. Montgomery reviewed the consideration paid in
eighteen U.S. acquisitions announced since January 1, 1996 involving all stock
consideration with a transaction value of between $100 and $500 million.
Montgomery calculated the premiums paid in these transactions over the
applicable stock price of the target company one day, one week and four weeks
prior to the issuance of their oral opinion, and then calculated the mean and
median of those premiums. Montgomery then applied the mean and median premiums
so derived to the closing price of Vacation Break Common Stock on July 15, 1997
($12.25), July 8, 1997 ($9.06) and June 16, 1997 ($8.63). This analysis
indicated an implied equity valuation range of Vacation Break per share of
$11.11 to $15.49. Based on this analysis, an application of the same mean and
median premiums to the closing stock price of Vacation Break Common Stock one
day, one week and four weeks prior to the announcement of the acquisition offer
would be $14.00, $14.25 and $10.13 per share, respectively, with an implied
equity valuation range per share of $13.05 to $19.09.
CONTRIBUTION ANALYSIS. Using the Vacation Break Forecasts and the
Fairfield Estimates, Montgomery reviewed the estimated contribution of Vacation
Break and Fairfield to 1998 estimated revenues, earnings before interest and
taxes ("EBIT"), pre-tax income and net income of the combined company.
Montgomery then compared such contributions to the equity value of the combined
company to be contributed by Vacation Break and Fairfield stockholders,
respectively, assuming consummation of the Merger as described in the Merger
Agreement. Such analysis indicated that Vacation Break stockholders would hold
approximately 22.6% of the combined company's equity. Such analysis also
indicated that Vacation Break would contribute approximately 37.8%, 37.4%, 32.6%
and 33.3% of the combined companies' 1998 estimated revenues, EBIT, pre-tax
income and net income, respectively. Montgomery's contribution analysis was
only one component in its evaluation of the fairness of the transaction. The
contribution analysis does not consider mitigating factors, such as Vacation
Break's lawsuits, consistency of earnings or the growth potential of Vacation
Break and Fairfield.
PRO FORMA MERGER ANALYSIS. Using the Vacation Break Forecasts and the
Fairfield Estimates, Montgomery compiled and reviewed pro forma financial
information of the combined company, assuming consummation of the Merger as
described in the Merger Agreement. Such analysis indicated that the Merger
would be accretive to earnings per share of the combined company in 1998,
without assuming operating synergies.
While the foregoing summary describes all analyses and examinations that
Montgomery deems material to its opinion, it is not a comprehensive description
of all analyses and examinations actually conducted by Montgomery. The
preparation of a fairness opinion necessarily is not susceptible to partial
analysis or summary description. Montgomery believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and of the factors considered, without considering all
analyses and factors, would create an incomplete view of the process underlying
the analyses set forth in its presentation to the Board of Directors of Vacation
Break. Accordingly, the ranges of valuations resulting from any particular
analysis described above should not be taken to be Montgomery's view of the
actual value of Vacation Break.
In performing its analyses, Montgomery made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Vacation Break and
Fairfield. The analyses performed by Montgomery are not necessarily indicative
of actual values or actual future results, which may be significantly more or
less favorable than those suggested by such analyses. Such analyses were
prepared solely as part of Montgomery's analysis of the financial fairness of
the consideration to be received by the stockholders of Vacation Break pursuant
to the Merger, and were provided to Vacation Break's Board of Directors in
connection with the delivery of Montgomery's opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at any time in
the future. Montgomery used in its analyses various projections of future
performance prepared by the management of Vacation Break and obtained from third
parties. The projections are based on numerous variables and assumptions which
are inherently unpredictable and must be considered not certain of occurrence as
projected. Accordingly, actual results could vary significantly from those set
forth in such projections.
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As described above, Montgomery's opinion and presentation to Vacation
Break, which included discussion of the various analyses performed by Montgomery
including its contribution analysis, were among the many factors taken into
consideration by Vacation Break in making its determination to approve, and to
recommend that its stockholders approve, the Merger.
Pursuant to a letter agreement dated July 2, 1997 (the "Engagement
Letter"), Vacation Break engaged Josephthal, along with Montgomery, to act as
its financial advisors in connection with the Merger. Pursuant to the terms and
conditions of the Engagement Letter, if the Merger is effected, Vacation Break
is obligated to pay Josephthal and Montgomery a fee (to be made to and split
equally between Josephthal and Montgomery) equal to 1.25% of total consideration
up to $175 million, 1.75% of total consideration from $175 million to $200
million and 2.25% of total consideration over $200 million. The Board of
Directors of Vacation Break was aware of this fee structure and took it into
account in considering Montgomery's opinion and in approving the Merger
Agreement and the transactions contemplated thereby. The Engagement Letter also
calls for Vacation Break to reimburse Josephthal and Montgomery for their
reasonable out-of-pocket expenses up to $75,000. Pursuant to a separate letter
agreement, Vacation Break has agreed to indemnify both Josephthal and
Montgomery, its affiliates, and their respective partners, directors, officers,
agents, consultants, employees and controlling persons against certain
liabilities, including liabilities under the federal securities laws.
In the ordinary course its business, both Josephthal and Montgomery
actively trade the equity securities of Vacation Break for their own accounts
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material federal income tax
consequences of the Merger. This summary is based on federal income tax laws,
regulations, rulings and court decisions in effect on the date hereof, all of
which are subject to change, retroactively or prospectively, and to differing
interpretation. This summary does not address state, local or foreign tax
consequences. In addition, this summary assumes that each share of Vacation
Break Common Stock is held as a capital asset, and it does not discuss federal
income tax consequences to categories of holders entitled to special tax
treatment under the Code, including, without limitation, tax-exempt
organizations, certain retirement plans, insurance companies, financial
institutions, dealers in stocks and securities, foreign persons or stockholders
who acquired shares pursuant to the exercise of an employee stock option or
otherwise as compensation. No rulings will be sought from the Internal Revenue
Service with respect to the federal income tax consequences of the Merger.
Vacation Break stockholders are urged to consult their own tax advisers as to
specific tax consequences of the Merger to them.
OPINION REGARDING REORGANIZATION TREATMENT AND ANCILLARY CONSEQUENCES.
Consummation of the Merger is subject to the condition (unless waived) that
Vacation Break and Fairfield receive an opinion of Greenberg Traurig Hoffman
Lipoff Rosen & Quentel, P.A., to the effect that, based on representation
letters and certificates provided to counsel by Vacation Break, Fairfield and
certain stockholders of Fairfield, and based on the assumptions and
qualifications set forth in that opinion, for federal income tax purposes, (i)
the Merger will be treated as a reorganization within the meaning of sections
368(a) and 368(a)(2)(E) of the Code, (ii) each of Vacation Break, Merger Sub and
Fairfield will be a party to the reorganization within the meaning of section
368(b) of the Code, (iii) no gain or loss will be recognized by a stockholder of
Vacation Break upon the exchange pursuant to the Merger of shares of Vacation
Break solely for shares of Fairfield except for cash received in lieu of a
fractional share, (iv) the basis of the Fairfield shares received by a
stockholder pursuant to the Merger will be the same as the basis of the Vacation
Break shares exchanged therefor (reduced by any amount allocable to a fractional
share of Fairfield Common Stock for which cash is received), and (v) the holding
period of the shares of Fairfield Common Stock received by a stockholder of
Vacation Break pursuant to the Merger will include the holding period of the
Vacation Break Common Stock exchanged therefor, provided those shares of
Vacation Break Common Stock were held as capital assets as of the Effective Time
of the Merger.
CASH RECEIVED IN LIEU OF FRACTIONAL SHARES. Cash received in lieu of a
fractional share of Fairfield Common Stock will be treated as received in
redemption of that fractional share, and gain or loss will be recognized in an
amount equal to the difference between the amount of cash received and the basis
of the Vacation Break Common Stock allocable to that fractional share. That
gain or loss will constitute capital gain or loss, and, in the case of
individuals and certain other noncorporate holders of Vacation Break Common
Stock, will be subject to a maximum federal income tax rate of (i) 20 percent in
the case of Vacation Break Common Stock held more than 18 months as of the date
of the exchange and (ii) 28 percent in the case of Vacation Break Common Stock
held more than 12 months but not more than 18 months as of that date.
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BACKUP WITHHOLDING. Under the backup withholding rules, a holder of
Fairfield Common Stock may be subject to backup withholding at the rate of 31%
with respect to dividends unless the stockholder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates that
fact or (ii) provides a correct taxpayer identification number, certifies as to
no loss of exemption from backup withholding and otherwise complies with the
applicable requirements of the backup withholding rules. Any amount withheld
under those rules will be credited against the stockholder's federal income tax
liability and may be refunded if it exceeds that liability and the stockholder
files an appropriate claim for refund. A stockholder who does not provide
Fairfield with his or her correct taxpayer identification number or who
otherwise does not establish an exemption, in addition to being subject to
backup withholding, may be subject to penalties imposed by the Internal Revenue
Service.
ANTICIPATED ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a pooling of interests in
accordance with generally accepted accounting principles. Under this method of
accounting, the recorded assets and liabilities of Fairfield and Vacation Break
will be carried forward to Fairfield at their historical recorded amounts after
addressing any conformity issues; net income of Fairfield after the Merger will
include the net income of Fairfield and Vacation Break for the entire fiscal
year in which the Merger occurs, and the historical reported net income of the
separate companies for prior periods will be combined and restated as net income
of Fairfield after addressing any conformity issues. The Merger Agreement
provides that a condition to the consummation of the Merger is the receipt of
letters from Ernst & Young LLP and Coopers & Lybrand L.L.P. (the independent
auditors of Fairfield and Vacation Break, respectively) to the effect that the
Merger qualifies for pooling-of-interests accounting treatment.
In connection with the Merger, the merged companies will incur certain
transition costs currently estimated at $11.0 million, in connection with
consummating the transaction and integrating the operations of Fairfield and
Vacation Break. In addition, in connection with the preparation of the pro forma
information included elsewhere in this Joint Proxy Statement/ Prospectus,
management of Fairfield and Vacation Break have conformed certain differences in
accounting practice (see "Unaudited Pro Forma Condensed Combined Financial
Information"). Following the Merger, management of Fairfield expects to conduct
a complete review of the accounting policies employed by Vacation Break,
including the methods used to apply such policies, in order to identify the
appropriate accounting practices to be applied by the Surviving Corporation;
additionally, management of Fairfield will review, and when appropriate conform,
the methods employed to develop and assess information used to make accounting
estimates. Any adjustments or changes that may result from such reviews are
expected to be recorded during the accounting period in which the Effective Time
occurs, and may have a material effect on the results reported during such
period.
MANAGEMENT AFTER THE MERGER
Following consummation of the Merger, it is anticipated that Mr. Muller
will be the only director of Vacation Break who becomes a member of the
Fairfield Board. Pursuant to the Merger Agreement, Fairfield has agreed to
cause Mr. Muller to be elected to the Fairfield Board promptly following the
Effective Time. Mr. Muller, age 56, co-founded Vacation Break, and has served
as Chairman of the Board and Chief Executive Officer since its inception in
1985, and as President of Vacation Break from its inception until May 1995. Mr.
Muller is also the President, Chief Executive Officer and Director of each of
Serenity Homes, Inc., a company engaged in the business of purchasing and
developing for sale residential real property, Sea America, Inc., a company
engaged in the business of owning and administering a fleet of fishing and
recreational boats as part of a 400 member boat club and USA Today Realty, a
full-service real estate brokerage firm. Mr. Muller has over 25 years of
experience in the vacation/leisure industry. It is also anticipated that
Messrs. Muller and Sheehan will resign as the Chairman and Chief Executive
Officer and the President, respectively, of Vacation Break and all other
executive officers of Vacation Break will remain in their current positions
following the Effective Time until the expiration of their respective employment
agreements. Thereafter, Fairfield may enter into consulting or employment
agreements with one or more of Vacation Break's officers. See "Information
regarding Vacation Break --Executive Compensation."
The current directors and executive officers of Fairfield will continue to
serve in such positions after the consummation of the Merger. The information
contained in "Item 11. Executive Compensation" and "Item 13. Certain
Relationships and Related Transactions" of Fairfield's Annual Report on Form 10-
K for the year ended December 31, 1996 is hereby incorporated by reference
herein. For information concerning the directors and executive officers of
Fairfield, see "Management of Fairfield" and "Share Ownership of Management and
Principal Stockholders of Fairfield."
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Board of Directors and management of Fairfield and
Vacation Break have certain interests in the Merger that are different from, or
in addition to, the interests of stockholders of Vacation Break, generally.
Such interests relate to or arise from, among other things, the terms of the
Merger Agreement providing for the appointment of Ralph Muller to the Fairfield
Board and the conversion of employee stock options and other rights granted to
employees of Vacation Break, including executive officers, the indemnification
of existing directors and officers of Vacation Break and Fairfield, and the
terms of the Principal Stockholders Agreement providing for Fairfield and
Vacation Break to use their reasonable efforts to obtain the release by the
applicable lender of Ralph Muller and his spouse from guarantees of indebtedness
of Vacation Break (of which Mr. Muller and his spouse are the only individuals
who granted such guarantees), and for Fairfield to enter into the Registration
Rights Agreement. All such additional interests are described below, to the
extent material, and except as described below such persons have, to the
knowledge of Fairfield and Vacation Break, no material interest in the Merger
apart from those of stockholders generally. The Fairfield Board and the
Vacation Break Board were each aware of these interests of their respective
directors and officers and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby. See "--Certain
Executive Compensation and Other Employee-Related Matters in Connection with the
Merger", "--Indemnification" and "Other Terms of the Merger and the Merger
Agreement --Principal Stockholders Agreement" and "--Resale of Fairfield Common
Stock."
CERTAIN EMPLOYEE-RELATED MATTERS AND INDEMNIFICATION. For a discussion of
various employment arrangements being entered into in connection with the
Merger, and the effect of the Merger on employee benefit and stock plans, see
"--Certain Executive Compensation and Other Employee-Related Matters in
Connection with the Merger." For a discussion of indemnification and exculpation
matters applicable to directors and officers of Vacation Break and Fairfield in
connection with the Merger, see "--Indemnification."
CERTAIN EXECUTIVE COMPENSATION AND OTHER EMPLOYEE-RELATED MATTERS IN CONNECTION
WITH THE MERGER
EMPLOYMENT AGREEMENTS. Prior to the execution of the Merger Agreement,
Vacation Break and each of its executive officers were parties to existing
employment/severance agreements which provided for, among other things, the
payment of severance amounts and benefits upon certain terminations of
employment. Pursuant to the Principal Stockholders Agreement, Messrs. Muller
and Sheehan have agreed to waive any severance that would otherwise be payable
under their existing employment agreements and to certain restrictions on
competition with Vacation Break, disclosure of confidential information, and
solicitation of employees of Fairfield or Vacation Break. See "Other Terms of
the Merger and the Merger Agreement --Principal Stockholders Agreement." After
the expiration of their employment agreements, Fairfield may enter into
consulting or employment agreements with one or more of Vacation Break's
executive officers. For a discussion of Vacation Break's existing employment
agreements with its executive officers and related executive compensation
matters, see "Information regarding Vacation Break --Executive Compensation."
EFFECT OF THE MERGER ON STOCK OPTION PLANS. In accordance with the Merger
Agreement and the terms of the employee stock options granted under Vacation
Break's 1995 Stock Option Plan and Directors' Option Plan, as of the Effective
Time, all outstanding options under such option plans will be assumed by
Fairfield and constitute Assumed Options. The Assumed Options will each be
deemed to constitute an option to acquire (on the same terms and conditions as
were applicable under such option, including vesting) the number of shares of
Fairfield Common Stock (rounded to the nearest whole share) equal to the product
of the Exchange Ratio multiplied by the number of shares of Vacation Break
Common Stock subject to such option immediately prior to the Effective Time, at
a price per share of Fairfield Common Stock equal to (i) the aggregate exercise
price for the shares of Vacation Break Common Stock otherwise purchasable
pursuant to such Vacation Break option, divided by (ii) the aggregate number of
shares of Fairfield Common Stock deemed purchasable pursuant to such option.
The Merger Agreement provides that all options assumed by Fairfield, in
accordance with their existing terms, will vest as of the Effective Time and
such options will be exercisable in accordance with their terms.
INDEMNIFICATION
The Merger Agreement provides that the indemnification provisions of the
by-laws and articles of incorporation of the Surviving Corporation will not be
amended or otherwise modified in any manner that would adversely affect the
rights of individuals who at the Effective Time were directors, officers,
employees or agents of Vacation Break or any of its subsidiaries. In addition,
the Merger Agreement requires Fairfield and the Surviving Corporation, jointly
and severally, to indemnify each present and former director or officer of
Vacation Break or any of its subsidiaries to the same extent provided
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in Vacation Break's articles of incorporation or by-laws or in any applicable
agreement for a period of six years from the date of the Merger Agreement.
Fairfield or the Surviving Corporation are also required to maintain in effect,
if available, directors' and officers' liability insurance covering those
persons who are currently covered by Vacation Break's directors' and officers'
liability insurance policy on terms no less advantageous than those now
applicable to such persons, unless the premium for such coverage exceeds 200% of
the annual premium paid by Vacation Break for such coverage, in which case
Fairfield or the Surviving Corporation are required to purchase the greatest
coverage available for 200% of such annual premium.
OTHER TERMS OF THE MERGER AND THE MERGER AGREEMENT
GENERAL
The Fairfield Board and the Vacation Break Board have approved the Merger
Agreement, which provides for the Merger to occur at the Effective Time, with
Vacation Break continuing as the surviving corporation and, as a result of the
Merger, becoming a wholly-owned subsidiary of Fairfield. This section of the
Joint Proxy Statement/Prospectus, together with other sections of this Joint
Proxy Statement/Prospectus, describes certain material terms of the proposed
Merger, including certain material terms of the Merger Agreement and the
Principal Stockholders Agreement, and together with the other sections of this
Joint Proxy Statement/Prospectus describes the material terms of the proposed
Merger. The description of the Merger and the Merger Agreement contained in
this Joint Proxy Statement/Prospectus does not purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached hereto as Appendix A and which is incorporated herein by reference.
All stockholders of Fairfield and Vacation Break are urged to carefully read the
Merger Agreement in its entirety.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
The conversion of Vacation Break Common Stock into the right to receive
Fairfield Common Stock will occur automatically at the Effective Time. As soon
as practicable after the Effective Time, Boston EquiServe, L.P., or another bank
or trust company reasonably acceptable to Vacation Break, in its capacity as
Exchange Agent (the "Exchange Agent"), will send a transmittal letter to each
former Vacation Break stockholder. The transmittal letter will contain
instructions with respect to the surrender of certificates previously
representing Vacation Break Common Stock to be exchanged for Fairfield Common
Stock.
VACATION BREAK STOCKHOLDERS SHOULD NOT FORWARD VACATION BREAK STOCK
CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS.
VACATION BREAK STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY.
After the Effective Time, each certificate that previously represented
shares of Vacation Break Common Stock will represent only the right to receive
the Fairfield Common Stock into which such shares were converted in the Merger
and the right to receive cash in lieu of fractional shares of Fairfield Common
Stock as described below.
Holders of certificates previously representing Vacation Break Common Stock
will not be paid dividends or distributions on the Fairfield Common Stock into
which such shares have been converted with a record date after the Effective
Time, and will not be paid cash in lieu of fractional shares of Fairfield Common
Stock, until such certificates are surrendered to the Exchange Agent for
exchange. When such certificates are surrendered, any unpaid dividends and any
cash in lieu of fractional shares of Fairfield Common Stock payable as described
below will be paid without interest.
In the event of a transfer of ownership of Vacation Break Common Stock
which is not registered in the transfer records of Vacation Break, a certificate
representing the proper number of shares of Fairfield Common Stock may be issued
to a person other than the person in whose name the certificate so surrendered
is registered if such certificate shall be properly endorsed or otherwise be in
proper form for transfer and the person requesting such issuance shall pay any
transfer or other taxes required by reason of the issuance of shares of
Fairfield Common Stock to a person other than the registered holder of such
certificate or establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not applicable.
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All shares of Fairfield Common Stock issued upon conversion of shares of
Vacation Break Common Stock (including any cash paid in lieu of any fractional
shares of Fairfield Common Stock), will be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Vacation Break Common
Stock.
No fractional shares of Fairfield Common Stock will be issued to any
Vacation Break stockholder upon surrender of certificates previously
representing Vacation Break Common Stock. For each fractional share that would
otherwise be issued, the Exchange Agent will make available to such stockholders
an amount in cash equal to (i) each such stockholder's pro rata share of the
proceeds of the sale by the Exchange Agent of the whole shares of Fairfield
Common Stock delivered by Fairfield to the Exchange Agent for distribution in
excess of the aggregate number of whole shares to be distributed to holders of
Vacation Break Common Stock or, (ii), at the option of Merger Sub, exercised
prior to the Effective Time, the product obtained by multiplying the fractional
share interest to which such holder would otherwise be entitled by the closing
price for a share of Fairfield Common Stock on the NYSE Composite Transaction
Tape on the Closing Date.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Each party's obligation to effect the Merger is subject to the satisfaction
or waiver on or prior to the Closing Date of various conditions which include,
in addition to other customary closing conditions, the following:
(i) the Stockholder Approvals shall have been obtained;
(ii) no judgment, order, decree, statute, law, ordinance, rule,
regulation, temporary restraining order, injunction or other order enacted,
entered, promulgated, enforced or issued by any court or other governmental
entity or other legal restraint or prohibition preventing the consummation
of the Merger shall be in effect;
(iii) there shall not be pending any suit, action or proceeding
brought by any governmental entity (a) seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by
the Merger Agreement or seeking to obtain any material damages, (b) seeking
to prohibit or limit the ownership or operation by Vacation Break,
Fairfield or any of their respective subsidiaries of any material portion
of the business or assets of Vacation Break, Fairfield or any of their
respective subsidiaries or to compel Vacation Break, Fairfield or any of
their respective subsidiaries to dispose of or hold separate any material
portion of their business or assets or (c) which otherwise could reasonably
be expected to have a material adverse effect on Vacation Break or
Fairfield;
(iv) the Registration Statement of which this Joint Proxy
Statement/Prospectus is a part shall have become effective and shall not be
the subject of any stop order or proceedings seeking a stop order;
(v) the shares of Fairfield Common Stock issuable to Vacation Break's
stockholders pursuant to the Merger Agreement, and to the appropriate
persons pursuant to the Supplemental Warrant Agreements and Assumed Options
shall be approved for listing on the NYSE, subject to official notice of
issuance;
(vi) Fairfield and Vacation Break shall each have received letters
dated as of the Closing Date from Ernst & Young LLP and Coopers & Lybrand
L.L.P. (the independent auditors of Fairfield and Vacation Break,
respectively) to the effect that the Merger qualifies for pooling-of-
interests accounting treatment;
(vii) Fairfield and Vacation Break shall have received from Vacation
Break's counsel, on or prior to the Closing Date, an opinion to the effect
that (a) the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; (b)
Fairfield, Merger Sub and Vacation Break will each be a party to that
reorganization within the meaning of Section 368(b) of the Code; (c) no
gain or loss will be recognized by the stockholders of Vacation Break upon
their exchange of Vacation Break Common Stock into Fairfield Common Stock
except for cash received in lieu of fractional shares; (d) the basis of the
shares of Fairfield Common Stock received by a stockholder of Vacation
Break pursuant to the Merger will be the same as the basis of the shares of
Vacation Break Common Stock exchanged therefor; and (e) the holding period
of the shares of Fairfield Common Stock received by a stockholder of
Vacation Break pursuant to the Merger will include the holding period of
the Vacation Break Common Stock exchanged therefor, provided those shares
of Vacation Break Common Stock were held as capital assets as of the
Effective Time (see "The Merger --Certain Federal Income Tax
Consequences"); and
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(viii) Fairfield and Vacation Break shall have obtained all required
consents.
In addition, each party's obligation to effect the Merger is subject to the
following additional conditions (any of which may be waived by such party):
(i) the representations and warranties of the other party to the
Merger Agreement set forth in the Merger Agreement that are qualified as to
materiality shall be true and correct, and the representations and
warranties of such other party set forth in the Merger Agreement that are
not so qualified shall be true and correct in all material respects, in
each case as of the date of the Merger Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date;
(ii) the other party to the Merger Agreement shall have performed in
all material respects all obligations required to be performed by it under
the Merger Agreement at or prior to the Closing Date; and
(iii) at any time after the date of the Merger Agreement there shall
not have occurred any material adverse change relating to the other party.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the stockholders of Fairfield and
Vacation Break: (i) by mutual written consent of Fairfield and Vacation Break;
(ii) by either Fairfield or Vacation Break, if the Merger has not been
consummated by December 31, 1997; unless the failure to consummate the Merger is
the result of a breach of the Merger Agreement by the party seeking to terminate
the Merger Agreement; (iii) by either Fairfield or Vacation Break, if any
Stockholder Approval has not been obtained at a Special Meeting; (iv) by either
Fairfield or Vacation Break, if any judgment, order, decree, statute, law,
ordinance, rule, regulation, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced or
issued by any court of competent jurisdiction or other governmental entity or
other legal restraint or prohibition (collectively, "Restraints") preventing the
consummation of the Merger shall be in effect or if any governmental entity has
taken any other action permanently enjoining, restraining or otherwise
prohibiting the consummation of the Merger or any of the transactions
contemplated by the Merger Agreement and such Restraint or other action shall
have become final and nonappealable; (v) by Vacation Break, if on the date that
is 2 business days before the Closing Date the closing price for a share of
Fairfield Common Stock as reported on the NYSE Composite Transaction Tape is
less than $19 3/4; provided, however, if on that date the Standard and Poor's
Composite Index of 500 Stocks has decreased since the date of the Merger
Agreement, then such closing price must be less than the product of (a)
24 11/16 multiplied by (b) the difference of 80 percent less the percentage
decrease of such index; (vi) by Fairfield, if before the Closing Date certain
litigation and other proceedings and investigations commenced by the Attorneys
General of New York, Massachusetts, Texas, North Carolina, Connecticut, West
Virginia, New Mexico, Wisconsin, Minnesota, Illinois, Washington and Michigan
with respect to Vacation Break's marketing practices have not been dismissed or
settled on substantially the same terms as, or terms no less favorable than, the
terms previously approved by Fairfield; (vii) by Vacation Break, if prior to the
approval of the Merger Agreement by the Vacation Break stockholders the Vacation
Break Board determines in good faith, after it has received a Vacation Break
Superior Proposal (as defined below), that it is necessary to withdraw or modify
its recommendation of the Merger or the Merger Agreement in order to comply with
its fiduciary duties or that there is not a substantial probability that the
adoption of the Merger Agreement will be obtained due to the existence of a
Vacation Break Superior Proposal (as defined below); (viii) by Fairfield, if the
Vacation Break Board or any committee thereof (1) has withdrawn or modified in
any manner adverse to Fairfield its approval or recommendation of the Merger
Agreement or the Merger, (2) has failed to reconfirm such recommendation within
15 business days of Fairfield's written request, (3) has approved or recommended
any Vacation Break Takeover Proposal (as defined below) or (4) has resolved to
take any of the actions specified in clause (1), (2) or (3); or (ix) by
Fairfield, if Vacation Break or any of its officers, directors, employees,
representatives or agents has taken any of the actions that would be proscribed
by the covenant described under "--No Solicitation" below but for the exceptions
therein allowing certain actions to be taken pursuant to the proviso in the
first paragraph thereof or the second sentence of the second paragraph thereof.
A "Vacation Break Takeover Proposal" is a proposal relating to an acquisition of
20% or more of Vacation Break's and its subsidiaries' assets or 20% or more of
any class of equity securities of Vacation Break or any of its subsidiaries, any
tender offer or exchange offer that if consummated would result in any person
owning 20% or more of any class of equity securities of Vacation Break or any of
its subsidiaries or any merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Vacation Break or any of its subsidiaries. A "Vacation Break Superior Proposal"
is a proposal made by a third party to acquire, for consideration
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consisting of cash and/or securities, more than 50% of the shares of Vacation
Break Common Stock or all or substantially all of the assets of Vacation Break,
on terms that the Vacation Break Board determines in good faith to be more
favorable to its stockholders than the Merger and for which financing, to the
extent required, is then committed or, in the good faith judgment of the
Vacation Break Board, is reasonably capable of being obtained.
TERMINATION FEE
The Merger Agreement provides that if a Vacation Break Takeover Proposal is
made known to Vacation Break or any of its subsidiaries or has been made
directly to its stockholders generally or any person shall have publicly
announced an intention to make a Vacation Break Takeover Proposal and thereafter
the Merger Agreement is terminated pursuant to the provisions described in
clause (iii) (with respect to the Vacation Break Stockholder Approval), (vii),
or (viii) under "--Termination" above, then Vacation Break, within 10 days of
the termination, must pay Fairfield a termination fee of $7.5 million (the
"Termination Fee").
The Merger Agreement further provides that if the Termination Fee is
payable and Vacation Break fails to pay the Termination Fee when due, Vacation
Break must pay Fairfield its costs and expenses in connection with any action
taken to collect payment that results in a judgment against Vacation Break for
the Termination Fee, together with interest on the amount of the Termination
Fee.
NO SOLICITATION
The Merger Agreement provides that Vacation Break shall not, nor shall it
permit any of its subsidiaries to, nor shall it authorize or permit any of its
officers, directors or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it or any of its
subsidiaries to, directly or indirectly through another person, (i) solicit,
initiate or encourage (including by way of furnishing information), or take any
other action designed to facilitate, any inquiries or the making of any proposal
which constitutes any Vacation Break Takeover Proposal or (ii) participate in
any discussions or negotiations regarding any Vacation Break Takeover Proposal;
provided, however, that if, at any time prior to the adoption of the Merger
Agreement by the holders of Vacation Break Common Stock, the Vacation Break
Board determines in good faith, after consultation with outside counsel, that it
is necessary to do so in order to comply with its fiduciary duties to Vacation
Break's stockholders under applicable law, Vacation Break may, in response to a
Vacation Break Takeover Proposal which was not solicited by it or which did not
otherwise result from a breach of the provisions described in this paragraph,
(x) furnish information with respect to Vacation Break and its subsidiaries to
any person pursuant to a customary confidentiality agreement and (y) participate
in negotiations regarding such Vacation Break Takeover Proposal.
Except as expressly permitted by the Merger Agreement, neither the Vacation
Break Board nor any committee thereof shall (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Fairfield, the approval
or recommendation by such Board of Directors or such committee of the Merger or
the Merger Agreement, (ii) approve or recommend, or propose publicly to approve
or recommend, any Vacation Break Takeover Proposal or (iii) cause Vacation Break
to enter into any letter of intent, agreement in principle, acquisition
agreement or other similar agreement related to any Vacation Break Takeover
Proposal. Notwithstanding the foregoing, in the event that prior to the
approval of the Merger Agreement by the holders of Vacation Break Common Stock
(x) the Vacation Break Board determines in good faith, after it has received a
Vacation Break Superior Proposal and after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
Vacation Break's stockholders under applicable law, the Vacation Break Board may
withdraw or modify its approval or recommendation of the Merger or the Merger
Agreement, or (y) the Vacation Break Board determines in good faith that there
is not a substantial probability that the adoption of the Merger Agreement by
holders of Vacation Break Common Stock will be obtained due to the existence of
a Vacation Break Superior Proposal, the Vacation Break Board may approve or
recommend such Vacation Break Superior Proposal or terminate the Merger
Agreement, but in each of the cases set forth in this clause (y) only at a time
that is after the fifth business day following Fairfield's receipt of written
notice advising Fairfield that the Vacation Break Board has received a Vacation
Break Superior Proposal, specifying the material terms and conditions of such
Vacation Break Superior Proposal and identifying the person making such Vacation
Break Superior Proposal. See "Other Terms of the Merger and the Merger
Agreement --Termination."
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CONDUCT OF BUSINESS PENDING MERGER
Pursuant to the Merger Agreement, Fairfield and Vacation Break have each
agreed to carry on their respective businesses in the usual, regular and
ordinary course in substantially the same manner as conducted prior to the
execution of the Merger Agreement. In addition, Vacation Break has agreed that,
among other things and subject to certain exceptions, neither it nor any of its
subsidiaries may:
(i) (A) set aside for payment or pay any dividends on, or make any
other actual, constructive or deemed distributions (whether in cash, stock
or property) in respect of, any of its capital stock or otherwise make any
payments to stockholders in their capacity as such, except for dividends by
a direct or indirect wholly owned subsidiary of Vacation Break to its
parent, (B) split, combine, subdivide or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock, or (C)
purchase, redeem or otherwise acquire or propose to redeem, purchase or
acquire any shares of its capital stock or any other securities thereof or
any rights, warrants or options to acquire any such securities or other
securities;
(ii) except for shares issued upon exercise of options outstanding
as of the date of the Merger Agreement or the Warrants under the Warrant
Agreement, issue, deliver, sell, dispose of, pledge or otherwise encumber,
or authorize or propose the issuance, sale, disposition or pledge or other
encumbrance of (A) any shares of its capital stock of any class (including
the Vacation Break Common Stock), or any securities or rights convertible
into, exchangeable for, or evidencing the right to subscribe for any shares
of its capital stock, or any rights, warrants, options, calls, commitments
or any other agreements of any character to purchase or acquire any shares
of its capital stock or any securities or rights convertible into,
exchangeable for, or evidencing the right to subscribe for, any shares of
its capital stock, or (B) any other securities in respect of, in lieu of,
or in substitution for, Vacation Break Common Stock outstanding on the date
hereof;
(iii) amend its articles of incorporation, bylaws or other comparable
charter or organizational documents or alter through merger, liquidation,
reorganization, restructuring or in any other fashion the corporate
structure or ownership of any of its subsidiaries;
(iv) acquire or agree to acquire (A) by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or (B) any
assets that are material, individually or in the aggregate, to Vacation
Break;
(v) sell, lease, license, mortgage or otherwise encumber or subject to
any lien or otherwise dispose of any properties or assets, except sales of
inventory in the ordinary course of business consistent with past practice,
disposition of obsolete assets or assets no longer used in its business,
and encumbrance of mortgages receivable pursuant to existing credit
facilities in accordance with paragraph (vii) below;
(vi) (A) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities, guarantee any debt
securities of another person, enter into any "keep well" or other agreement
to maintain any financial statement condition of another person or entity
or enter into any arrangement having the economic effect of any of the
foregoing, except borrowings under existing credit facilities and other
borrowings in the ordinary course up to $3.0 million after the date of the
Merger Agreement, or (B) make any loans, advances or capital contributions
to, or investments in, any other person or entity, other than (1) to
Vacation Break or any of its direct or indirect wholly owned subsidiaries
or (2) advances to officers and employees of Vacation Break for travel,
business and entertainment or relocation expenses in accordance with past
practice;
(vii) except in the ordinary course of business, make or agree to make
any new capital expenditure or expenditures which, individually, is in
excess of $100,000 or, in the aggregate, are in excess of $250,000;
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(ix) make any material tax elections or settle or compromise any
material tax liability;
(x) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge, settlement or satisfaction,
in the ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities less than $100,000 or reflected
or reserved against in, or contemplated by, the financial statements of
Vacation Break included in reports or other documents of Vacation Break
filed with SEC ("Vacation Break Filed SEC Documents") (or the notes
thereto) or incurred in the ordinary course of business consistent with
past practice, or waive any material benefits of, or agree to modify in any
material respect, any confidentiality, standstill or similar agreements to
which it is a party;
(xi) except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which it is a party or
waive, release or assign any material rights or claims;
(xii) except as required to comply with applicable law, (A) adopt,
enter into, terminate or amend any benefit plan or other arrangement for
the benefit or welfare of any director, officer or current or former
employee, (B) increase in any manner the compensation or fringe benefits
of, or pay any bonus to, any director, officer or employee (except for
normal increases or bonuses in the ordinary course of business consistent
with past practice), (C) pay any benefit not provided for under any benefit
plan, (D) except as permitted in clause (B), grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
benefit plan (including the grant of stock options, stock appreciation
rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any benefit
plans or agreement or awards made thereunder) or (E) take any action to
fund or in any other way secure the payment of compensation or benefits
under any employee plan, agreement, contract or arrangement or benefit
plan;
(xiii) make any change in any method of accounting or accounting
practice or policy other than those required by generally accepted
accounting principles;
(xiv) take any action that would prevent the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of the Code and
Vacation Break will use all reasonable efforts to achieve that result;
(xv) (A) other than in the ordinary course of business consistent
with past practices, and as approved by the Vacation Break Board, (1) grant
any increases in the base compensation of any of its directors, officers or
key employees, (2) pay or agree to pay any material pension, retirement
allowance or other employee benefit not required by any of the employee
plans or benefit arrangements as in effect on the date hereof to any such
director, officer or key employees, whether past or present, or (3) grant
any increase in the commissions payable to its sales agents, or (B) (1)
enter into any new or amend any existing employment or severance agreement
with any director, officer or key employee of Vacation Break or any of its
subsidiaries, or (2) except as may be required to comply with applicable
law, become obligated under any new employee plan or benefit arrangement
which was not in existence on the date hereof, or amend any such employee
plan or benefit arrangement in existence on the date hereof if such
amendment would have the effect of accelerating or materially enhancing any
benefits thereunder;
(xvi) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of Vacation Break or any of its subsidiaries (other than the
Merger);
(xvii) enter into any agreement providing for acceleration of payment
of any material obligation or performance of any material benefit or
payment or other consequence as a result of a change of control of Vacation
Break or its subsidiaries;
(xviii) except as disclosed in the current capital budget which
Vacation Break delivered to Fairfield, enter into any contract, arrangement
or understanding requiring the lease or purchase of equipment, materials,
supplies or services over a period greater than 12 months, which is not
cancelable without penalty on 30 days' or less notice;
(xix) authorize any of, or commit or agree to take any of, the
foregoing actions; or
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(xx) take any action that (without regard to any action taken or
agreed to be taken by Fairfield or any of its affiliates) would prevent
Fairfield from accounting for the business combination to be effected by
the Merger as a pooling of interests.
Subject to certain exceptions, Fairfield has agreed that, among other
things, neither it nor any of its subsidiaries may:
(i) (A) set aside for payment or pay any dividends on, or make any
other actual, constructive or deemed distributions (whether in cash, stock
or property) in respect of, any of its capital stock or otherwise make any
payments to stockholders in their capacity as such, except for dividends by
a direct or indirect wholly owned subsidiary of Fairfield to its parent,
(B) split, combine, subdivide or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (C)
purchase, redeem or otherwise acquire or propose to redeem, purchase or
acquire any shares of its capital stock (including shares of Fairfield
Common Stock) or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities;
(ii) except for (A) shares of Fairfield Common Stock issued (1) upon
exercise of options and warrants granted under existing stock option and
warrant plans; (2) under Fairfield's plan of reorganization and related
agreements and settlements; and (3) under the employee stock purchase plan;
(B) granting of options, warrants or rights under the plans described in
(A)(1) and (A)(3) above; or (C) repurchasing Fairfield Common Stock
pursuant to an existing restricted stock plan; issue, deliver, sell,
dispose of, pledge or otherwise encumber, or authorize or propose the
issuance, sale, disposition or pledge or other encumbrance of (a) any
shares of its capital stock of any class (including shares of Fairfield
Common Stock), or any securities or rights convertible into, exchangeable
for, or evidencing the right to subscribe for any shares of its capital
stock, or any rights, warrants, options, calls, commitments or any other
agreements of any character to purchase or acquire any shares of its
capital stock or any securities or rights convertible into, exchangeable
for, or evidencing the right to subscribe for, any shares of its capital
stock, or (b) any other securities in respect of, in lieu of, or in
substitution for, shares of Fairfield Common Stock outstanding on the date
hereof;
(iii) except as contemplated under the Merger Agreement, amend
Fairfield's certificate of incorporation or bylaws;
(iv) acquire (A) by merging or consolidating with, or by purchasing
a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, joint venture, association or
other business organization or division thereof or (B) any assets that are
material, individually or in the aggregate, to Fairfield; provided,
however, Fairfield or its subsidiaries may acquire any such business,
assets or entity or division thereof if (1) it does not exceed 15 percent
of the total assets of Fairfield and its subsidiaries consolidated as of
the end of the most recently completed fiscal year (for a proposed business
combination to be accounted for as a pooling of interests, this condition
will be met if the number of common shares exchanged or to be exchanged by
Fairfield does not exceed 15 percent of its total common shares outstanding
at the date the combination is initiated) or (2) Fairfield and its
subsidiaries' proportionate share of the total assets (after intercompany
eliminations) of any such business, assets, person or division does not
exceed 15 percent of the total assets of Fairfield and its subsidiaries
consolidated as of the end of the most recently completed fiscal year.
(v) make any change in any method of accounting or accounting
practice or policy other than those required by generally accepted
accounting principles;
(vi) take any action that would prevent the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of the Code and
Fairfield will use all reasonable efforts to achieve that result;
(vii) authorize any of, or commit or agree to take any of, the
foregoing actions;
(viii) take any action that (without regard to any action taken or
agreed to be taken by Vacation Break or any of its affiliates) would
prevent Fairfield from accounting for the business combination to be
effected by the Merger as a pooling of interests;
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(ix) purchase shares of Vacation Break Common Stock.
AMENDMENT AND WAIVER
Subject to applicable law: (i) the Merger Agreement may be amended by an
instrument in writing signed on behalf of each party at any time (except that
after the Merger Agreement shall have been approved and adopted by the
stockholders of Vacation Break, no amendment may be entered into which requires
further approval by such stockholders unless such further approval is obtained)
and (ii) at any time prior to the Effective Time, the parties may, by written
instrument signed on behalf of each party, (a) extend the time for performance
of the obligations of the other party to the Merger Agreement, (b) waive
inaccuracies in representations and warranties contained in the Merger Agreement
or in any document delivered pursuant thereto and (c) waive (subject to the
parenthetical in clause (i)) compliance with any agreements or conditions for
their respective benefit contained in the Merger Agreement.
Pursuant to Section 607.1103 of the FBCA, no amendment to the Merger
Agreement made subsequent to the approval of the Merger Agreement by the
stockholders of Vacation Break may alter or change the amount or kind of shares,
securities, cash, property or rights to be received by such stockholders in the
Merger, change any other terms and conditions of the Merger Agreement if such
change would materially and adversely affect Vacation Break or the holders of
any class or series of stock of Vacation Break or, subject to limited
exceptions, change any term of the articles of incorporation of Vacation Break
without stockholder approval.
EXPENSES
Whether or not the Merger is consummated, all fees and expenses incurred in
connection with the Merger, the Merger Agreement and the transactions
contemplated by the Merger Agreement shall be paid by the party incurring such
fees or expenses, except as described under "--Termination" above and except
that Fairfield and Vacation Break will share equally the expenses incurred in
connection with the filing, printing and mailing of this Joint Proxy
Statement/Prospectus.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary mutual representations and
warranties relating to, among other things, (i) corporate organization and
similar corporate matters; (ii) subsidiaries; (iii) the capital structures of
each of Vacation Break and Fairfield; (iv) authorization, execution, delivery,
performance and enforceability of, and required consents, approvals, orders and
authorizations of governmental authorities relating to, the Merger Agreement and
related matters; (v) documents filed by each of Fairfield and Vacation Break
with the SEC, the accuracy of information contained therein and the absence of
undisclosed liabilities of each of Fairfield and Vacation Break; (vi) the
accuracy of information supplied by each of Fairfield and Vacation Break in
connection with the Registration Statement and this Joint Proxy
Statement/Prospectus; (vii) absence of material changes or events with respect
to each of Vacation Break and Fairfield; (viii) the absence of material
litigation; (ix) compliance with applicable laws; (x) retirement and other
employee plans and matters relating to the Employees Retirement Income Security
Act of 1974, as amended; (xi) the absence of any collective bargaining
agreement, union organizing effort, labor strikes or other labor troubles; (xii)
filing of tax returns and payment of taxes; (xiii) required stockholder votes;
(xiv) the absence of any "excess parachute payment" (as such term is defined in
Section 280G(b)(1) of the Code); (xv) engagement and payment of fees of brokers,
investment bankers, finders and financial advisors; (xvi) sales of VOIs at each
resort property, condition of resort properties and VOIs held for sale, title to
material properties and assets, absence of liens, validity and absence of
defaults under material leases; (xvii) absence of material claims under any
customer warranties; (xviii) absence of violations of any environmental laws,
possession of all required environmental permits, absence of any cleanup
liability and related matters; (xix) adequacy of insurance coverage; (xx)
validity and collectability of mortgages receivable; and (xxi) the satisfaction
of certain state takeover statutes requirements.
PRINCIPAL STOCKHOLDERS AGREEMENT
GENERAL. Concurrently with the execution and delivery of the Merger
Agreement, Fairfield and Merger Sub entered into the Principal Stockholders
Agreement with the Principal Stockholders pursuant to which, among other things,
the Principal Stockholders agreed, subject to certain limitations, (i) to vote
all of the shares of Vacation Break Common Stock held by them for approval of
the Merger Agreement at the Vacation Break Stockholders Meeting, (ii) to not
compete with or solicit employees of Vacation Break under certain conditions,
and (iii) to indemnify Fairfield and its subsidiaries, including
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Vacation Break of any Indemnified Matter. The following is a summary of certain
provisions of the Principal Stockholders Agreement.
VOTING AGREEMENT. Subject to the limitations relating to the duties of
Messrs. Muller and Sheehan as a director or officer of Vacation Break described
below, each of the Principal Stockholders has agreed, at the Vacation Break
Stockholders Meeting or any meeting of the stockholders of Vacation Break,
however called, and in any action by consent of the stockholders of Vacation
Break, to vote all of the shares of Vacation Break Common Stock beneficially
owned by such Principal Stockholder and entitled to vote (i) for approval of the
Merger Agreement and the other transactions contemplated by the Merger
Agreement, (ii) against any action or agreement that would result in a breach of
any representation, warranty, covenant, agreement or other obligation of
Vacation Break under the Merger Agreement or may result in any of the conditions
to Vacation Break's obligations under the Merger Agreement not being fulfilled
and (iii) in favor of any other matter necessary to consummate the transactions
contemplated by the Merger Agreement and considered and voted upon by the
stockholders of Vacation Break. Subject to the same limitations, the Principal
Stockholders have also agreed not to solicit, encourage or recommend to other
holders of Vacation Break Common Stock that those holders (a) vote their shares
of Vacation Break Common Stock in any manner that would, directly or indirectly,
impede or adversely affect stockholder approval of the Merger Agreement and the
other transactions contemplated by the Merger Agreement, (b) at the Vacation
Break Stockholders Meeting, abstain from voting, or otherwise fail to vote,
their shares of Vacation Break Common Stock, (c) sell, transfer, tender or
otherwise dispose of their shares of Vacation Break Common Stock or (d) exercise
any dissenters' appraisal or other similar rights. The foregoing obligations of
each of Messrs. Muller and Sheehan are subject to his obligation to faithfully
discharge his duties as a director or an officer of Vacation Break; PROVIDED,
HOWEVER, if Vacation Break has not terminated the Merger Agreement in connection
with a Vacation Break Superior Proposal pursuant to the provisions of the Merger
Agreement described in clause (vii) under "--Termination," each such Principal
Stockholder must vote his shares as described above.
TRANSFER OF SHARES. Until the close of business on the date on which
results covering at least 30 days of combined operations of Fairfield and
Vacation Break have been published by Fairfield, in the form of a quarterly
earnings report, an effective registration statement filed with the SEC, a
report filed with the SEC on Form 10-K, 10-Q or 8-K, or any other public filing
or announcement which includes those combined results of operations (a "Combined
Operations Filing"), none of the Principal Stockholders will, directly or
indirectly, (a) sell, assign, transfer, pledge, encumber or otherwise dispose of
any of their shares of Vacation Break Common Stock or the shares of Fairfield
Common Stock into which such shares are converted or exchanged pursuant to the
Merger Agreement, (b) deposit any of such shares into a voting trust or enter
into a voting agreement or arrangement with respect to any of such shares or
grant any proxy or power of attorney with respect thereto or (c) enter into any
contract, option or other arrangement or undertaking with respect to the direct
or indirect sale, assignment, transfer or other disposition of any of such
shares, other than in connection with certain existing options to purchase a
portion of such shares and to maintain existing pledges of a portion of such
shares.
NON-COMPETITION. For a period of one year following the Effective Time, or
if employed by or otherwise engaged to provide services to Fairfield or any of
its subsidiaries or elected to the Fairfield Board, during such employment,
engagement, or tenure on the Fairfield Board and for a period of one year after
the termination of that employment, engagement, or tenure on the Fairfield
Board, neither of Muller or Sheehan will directly or indirectly, engage in or
have any interest in any entity that, directly or indirectly, engages in sales
of leads for vacation ownership marketing, marketing or sales of VOIs, vacation
packages, or other travel or vacation related services or products and any other
business or activity in which Vacation Break and its subsidiaries is engaged in
the State of Florida with respect to marketing or sales of vacation ownership
interests or timeshares, and in any geographic area in which Vacation Break and
its subsidiaries presently conduct any part of their businesses with respect to
all other aspects of their businesses that are conducted in that area, subject
to certain exceptions for their involvement with or investment in Fairfield,
companies which are part of Fairfield's consolidated group, publicly traded
companies and Ralph Muller's continued investment in or involvement with certain
companies.
NONDISCLOSURE. Neither of Muller or Sheehan will divulge, communicate, use
to the detriment of Fairfield or its subsidiaries (including, without
limitation, Vacation Break and its subsidiaries) or for the benefit of any other
person or persons, or misuse in any way, any confidential information pertaining
to the business of Fairfield and its subsidiaries (including, without
limitation, Vacation Break and its subsidiaries). For these purposes,
confidential information means proprietary information known or disclosed to
Ralph Muller or Kevin Sheehan, as applicable, as a consequence of or through his
employment by Vacation Break or Fairfield or any of their respective
subsidiaries or service as a director of Vacation Break or Fairfield or any of
their respective subsidiaries or as a consequence of the Merger and all related
transactions (including information conceived, originated, discovered or
developed by Ralph Muller or Kevin Sheehan, as applicable)
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at any time, and not known to the general public, about Fairfield and its
subsidiaries, Vacation Break and its subsidiaries, and their respective
businesses.
NONSOLICITATION OF EMPLOYEES. Muller and Sheehan have each agreed that,
for a period of two years following the Effective Time, or if he is employed by
or otherwise engaged to provide services to Fairfield or any of its subsidiaries
or elected to the Fairfield Board, during such employment, engagement or tenure
on the Fairfield Board and for a period of two years thereafter, he will not
directly or indirectly, for himself or for any business or other person or
entity, employ or attempt to employ, or enter into any contractual arrangement
with any employee or sales agent or former employee or former sales agent of
Fairfield or Vacation Break or their respective subsidiaries (except with
respect to one individual), unless such person has not been employed or
otherwise engaged by Fairfield or Vacation Break or their respective
subsidiaries for a period in excess of six months.
INDEMNIFICATION OF FAIRFIELD. Subject to the limitations on liability
described below, the Principal Stockholders have agreed that Muller and R&A,
jointly and severally as a group, and Sheehan, severally and not jointly, will
indemnify and hold Fairfield and its subsidiaries (including, without
limitation, Vacation Break and its subsidiaries) (each an "Indemnified Person")
harmless from and against the sum of (1) 75% of any and all losses,
deficiencies, liabilities and damages incurred or suffered by an Indemnified
Person resulting from or arising out of the matters that are the subject of the
Indemnified Matters, plus (2) 25% of all Litigation Expenses (as defined below)
incurred by any Indemnified Person in connection with or as a result of any
Indemnified Matter in excess the reserve for the Indemnified Matter, if any,
that is reflected in Vacation Break's consolidated financial statements at June
30, 1997 (the sum of (1) and (2) are referred to as an "Indemnifiable Loss").
Litigation Expenses means all reasonable legal, investigatory, expert and
similar fees and expenses, witness fees, transcript costs, court costs, appeal
bonds, appeal bond premiums and printing costs related to the defense of an
Indemnified Matter.
The maximum liability of Muller and R&A, as a group, and Sheehan under
their indemnity with respect to an Indemnified Matter is 80% and 20%,
respectively, of the Maximum Amount for that Indemnified Matter. The aggregate
of the Maximum Amounts for all of the Indemnified Matters is $7.0 million; which
amounts may be more or less than the actual liability that Vacation Break may
incur. Any obligation under this indemnity will be satisfied by payment of
Holdback Shares (as defined below) from the escrow account for the Holdback
Shares established under the Escrow Agreement (the "Escrow Account") valued at
the Share Value (as defined below) unless some or all of the Holdback Shares
have been sold or otherwise disposed of in accordance with the Principal
Stockholders Agreement, in which case the payment will be made first from the
cash held in the Escrow Account and then from the Holdback Shares in accordance
with the Escrow Agreement. For these purposes, Share Value means the closing
price of a share of Fairfield Common Stock on the New York Stock Exchange (or,
if not quoted on the New York Stock Exchange, on the principal national
securities exchange upon which the Fairfield Common Stock is then traded) on the
business day immediately preceding the Closing Date, as such price may be
equitably adjusted after that date to give effect to any stock split, dividend,
or combination or reclassification of Fairfield's capital stock.
SECURITY FOR INDEMNIFICATION OF FAIRFIELD. As security for the agreement
by the Principal Stockholders to indemnify and hold the Indemnified Persons
harmless under the Principal Stockholders Agreement and the sole source of
payment of any claim under such indemnity, at the Effective Time the Principal
Stockholders have agreed to place in the Escrow Account with the Escrow Agent,
certificates representing the Holdback Shares. The number of Holdback Shares
will be equal to $7.0 million divided by the Share Value. All cash dividends
paid on the Holdback Shares and all shares of Fairfield Common Stock or other
securities issued or distributed to the Principal Stockholders with respect to
the Holdback Shares as a result of any stock split, stock dividend, or
combination or reclassification of or in respect of Fairfield's capital stock,
together with any associated share purchase rights are also required to be
deposited in the Escrow Account. Ralph Muller and R&A have agreed to deposit
80% and Kevin Sheehan has agreed to deposit 20% of the Holdback Shares in the
Escrow Account. The number of Holdback Shares (valued at the Share Value) plus
any proceeds from any such shares that are sold or otherwise disposed of in
market transactions in accordance with the provisions of the Escrow Agreement,
plus any other securities or other cash amounts required to be deposited in the
Escrow Account that are received in respect of such shares or other cash
amounts, that may be applied to the Principal Stockholders' Indemnification
obligations may not exceed the Maximum Amount with respect to any Indemnified
Matter.
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ESCROW AGREEMENT
The Escrow Agreement will govern the procedure for the satisfaction of any
claims for indemnification pursuant to the Principal Stockholders Agreement.
STOCK EXCHANGE LISTING
It is a condition to the Merger that the shares of Fairfield Common Stock
to be issued in the Merger and under certain Vacation Break stock options and
warrants be approved for listing on the NYSE, subject to official notice of
issuance.
RESALE OF FAIRFIELD COMMON STOCK
The Fairfield Common Stock issued pursuant to the Merger will not be
subject to any restrictions on transfer arising under the Securities Act, except
for shares issued to any Vacation Break stockholder who may be deemed to be an
"affiliate" of Fairfield or Vacation Break for purposes of Rule 145 under the
Securities Act or for purposes of qualifying the Merger for pooling-of-interests
accounting treatment. It is expected that each such affiliate will enter into
an agreement with Fairfield providing that such affiliate will not transfer any
Fairfield Common Stock received in the Merger except in compliance with the
Securities Act and will make no disposition of any Fairfield Common Stock (or
any interest therein) received in connection with the Merger unless, in the
opinion of counsel to Fairfield, the transaction will not have any adverse
consequences for Fairfield with respect to the treatment of the Merger for tax
purposes. In addition, it is expected that each such affiliate will agree not
to make any such disposition until after Fairfield has made a Combined
Operations Filing. Pursuant to the Merger Agreement, holders of 5% or more of
Vacation Break Common Stock, their family members and affiliated persons of
Vacation Break, in connection with the opinion of counsel to Vacation Break
regarding the U.S. federal income tax consequences of the Merger (see "--Certain
Federal Income Tax Consequences"), will be required to agree not to sell,
transfer or otherwise dispose, for a period of one year after the Effective
Date, of their proportionate share of the number of shares of Fairfield Common
Stock to be issued in the Merger (exclusive of Holdback Shares) equal to (i) 50%
of the total number of those shares reduced by (ii) all or part of those shares
issued to the public stockholders of Vacation Break. This Joint Proxy
Statement/Prospectus does not cover resales of Fairfield Common Stock received
by any person who may be deemed to be such an affiliate of Fairfield or Vacation
Break.
Pursuant to the Principal Stockholders Agreement, Fairfield and the
Principal Stockholders have agreed to enter into a Registration Rights Agreement
at the Effective Time. The Principal Stockholders will be entitled under the
Registration Rights Agreement, subject to the conditions set forth therein as
described below, to require Fairfield, at any time after Fairfield has made a
Combined Operations Filing, to register the shares of Fairfield Common Stock
received by the Principal Stockholders pursuant to the Merger, in accordance
with the provisions of the Securities Act for an offering to be made on a
delayed or continuous basis pursuant to Rule 415 thereunder. Fairfield will be
required to use its reasonable efforts to keep such registration continuously
effective until the earlier of (i) the date on which the Principal Stockholders
have disposed of all such shares of Fairfield Common Stock, (ii) the date on
which the Principal Stockholders may resell such shares pursuant to Rule 144
without complying with the provisions of paragraphs (c), (e), (f) and (h) of
Rule 144, or (iii) 36 months after the SEC declares such registration effective.
The Principal Stockholders will also have certain "piggyback" registration
rights to require Fairfield to include their shares in any registration of
Fairfield Common Stock under the Securities Act which Fairfield intends to
effect. The rights of the Principal Stockholders to have their shares of
Fairfield Common Stock registered are subject to certain conditions and
limitations, including suspension of Fairfield's obligations to effect such
registration for periods of up to 90 days in the case of unforeseen
circumstances such as Fairfield's negotiation or consummation of a financing
plan or transaction.
STOCKHOLDERS' RIGHTS OF APPRAISAL
Under Section 607.1302 of the FBCA, any stockholder of the corporation has
the right to dissent from, and obtain payment of the fair value of his shares in
the event of the consummation of a plan of merger to which the corporation is a
party if the stockholder is entitled to vote on the merger. However, Section
607.1302 does not apply with respect to a plan of merger to the holders of
shares of any class which, on the record date fixed to determine the
stockholders entitled to vote at the meeting of stockholders at which such
action is to be acted upon, were either registered on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the Nasdaq or held of record by not fewer than 2,000
stockholders. Because Vacation Break is designated as a national market system
security
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on an interdealer quotation system by the Nasdaq, holders of Vacation Break
Common Stock are not entitled to appraisal rights in connection with the Merger.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of
June 30, 1997 and unaudited pro forma condensed combined statements of earnings
for the six months ended June 30, 1997 and for the years ended December 31,
1996, 1995 and 1994 give effect to the Merger using the pooling-of-interests
method of accounting. For a description of pooling-of-interests accounting with
respect to the Merger and certain other accounting matters, see "The Merger --
Anticipated Accounting Treatment." The unaudited pro forma condensed combined
financial statements have been prepared from, should be read in conjunction
with, and are qualified in their entirety by reference to, historical
consolidated financial statements and notes thereto of Fairfield and Vacation
Break appearing elsewhere in this Joint Proxy Statement/Prospectus or which are
incorporated by reference in this Joint Proxy Statement/Prospectus (see
"Incorporation of Certain Documents by Reference"). Certain reclassifications
have been made to the unaudited pro forma financial statements to conform to the
presentations expected to be used by the merged companies. The transaction is
summarized in the following paragraph.
On August 8, 1997, Fairfield entered into a definitive merger agreement
with Vacation Break, whereby Fairfield will acquire Vacation Break in an all
stock transaction. Under the terms of the Merger, Fairfield will issue up to
5,826,281 shares of Fairfield Common Stock in exchange for (i) all the
outstanding options/warrants of Vacation Break, assuming such options and
warrants were exercised, and (ii) all of the outstanding Vacation Break Common
Stock, based upon an exchange rate of .6075 shares of Fairfield Common Stock in
exchange for each share of Vacation Break Common Stock.
The unaudited pro forma condensed combined financial information gives
effect to the Merger as if it had been consummated, with respect to statement of
earnings data, at the beginning of the periods presented, or, with respect to
balance sheet data, as of the date presented. The unaudited pro forma condensed
combined financial information has been included for illustrative purposes only
and is not necessarily indicative of the results of operations or financial
position that would have occurred had the Merger been consummated at the dates
indicated, nor is it necessarily indicative of future results of operations or
financial position of the merged companies.
As a result of the Merger, the merged companies will incur certain
transition costs, currently estimated at $11.0 million ($8.4 million net of
tax), in connection with consummating the transaction and integrating the
operations of Fairfield and Vacation Break. The transition costs consist
principally of professional fees, employee severance and relocation expenses
resulting from the Merger. While the exact timing, nature and amount of these
transition costs is subject to change, Fairfield anticipates that these direct
incremental costs will be recorded in the quarter in which the Merger is
consummated; however, because these charges are nonrecurring, they have not been
reflected in the pro forma condensed combined statements of earnings. The
unaudited pro forma condensed combined financial information does not give
effect to the anticipated cost savings expected to result from the Merger.
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FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
VACATION
FAIRFIELD BREAK PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS CONSOLIDATED
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $ 3,090 $ 3,649 $ 6,739
Loans receivable, net.................... 170,161 90,102 260,263
Real estate inventories.................. 47,113 22,345 69,458
Restricted cash and escrow accounts...... 6,292 19,864 26,156
Property and equipment, net.............. 15,465 9,695 25,160
Other assets............................. 22,882 3,212 $ 2,626 (a) 28,720
-------- -------- -------- --------
$265,003 $148,867 $ 2,626 $416,496
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Financing arrangements................. $ 61,124 $ 65,470 $126,594
Deferred revenue....................... 20,702 18,190 38,892
Other liabilities...................... 35,718 32,160 $ 11,000 (a) 78,878
-------- -------- -------- --------
117,544 115,820 11,000 244,364
-------- -------- -------- --------
Stockholders' equity
Common stock........................... 134 86 (86)(b) 192
58 (b)
Paid-in capital........................ 93,219 13,541 86 (b) 106,788
(58)(b)
Retained earnings...................... 54,882 19,420 (8,374)(a) 65,928
Unamortized value of restricted stock.. (776) -- (776)
Treasury stock, at cost................ -- -- --
-------- -------- --------
147,459 33,047 (8,374) 172,132
-------- -------- -------- --------
$265,003 $148,867 $ 2,626 $416,496
======== ======== ======== ========
</TABLE>
__________________
(a) To record the direct incremental Merger-related costs as an increase to
Other liabilities, the tax effect thereof as an increase in Other assets
(which includes the net deferred tax assets of the merged entity), and the
after-tax cost as a reduction in Retained earnings.
(b) To record the Merger under the pooling-of-interests method of accounting and
reflect the issuance of up to 5,829,197 shares of Fairfield Common Stock in
exchange for (i) all the outstanding options/warrants of Vacation Break,
assuming such options and warrants were exercised, and (ii) all of the
outstanding Vacation Break Common Stock, based upon an exchange rate of
.6075 shares of Fairfield Common Stock in exchange for each share of
Vacation Break Common Stock.
52
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
VACATION
FAIRFIELD BREAK PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS CONSOLIDATED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
Vacation ownership, net................... $ 70,169 $ 50,979 $ 121,148
Resort management......................... 8,075 5,892 13,967
Interest.................................. 10,958 5,884 16,842
Other..................................... 11,910 80 11,990
----------- ---------- -------- ----------
101,112 62,835 163,947
----------- ---------- -------- ----------
EXPENSES
Vacation ownership........................ 17,497 14,623 32,120
Provision for loan losses................. 3,150 1,808 4,958
Selling................................... 36,255 21,118 57,373
Resort management......................... 7,305 5,477 12,782
General and administrative................ 8,130 7,551 15,681
Interest, net............................. 2,476 2,562 5,038
Other..................................... 7,509 1,646 9,155
----------- ---------- -------- ----------
82,322 54,785 137,107
----------- ---------- -------- ----------
Earnings before provision for income taxes.. 18,790 8,050 26,840
Provision for income taxes.................. 7,488 2,956 10,444
----------- ---------- -------- ----------
Net earnings................................ $ 11,302 $ 5,094 $ 16,396
=========== ========== ======== ==========
NET EARNINGS PER SHARE...................... $ 0.63 $ 0.57 $ 0.70
=========== ========== ======== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING......... 17,927,964 8,885,399 23,325,844 (a)
=========== ========== ======== ==========
</TABLE>
___________________
(a) Reflects 5,397,880 shares of Fairfield Common Stock to be issued in
connection with the Merger, which calculation is based on an exchange rate
of .6075 of Fairfield Common Stock for each weighted average share of
Vacation Break Common Stock outstanding.
53
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
VACATION
FAIRFIELD BREAK PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS CONSOLIDATED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
<S>
Vacation ownership, net................... $ 114,592 $ 80,020 $ 194,612
Resort management......................... 14,644 12,343 26,987
Interest.................................. 19,994 8,657 28,651
Other..................................... 23,248 1,884 25,132
----------- ---------- --------- -----------
172,478 102,904 275,382
----------- ---------- --------- -----------
EXPENSES
Vacation ownership........................ 29,249 22,136 51,385
Provision for loan losses................. 5,390 2,437 7,827
Selling................................... 63,243 37,436 100,679
Resort management......................... 12,593 12,825 25,418
General and administrative................ 15,223 10,243 25,466
Interest, net............................. 6,757 3,997 10,754
Other..................................... 15,529 2,881 18,410
----------- ---------- --------- -----------
147,984 91,955 239,939
----------- ---------- --------- -----------
Earnings before provision for income taxes.. 24,494 10,949 35,443
Provision for income taxes.................. 9,631 3,709 13,340
----------- ---------- --------- -----------
Net earnings................................ $ 14,863 $ 7,240 $ 22,103
=========== ========== ========= ===========
NET EARNINGS PER SHARE...................... $ 0.91 $ 0.82 $ 1.02
=========== ========== ========= ===========
WEIGHTED AVERAGE SHARES OUTSTANDING......... 16,367,394 8,843,247 21,739,667 (a)
=========== ========== ========= ===========
</TABLE>
___________________
(a) Reflects 5,372,273 shares of Fairfield Common Stock to be issued in
connection with the Merger, which calculation is based on an exchange rate
of .6075 of Fairfield Common Stock for each weighted average share of
Vacation Break Common Stock outstanding.
54
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
VACATION
FAIRFIELD BREAK PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS CONSOLIDATED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
Vacation ownership, net.................... $ 85,460 $ 40,291 $ 125,751
Resort management.......................... 13,178 9,086 22,264
Interest................................... 19,111 4,704 23,815
Other...................................... 23,026 4,665 27,691
----------- ---------- --------- -----------
140,775 58,746 199,521
----------- ---------- --------- -----------
EXPENSES
Vacation ownership......................... 23,838 9,500 33,338
Provision for loan losses.................. 6,505 1,525 8,030
Selling.................................... 50,738 13,790 64,528
Resort management.......................... 11,730 9,645 21,375
General and administrative................. 11,844 9,766 21,610
Interest, net.............................. 8,562 1,959 10,521
Other...................................... 14,520 3,391 17,911
----------- ---------- --------- -----------
127,737 49,576 177,313
----------- ---------- --------- -----------
Earnings before provision for income taxes... 13,038 9,170 22,208
Provision for income taxes................... 5,009 3,325 (b) 8,334
----------- ---------- --------- -----------
Net earnings................................. $ 8,029 $ 5,845 $ 13,874
=========== ========== ========= ===========
NET EARNINGS PER SHARE....................... $ 0.51 $ 0.90 $ 0.70
=========== ========== ========= ===========
WEIGHTED AVERAGE SHARES OUTSTANDING.......... 15,879,555 6,524,658 19,843,285 (a)
=========== ========== ========= ===========
</TABLE>
___________________
(a) Reflects 3,963,730 shares of Fairfield Common Stock to be issued in
connection with the Merger, which calculation is based on an exchange rate
of .6075 of Fairfield Common Stock for each weighted average share of
Vacation Break Common Stock outstanding.
(b) Effective November 1, 1995, Vacation Break terminated all S Corporation
elections. The provision for income taxes reflects the effect on the
historical statement of earnings, assuming the companies had been treated as
C corporations rather than as S Corporations for income tax purposes, and
assuming that combined federal and state effective income tax rates
aggregate 38.6% for 1995.
55
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
VACATION
FAIRFIELD BREAK PRO FORMA PRO FORMA
(AS REPORTED) (AS REPORTED) ADJUSTMENTS CONSOLIDATED
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
Vacation ownership, net.................... $ 53,085 $ 27,644 $ 80,729
Resort management.......................... 10,206 7,602 17,808
Interest................................... 20,366 2,508 22,874
Other...................................... 21,690 8,989 30,679
Gain on sale of First Federal, net......... 5,200 -- 5,200
----------- ---------- ----------- -----------
110,547 46,743 157,290
----------- ---------- ----------- -----------
EXPENSES
Vacation ownership......................... 14,958 6,076 21,034
Provision for loan losses.................. 4,430 679 5,109
Selling.................................... 31,176 5,091 36,267
Resort management.......................... 8,784 7,855 16,639
General and administrative................. 10,456 9,573 20,029
Interest, net.............................. 10,528 1,159 11,687
Other...................................... 15,068 4,623 19,691
----------- ---------- ----------- -----------
95,400 35,056 130,456
----------- ---------- ----------- -----------
Earnings before provision for income taxes... 15,147 11,687 26,834
Provision for income taxes................... 2,878 3,922(b) 6,800
----------- ---------- ----------- -----------
Net earnings................................. $ 12,269 $ 7,765 $ 20,034
=========== ========== =========== ===========
NET EARNINGS PER SHARE....................... $0.77 $1.19 $ 1.01
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING.......... 15,863,772 6,500,000 19,812,522(a)
=========== ========== =========== ===========
</TABLE>
____________________
(a) Reflects 3,948,750 shares of Fairfield Common Stock to be issued in
connection with the Merger, which calculation is based on an exchange rate
of .6075 of Fairfield Common Stock for each weighted average share of
Vacation Break Common Stock outstanding.
(b) Effective November 1, 1995, Vacation Break terminated all S Corporation
elections. The provision for income taxes reflects the effect on the
historical statement of earnings, assuming the companies had been treated as
C corporations rather than as S Corporations for income tax purposes, and
assuming that combined federal and state effective income tax rates
aggregate 38.6% for 1994.
56
<PAGE>
APPROVAL OF THE CERTIFICATE AMENDMENT
INTRODUCTION
In order to issue the number of shares of Fairfield Common Stock required
pursuant to the Merger Agreement to be issued in connection with the Merger and
the Assumed Options and Supplemental Warrants, Fairfield's Certificate of
Incorporation must be amended to increase the authorized capital stock of
Fairfield. The Fairfield Board approved the Certificate Amendment (which amends
Section 1 of Article Fourth) as set forth below:
Section 1. AUTHORIZED CAPITAL STOCK. The Company is authorized to issue
------------------------
two classes of capital stock, designated Common Stock and Preferred
Stock. The total number of shares of capital stock that the Company is
authorized to issue is 105,000,000 shares, consisting of 100,000,000
shares of Common Stock, par value $0.01 per share, and 5,000,000 shares
of Preferred Stock, par value $0.01 per share.
The Fairfield Board recommended that the Certificate Amendment be submitted
to Fairfield's stockholders for consideration at the Fairfield Special Meeting.
VOTE REQUIRED
The approval of the Certificate Amendment requires the affirmative vote of
holders of record of a majority of the shares of Fairfield Common Stock
outstanding on the Record Date. The approval of the Certificate Amendment is a
condition to the Issuance of Fairfield Common Stock and the approval of both
proposals is a condition to the closing of the Merger.
THE FAIRFIELD BOARD RECOMMENDS THAT FAIRFIELD STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE CERTIFICATE AMENDMENT.
PURPOSE
Prior to the Effective Time, the Fairfield Certificate of Incorporation will
be amended to increase the number of authorized shares of Fairfield Common Stock
to 100,000,000. No change will be made with respect to the number of authorized
shares of preferred stock.
The Fairfield Certificate of Incorporation currently authorizes the issuance
of 25,000,000 shares of Fairfield Common Stock. On the Record Date, 19,249,550
shares of Fairfield Common Stock were either issued and outstanding or reserved
for issuance. Fairfield expects to issue approximately 5,270,800 shares of
Fairfield Common Stock to holders of Vacation Break Common Stock in the Merger,
to reserve an additional approximately 427,906 shares for issuance upon exercise
of the Assumed Options and 127,575 shares for issuance upon exercise of the
Supplemental Warrants. After taking into account the shares of Fairfield Common
Stock either issued or reserved for issuance the number of shares remaining for
issuance would not be sufficient to complete the Merger if the Fairfield
Certificate of Incorporation were not amended. The Fairfield Board believes it
is desirable to authorize additional shares of Fairfield Common Stock so that
there will be sufficient shares available for issuance to complete the Merger,
effect the transactions contemplated by the Merger Agreement (and the Assumed
Options and Supplemental Warrants) and for purposes that the Fairfield Board may
hereafter determine to be in the best interests of Fairfield and its
stockholders. Such purposes could include the offer of shares for cash,
acquisitions, employee benefit programs and other general corporate purposes. In
many situations, prompt action may be required which would not permit seeking
stockholder approval to authorize additional shares for the specific transaction
on a timely basis. The terms of any future issuance of shares of Fairfield
Common Stock will be dependent largely on market and financial conditions and
other factors existing at the time of issuance. For the foregoing reasons, the
approval of the Issuance of Fairfield Common Stock and the completion of the
Merger are conditioned upon the approval of the Certificate Amendment to
increase the number of authorized shares of Fairfield Common Stock in order to
have a sufficient number of shares for issuance pursuant to the Merger Agreement
and from time to time after the Merger.
Fairfield currently has no plans, understandings, agreements or arrangements
concerning the issuance of additional shares of Fairfield Common Stock, except
for the shares to be issued in connection with the Merger and shares reserved or
to be reserved for issuance by Fairfield as described herein, including (without
limitation) as further described below.
57
<PAGE>
Fairfield expects to continue to pursue acquisition opportunities consistent
with the best interests of Fairfield and its stockholders and may, in connection
with any such acquisitions, issue additional shares of Fairfield Common Stock.
In addition, Fairfield expects to continue to issue additional shares of
Fairfield Common Stock upon exercise of options and warrants granted under
existing stock option and warrant plans, under Fairfield's plan of
reorganization and related agreements and settlements, and under Fairfield's
employee stock purchase plan. If any other plans, understandings, arrangements
or agreements are made concerning the issuance of any such shares, holders of
the then outstanding shares of Fairfield's capital stock may or may not be given
the opportunity to vote thereon, depending upon the nature of any such
transaction, the law applicable thereto, the policy of the NYSE and the judgment
of the Fairfield Board regarding the submission thereof to Fairfield's
stockholders. The current rules of the NYSE, however, would require stockholder
approval if the number of shares of Fairfield Common Stock to be issued would
equal or exceed 20% of the number of shares of Fairfield Common Stock
outstanding immediately prior to the such issuance.
It is not presently contemplated that additional shares of Fairfield Common
Stock would be issued for the purpose of making the acquisition by an unwanted
suitor of a controlling interest in Fairfield more difficult, time-consuming or
costly. However, it should be noted that shares of Fairfield Common Stock could
be issued for that purpose and to that effect, and the Fairfield Board reserves
its right (if consistent with its fiduciary responsibilities) to issue Fairfield
Common Stock for such purpose. For a description of certain antitakeover
effects of the Fairfield Rights which are attached to the existing Fairfield
Common Stock and will be attached to any additional shares of Fairfield Common
Stock when issued, see "Description of Fairfield Capital Stock --Rights
Agreement."
MANAGEMENT OF FAIRFIELD
Fairfield's directors and executive officers, and their ages and positions
with Fairfield as of the date of this Joint Proxy Statement/Prospectus, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John W. McConnell 55 President, Chief Executive Officer and Director
Les R. Baledge 40 Director
Ernest D. Bennett, III 45 Director
Philip L. Herrington 44 Director
Gerald Johnston 55 Director
Bryan D. Langton 60 Director
Charles D. Morgan 54 Director
William C. Scott 60 Director
Clayton G. Gring, Sr. 65 Senior Vice President and Chief Operating Officer
Marcel J. Dumeny 46 Senior Vice President, General Counsel and Secretary
Franz S. Hanning 43 Senior Vice President/Corporate Sales
Robert W. Howeth 49 Senior Vice President and Chief Financial Officer
Mark Nuzzo 46 Vice President/Property Management
William G. Sell 44 Vice President, Controller and Chief Accounting Officer
</TABLE>
John W. McConnell has been with Fairfield since 1986, serving as President
and Chief Executive Officer of Fairfield since 1991, President and Chief
Operating Officer from 1990 to 1991 and Senior Vice President and Chief
Financial Officer prior thereto. He has been a Director of Fairfield since
1990.
Les R. Baledge has been a Director of Fairfield since 1996. He joined The
Rose Law Firm, a Professional Association, in 1982 and has been a member since
1986.
58
<PAGE>
Ernest D. Bennett, III has been a Director of Fairfield since 1992. He has
been a partner at the law firm of Taylor, Philbin, Pigue, Marchetti and Bennett
since June 1992. Mr. Bennett served as General Counsel at Robert Orr/Sysco Food
Services Company from 1989 to May 1992, and was a partner at the law firm of
Camp and Bennett from 1980 to 1989.
Philip L. Herrington has been a Director of Fairfield since 1992. He has
been President and Chief Executive Officer of Herrington, Inc., a private
investment and business advisory firm involved in resort and real estate
development and management, since 1986 and President and Chief Operating Officer
of Destin Guardian Corporation, a real estate development company, since 1989.
Gerald Johnston has been a Director of Fairfield since June, 1997. Mr.
Johnston served as Executive Vice President of Finance and Chief Financial
Officer of Tyson Foods, Inc., a producer, marketer and distributor of poultry
and other food products, at the time of his retirement in June 1996 and in
essentially the same capacity for more than 5 years prior to such time.
Bryan D. Langton has been a Director of Fairfield since May 1996. He served
as the former Chairman of Holiday Inns, Inc., an owner, franchiser and manager
of hotels from February 1990 to March 1997 and as the President and Chief
Executive Officer from February 1990 to March 1996 and from October 1996 to
March 1997. He has served as a director of Wachovia Bank of Georgia NA, and as
a director of Caribiner International, Inc., a national producer of meetings,
events, training programs and related business communication services since May
1996.
Charles D. Morgan has been a Director of Fairfield since May 1996. He has
served as Chairman, President and Chief Executive Officer of Acxiom Corporation,
a data processing, facilities management and software provider to the direct
marketing, mail order, catalogue sales and publishing industries and to
marketing firms engaged in prospect generation, since 1991 and as a director of
Boatmen's National Bank of Conway. Mr. Morgan was Chairman and Chief Executive
Officer of Acxiom Corporation from 1975 to 1991 and Vice President of Acxiom
Corporation from 1972 to 1975.
William C. Scott has been a Director of Fairfield since 1992. He has served
as Chairman and Chief Executive Officer of Summit Care Corporation, a developer
and operator of retirement and convalescent centers since 1986, and as a
director since 1985. He served as President of Summit Care Corporation from
1985 to 1996.
Clayton G. Gring, Sr. has been with Fairfield since 1991, serving as Senior
Vice President/Chief Operating Officer since January 1996 and Senior Vice
President/Leisure Products Group prior thereto. Mr. Gring was self-employed
from 1984 to 1991, specializing in the development and management of real estate
properties, including resort communities and hospitality related properties.
Marcel J. Dumeny has been with Fairfield since 1987, serving as Secretary
since 1991, as Senior Vice President and General Counsel since 1989 and Senior
Vice President/Law and Development prior thereto.
Franz S. Hanning has been with Fairfield since 1982, serving as Senior Vice
President/Corporate Sales since January 23, 1997. Mr. Hanning served as
Regional Vice President from 1991 to January 23, 1997, and as Vice
President/Sales - Fairfield Williamsburg from 1990 to 1991.
Robert W. Howeth has been with Fairfield since 1975, serving as Senior Vice
President and Chief Financial Officer since April 1996. Mr. Howeth served as
Senior Vice President, Chief Financial Officer and Treasurer from 1994 to April
1996, Senior Vice President and Treasurer from 1993 to 1994, and as Senior Vice
President/Planning and Administration from 1990 to 1993.
Mark Nuzzo has been with Fairfield since 1983, serving as Vice President of
Property Management since 1995. He served as Vice President of Resort Operations
from 1991 to December 1995.
William G. Sell has been with Fairfield since 1981, serving as Vice
President, Controller and Chief Accounting Officer since 1988.
59
<PAGE>
DESCRIPTION OF FAIRFIELD CAPITAL STOCK
GENERAL
Fairfield's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") provides that the authorized capital stock of
Fairfield consists of 25,000,000 shares of Fairfield Common Stock and 5,000,000
shares of Preferred Stock. If the Fairfield stockholders approve the Certificate
Amendment, the authorized capital stock will consist of 100,000,000 shares of
Fairfield Common Stock and 5,000,000 shares of Preferred Stock. Upon
consummation of the Merger, approximately 24,555,132 shares of Fairfield Common
Stock will be issued and approximately 22,262,405 shares outstanding, and no
shares of Preferred Stock will be issued and outstanding.
COMMON STOCK
Except as may otherwise be provided in a preferred stock designation, the
holders of Fairfield Common Stock are entitled to one vote per each share owned
of record on matters submitted to a vote of the stockholders. The holders of
Fairfield Common Stock vote as a class with the holders of any of Fairfield's
Series A Junior Participating Preferred Stock ("Series A Stock") issued under a
Rights Agreement, as amended, between Fairfield and FNBB, as successor rights
agent, (the "Rights Agreement"). The holders of Fairfield Common Stock have
rights under the Rights Agreement (the "Rights"), associated with the Fairfield
Common Stock, to purchase Series A Stock, under certain circumstances. See "--
Rights Agreement."
Subject to any preferential rights that may be applicable to Preferred Stock,
all shares of Fairfield Common Stock rank equally as to participation in any
property that may be available for distribution after satisfaction of all other
claims in the event of any liquidation, dissolution or winding up of the affairs
of Fairfield, whether voluntary or involuntary or otherwise, and as to such
dividends, if any, as may be declared from time to time by the Fairfield Board
in its discretion from funds legally available therefor.
It is not presently anticipated that any dividends will be paid on the
Fairfield Common Stock in the foreseeable future, and certain debt instruments
of Fairfield expressly limit, or may have the effect of limiting, the amount of
dividends payable by Fairfield. In particular, no dividends or other
distributions may be paid on the Fairfield Common Stock, other than dividends
payable solely in shares of Fairfield Common Stock, until certain loans made to
Fairfield by BankBoston, N.A., as agent on behalf of itself and such other
participating lenders as may become party to the lending agreement, have been
repaid in full, and no obligation remains to extend future loans. Similarly,
debt instruments of Vacation Break prohibit the payment of dividends. The
Fairfield Common Stock has no preemptive rights, no cumulative voting rights and
no redemption, sinking fund or conversion provisions.
PREFERRED STOCK
The Fairfield Board is authorized to issue the shares of Preferred Stock in
such series and to fix from time to time before issuance the number of shares to
be included in any such series and the designation, relative powers,
preferences, and rights and qualifications, limitations, or restrictions of all
shares of such series, including without limitation voting powers, redemption
provisions, dividend rates, rights upon dissolution, conversion rights and
sinking fund provisions. Fairfield has reserved 1,000,000 shares of Preferred
Stock for issuance of the Series A Stock. There are currently no shares of
Series A Stock issued and outstanding. See "--Rights Agreement." The issuance
of Preferred Stock could decrease the amount of earnings and assets available
for distribution to holders of Fairfield Common Stock or adversely affect the
rights and powers, including voting rights, of the holders of Fairfield Common
Stock. The issuance of Preferred Stock also could have the effect of delaying,
deferring or preventing a change in control of Fairfield.
RIGHTS AGREEMENT
In 1992, Fairfield adopted the Rights Agreement, which provides for the
issuance of 2/3 Right for each outstanding share of Fairfield Common Stock. The
Rights, which entitle the holder to purchase from Fairfield one one-hundredth of
a share of Series A Stock at $25 per share, become exercisable (i) ten business
days after a person becomes the beneficial holder of 20% or more of the
Fairfield Common Stock or (ii) ten business days following the commencement of a
tender or exchange offer for at least 20% of the Fairfield Common Stock.
Fairfield may redeem the Rights at $0.01 per right under certain circumstances.
The Rights expire on September 1, 2002.
60
<PAGE>
The Rights may have the effect of discouraging an unsolicited takeover
proposal. The Rights are intended to, among other objectives, (i) reduce
Fairfield's vulnerability to potentially coercive or unfair takeover practices
and takeover proposals that are inadequate or otherwise inconsistent with the
best interests of Fairfield and its stockholders, (ii) encourage potential
acquirors to negotiate with the Fairfield Board, acting on behalf of Fairfield
and its stockholders, (iii) enhance the bargaining position of the Fairfield
Board in such negotiations, (iv) provide additional time to the Fairfield Board
in which appropriately to evaluate and respond to an unsolicited takeover
proposal, and (v) under appropriate circumstances, provide additional time to
the Fairfield Board in which to develop or implement alternatives designed to
provide superior value to Fairfield's stockholders. Fairfield believes that the
benefits of the enhancement of the Fairfield Board's ability to negotiate with
the proponents of unsolicited takeover proposals and otherwise respond to such
proposals outweigh the disadvantages of potentially discouraging such proposals
and the possibility of self-interest by management.
DELAWARE LAW ANTI-TAKEOVER PROVISIONS
Fairfield is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a Delaware corporation for three
years following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time such transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
rights to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer), or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least two-
thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Section 203, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors and which transaction is approved or not opposed by a majority of the
board of directors then in office. No person or group currently is the
beneficial owner of 15% or more of Fairfield's voting stock, however, upon
completion of the Merger, Mr. Muller is expected to beneficially own % of
the outstanding Fairfield Common Stock. See "Item 12. Security Ownership of
Certain Beneficial Owners and Management" of Fairfield's annual report on Form
10-K for the year ended December 31, 1996, which is incorporated herein by
reference.
TRANSFER AGENT AND REGISTRAR
Fairfield has appointed Boston EquiServe as the transfer agent and registrar
for the Fairfield Common Stock.
COMPARISON OF STOCKHOLDER RIGHTS
As a result of the Merger, Vacation Break stockholders, whose stockholder
rights are currently governed by the FBCA and Vacation Break's Articles of
Incorporation and Bylaws, will become stockholders of Fairfield, and their
rights as stockholders will then be governed by the DGCL and Fairfield's
Certificate of Incorporation and Bylaws. Those provisions of the DGCL and the
FBCA, as well as of the Companies' respective charter and bylaws, provide
different rights to stockholders. The following summary describes the material
differences in the rights of Vacation Break stockholders and Fairfield
stockholders. The following summary does not purport to be complete and is
qualified in its entirety by reference to the provisions of the FBCA and
Vacation Break's Articles of Incorporation and Bylaws, and the DGCL and
Fairfield's Certificate of Incorporation and Bylaws.
RIGHTS AGREEMENT
Fairfield adopted a Rights Agreement which provides for the issuance of 2/3
of a Right for each outstanding share of Fairfield Common Stock. See
"Description of Fairfield Capital Stock."
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STOCKHOLDERS' MEETINGS AND VOTING
VACATION BREAK. Under the FBCA, a special meeting of stockholders of a
Florida corporation may be called by the holders of shares entitled to cast not
less than 10% of all shares entitled to vote at the meeting, unless a different
percentage, not to exceed 50%, is provided in the articles of incorporation or
by the Board of Directors or the person authorized to do so by the articles of
incorporation or bylaws. Vacation Break's Articles of Incorporation and Bylaws
provide that special meetings of stockholders may be called only by: (a) the
Vacation Break Board pursuant to a resolution approved by a majority of the
entire Vacation Break Board, (b) the Chief Executive Officer or (c) the holders
of at least one-third of the outstanding shares of capital stock of Vacation
Break.
The Vacation Break Bylaws provide that at an annual meeting of the
stockholders only such business as is properly brought before the meeting shall
be conducted. To be properly brought before an annual meeting, business must be
either (a) specified in the notice of meeting given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by providing timely notice containing (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and address of
the stockholder proposing such business, (iii) the class and number of shares of
Vacation Break Common Stock beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business. The Vacation Break
bylaws also provide that for a person nominated by a stockholder to be eligible
for election, the stockholder must provide timely notice setting forth certain
information as to each person the stockholder proposes to nominate, and the name
and address of the stockholder and the class and number of shares of Vacation
Break Common Stock beneficially owned by the stockholder. To be timely, a
stockholder notice must be delivered to the Secretary of Vacation Break not less
than 60 nor more than 90 days prior to the meeting, provided, however, that in
the event that less than 70 days notice of the date of the meeting is given or
made to the stockholders, stockholder notice to be timely must be received by
Vacation Break not later than the close of business on the tenth day following
the day on which notice of the annual meeting was mailed or public disclosure
made, whichever occurs first.
The FBCA provides for the taking of stockholder action by written consent
unless otherwise provided in the articles of incorporation. However, the
Vacation Break Articles of Incorporation and Bylaws provide that any required
action or vote of stockholders must be taken at a meeting duly called and held,
and may not be taken by written consent in lieu of a meeting.
FAIRFIELD. Under the DGCL, stockholders of a Delaware corporation do not
have a right to call special meetings unless such right is conferred upon the
stockholders in the corporation's certificate of incorporation or bylaws.
Fairfield's Certificate of Incorporation and Bylaws provide that, subject to the
rights of the holders of any series of Preferred Stock, special meetings of
stockholders may be called by (a) the Chief Executive Officer or the Chairman of
the Board, or (b) the Secretary of Fairfield, and shall be called by the Chief
Executive Officer, the Chairman or the Secretary within 10 calendar days after
receipt of the written request of the holders of record of at least 10% of the
issued and outstanding Fairfield Common Stock entitled to vote generally in an
election of directors.
The Fairfield Bylaws do not contain any specific requirements regarding
notice of stockholder proposals and the nomination of directors.
Pursuant to the DGCL, unless otherwise provided in the certificate of
incorporation, any action to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding stock of not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Fairfield's
Certificate of Incorporation does not provide otherwise. Accordingly, action may
be taken by written consent of holders of Fairfield Common Stock.
DIVIDENDS
VACATION BREAK. The FBCA provides that a corporation may declare and pay a
dividend to its stockholders unless, after giving the distribution effect, the
corporation would not be able to pay its debts as they become due in the usual
course of business or the corporation's total assets would be less than the sum
of its total liabilities plus the amount that
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would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy preferential rights that are superior to the rights of
stockholders receiving the distribution.
FAIRFIELD. The DGCL provides that dividends may be declared from the
corporation's surplus or, if there is no surplus, from its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
Dividends may not be declared or paid, however, if the corporation's capital has
been diminished to an amount less than the aggregate amount of all capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets.
LIMITATION OF LIABILITY AND INDEMNIFICATION
VACATION BREAK. The FBCA provides that directors of a corporation will not
be personally liable for monetary damages for breach of their fiduciary duty as
directors, except in certain specified circumstances. Those circumstances
involve either: (i) a violation of the criminal law; (ii) a transaction from
which the director derived an improper personal benefit; (iii) an unlawful
payment of a dividend or unlawful stock repurchase or redemption; (iv) in a
derivative proceeding or one by or in the right of a stockholder, conscious
disregard for the best interest of the corporation or willful misconduct; or (v)
in a proceeding by or in the right of someone other than the corporation or a
stockholder, recklessness or an act or omission that was committed in bad faith,
with malicious purpose or in a manner exhibiting wanton and willful disregard of
human rights, safety or property. The Vacation Break Articles of Incorporation
further provide that a director shall not be personally liable to Vacation Break
or the holders of shares of capital stock for monetary damages for breach of
fiduciary duty as a director, except (i) for any breach of the duty of loyalty
of such director to Vacation Break or such holders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 607.0831 of the FBCA, or (iv) for any transaction
from which such director derives an improper personal benefit. The Vacation
Break Articles of Incorporation further provide that if the FBCA is amended to
authorize the further or broader elimination or limitation of the personal
liability of directors, then the liability of a director of Vacation Break will
be eliminated or limited to the fullest extent permitted by the FBCA.
FAIRFIELD. The DGCL provides that the directors of a corporation shall not
be personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director except (i) for any breach of the
director's duty of loyalty to the corporation and its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct, or
knowing violations of law; (iii) under Section 174 of the DGCL, which relates to
unlawful payments of dividends and unlawful stock repurchases and redemptions;
or (iv) for any transaction from which the director derived an improper personal
benefit. This provision does not eliminate a director's fiduciary duties; it
merely eliminates the possibility of damage awards against a director personally
which may be occasioned by certain unintentional breaches (including situations
that may involve grossly negligent business decisions) by the director of those
duties. The Fairfield Certificate of Incorporation provides that, to the full
extent permitted by the DGCL or any other applicable law, no Director of
Fairfield will be personally liable to Fairfield or its stockholders for or with
respect to any acts or omissions in the performance of his or her duties as a
Director of Fairfield.
INFORMATION REGARDING VACATION BREAK
BUSINESS OVERVIEW
Vacation Break develops, markets, operates and finances VOIs in premium
resort properties in Florida and engages in other leisure-oriented business
activities. The VOIs offered by Vacation Break consist of undivided fee
interests, which provide owners with the exclusive right to use a vacation
residence in perpetuity, typically for a one-week period each year. Vacation
Break sells fully-furnished VOIs in its own resort properties in South and
Central Florida and also receives commissions in connection with the sale of
VOIs in resort properties owned by other developers in Florida. Vacation Break's
principal business strategy is to sell VOIs in Vacation Break-owned resorts
rather than in properties owned by other developers, as sales of VOIs in
Vacation Break-owned resorts are more profitable and will generate future
sources of revenues and earnings through Vacation Break's financing and resort
management activities.
Vacation Break believes that the key to being a successful VOI developer is
having strong, diversified and cost effective marketing programs. Through
marketing programs, Vacation Break generates leads for the sale of VOIs.
Historically, Vacation Break's principal means of attracting prospective
purchasers of VOIs has been through the sale
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of discounted, high quality vacation packages. Marketing/lead generation is
typically a significant cost to a VOI developer. Vacation Break believes that
its vacation packages in part enable Vacation Break to generate leads for the
sale of VOIs at a lower cost per lead than is typical in the industry. Vacation
Break's current marketing strategy is to expand and diversify its lead
generation programs through both more traditional VOI marketing programs and
other lead generation programs. The vacation package still serves as a major,
and cost efficient, marketing tool for Vacation Break complemented by the
addition of innovative approaches.
Vacation Break believes that it provides VOI owners with an attractive long-
term vacation experience. The VOIs sold by Vacation Break are all in full
service resorts that typically feature swimming pools, restaurants and access to
golf courses, marinas, beaches, tennis courts, spa or recreational facilities
and other amenities. In addition, Vacation Break owns and operates one yacht
and two fishing vessels, which can be chartered by owners of VOIs at attractive
rates. Vacation Break maintains close contact with its VOI owners by virtue of
its role as property manager of its VOI resorts. This exposure to VOI owners
also enables Vacation Break to improve the management of its resorts, while
reducing marketing expenses which it would otherwise incur to the extent repeat
and referral business is generated through such contacts.
Vacation Break believes that its VOIs are made more attractive through
Vacation Break's participation in Resort Condominium International's ("RCI's")
or Interval International's ("Interval") exchange networks, which have a total
of more than 4,300 participating resort facilities in 81 countries and in excess
of 2 million and 700,000 individual members worldwide, respectively, with in
excess of 1.85 million vacation exchanges annually. Membership in RCI or
Interval entitles Vacation Break's customers to exchange their occupancy right
in the unit in which they own a VOI for an occupancy right in another
participating resort, based upon availability and the payment of a variable
exchange fee to RCI or Interval.
Vacation Break offers financing to the purchasers of VOIs in Vacation Break's
resort properties and finances a substantial portion of its loans to purchasers
of VOIs with borrowings from unaffiliated lenders. At June 30, 1997, Vacation
Break had a portfolio of 13,339 loans to VOI purchasers, which loans had a
weighted average maturity of approximately 5.2 years, and a weighted average
interest rate of 16.3% compared to a weighted average interest rate of 10.2% on
Vacation Break's borrowings from its lenders. Approximately 2% of the mortgage
loans for VOIs which Vacation Break has financed have resulted in foreclosure.
Vacation Break believes that its financing activities both enhance its ability
to sell VOIs and provide Vacation Break with a significant source of revenues
and earnings.
Vacation Break currently owns and is developing five VOI resort properties.
As of June 30, 1997, Vacation Break has sold 6,954 VOIs at the Sea Gardens Beach
and Tennis Resort in South Florida and has 66 VOIs remaining available for sale
at such resort. Vacation Break currently is constructing an additional 4,368
VOIs at this resort of which sales commenced in August 1997. A second resort,
the Santa Barbara Resort and Yacht Club, located in South Florida, opened in May
1995 and, of the approximately 4,680 VOIs available for sale at this resort,
4,516 VOIs were sold as of June 30, 1997. Vacation Break also owns a 55%
interest in the Palm-Aire Resort and Spa in South Florida, which, upon
completion of construction to convert the property for the sale of VOIs, will
have approximately 5,564 VOIs available for sale as the Fairways of Palm Aire.
This property has the potential to accommodate additional expansion of 14,716
VOIs from new purpose built phases. There were 3,607 VOIs sold at this resort
as of June 30, 1997. Vacation Break Resorts at Star Island has entered into an
agreement pursuant to which it has the obligation to acquire 123 condominium
units at Vacation Break at Star Island in the Orlando area to be sold as
approximately 5,200 VOIs of which 3,622 were sold as of June 30, 1997. Vacation
Break also owns a 55% interest in the Royal Vista (formerly known as Ocean
Ranch) property where, upon completion of renovation and construction, Vacation
Break will have an additional 5,148 VOIs in South Florida. Construction on this
project is expected to be completed in the first quarter of 1998 with sales
expected to commence in the first quarter of 1998. Vacation Break continually
monitors its VOI availability to approximately match it with expected tours
produced through the various marketing programs.
HISTORY OF VACATION BREAK
Vacation Break was incorporated as a Florida corporation in 1985. Prior to
November 1995, the business of Vacation Break was conducted through Vacation
Break, Vacation Break Promotions, Inc., Vacation Break Marketing, Inc., I&M
Marketing, Inc., Atlantic Marketing Realty, Inc., Sea Gardens Beach and Tennis
Resort, Inc., Resort Yachts of America, Inc. and Serenity Yacht Club, Inc. (each
of such entities other than Vacation Break are referred to herein as the
"Affiliated Companies"), and the issued and outstanding common stock of Vacation
Break was owned 50% by
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Ralph Muller, Vacation Break's Chairman and Chief Executive Officer, and 50% by
Kevin Sheehan, Vacation Break's President. Each of the Affiliated Companies was
affiliated with Vacation Break because their issued and outstanding capital
stock was owned entirely by Mr. Muller. In November 1995, Vacation Break
Promotions, Inc., Vacation Break Marketing, Inc. and I&M Marketing, Inc. were
merged (the "Vacation Break Merger") with and into Vacation Break, which
survived the Vacation Break Merger. In addition, at the time of the Vacation
Break Merger, Mr. Muller contributed the outstanding capital stock of the
remaining Affiliated Companies to Vacation Break, and such entities became
wholly-owned subsidiaries of Vacation Break. In connection with the Vacation
Break Merger and such contributions of capital stock, Mr. Muller received 80.71%
of the Vacation Break Common Stock in exchange for his 50% interest in Vacation
Break and 100% interest in each of the Affiliated Companies, and Mr. Sheehan
received 19.29% of the Vacation Break Common Stock in exchange for his 50%
interest in Vacation Break.
Effective December 21, 1995, Vacation Break offered to the public 1,800,000
shares of Vacation Break Common Stock (the "Public Offering"). In addition,
immediately prior to the Public Offering, Vacation Break split the Vacation
Break Common Stock on a 65,000-for-1 basis.
Each of certain Affiliated Companies of Vacation Break (the "S Companies")
had elected to be treated as an S Corporation for federal and state income tax
purposes prior to November 1, 1995, the date that the S Companies' status as S
Corporations terminated. Accordingly, prior to such date, none of the S
Companies paid any federal or state income tax, and all earnings of the S
Companies were subject to federal and state taxation directly at the stockholder
level. The practice of each of the respective S Companies was to pay cash
dividends to Ralph Muller, the sole stockholder of each such company, to allow
Mr. Muller to pay taxes on each of the S Companies' taxable income. Vacation
Break paid dividends to Mr. Muller in the amount of Mr. Muller's tax liability
through October 31, 1995 for Vacation Break and the S Companies. Vacation Break
has not paid dividends to any other stockholder and currently has a policy to
retain earnings for the operation and development of its business.
ADMINISTRATIVE AND OPERATING FACILITIES
Vacation Break's executive offices are located in Fort Lauderdale, Florida,
where Vacation Break leases approximately 60,000 square feet of office space.
These leases expire in 2001. Vacation Break also leases approximately 21,000
square feet of office space in Johnson City, Tennessee where it conducts
marketing operations. The lease for this facility expires in April 2001 and
contains a 5 year renewal option and a purchase option which may be exercised in
the sole discretion of Vacation Break. Vacation Break believes that all of its
office space is adequate to meet its needs for the foreseeable future and that,
if necessary, it can obtain additional space at a commercially reasonable cost
without undue operational disruption.
VACATION BREAK'S RESORTS
Vacation Break currently owns and is developing five vacation ownership
resort properties in Florida.
The Sea Gardens Beach and Tennis Resort is situated on 7.5 acres in Pompano
Beach, Florida, and consists of a total of 7,020 VOIs of which 66 remained
available for sale at June 30, 1997. VOIs in this resort are offered for sale
at prices ranging from $9,000 to $15,000 per week. The Sea Gardens Beach and
Tennis Resort is situated on 250 feet of beachfront property, and features a
beach club restaurant, a beachfront activity center offering a wide range of
watersports and 14 tennis courts. The Sea Gardens Beach and Tennis Resort has
been designated as a Gold Crown Resort by RCI, which awards this designation to
less than 13% of its in excess of 3,000 member resorts. This resort has also
received top honors for both landscaping and interior design in ARDA's 1993
award competition. Vacation Break is currently constructing a new 10 story
phase of Sea Gardens which is expected to include 4,368 VOIs, of which sales
commenced in August 1997, with construction expected to be completed by February
1998.
The Santa Barbara Resort and Yacht Club, situated on 1 1/4 acres in Pompano
Beach, consists of 90 studio, one and two bedroom units for sale as 4,680 VOIs
priced at an average of approximately $10,500 per week. This resort features a
swimming pool, a restaurant and banquet facilities, as well as dockage on the
Spanish River and close access to the beach and the Atlantic Ocean. Vacation
Break began offering VOIs at this resort in May 1995 and, at June 30, 1997, 164
VOIs remained available for sale at this resort. The Santa Barbara Resort and
Yacht Club has been designated as a Gold Crown Resort by RCI and the resort
received top honors as a renovated hotel in ARDA's 1995 awards competition.
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In April 1995, Vacation Break purchased a 55% interest in a general
partnership which acquired the Palm Aire Resort and Spa, in Pompano, Florida,
which represents 5,564 VOIs to be offered at an average price of $10,500 per
week. This resort features a health spa, swimming pools, a restaurant, banquet
facilities, as well as access to adjacent golf courses. Additionally,
purchasers of VOIs are granted access to the beach at Vacation Break's Sea
Gardens Beach and Tennis Resort, which is situated approximately five miles from
this resort. Vacation Break began offering VOIs for sale at this resort in
August 1995 and, at June 30, 1997, 1,957 of such VOIs remained available for
sale. The Fairways at Palm Aire, located at Palm Aire Resort and Spa, has been
designated as a Gold Crown Resort by RCI. Pursuant to a sales and marketing
agreement with the Palm Vacation Group, Vacation Break has the right to serve as
the exclusive marketing agent for this resort for which it receives commissions
based on sales of VOIs. Vacation Break is entitled to 55% of the net profits of
the Palm Vacation Group.
Vacation Break has entered into a marketing and unconditional purchase
agreement under which Vacation Break is obligated to purchase 123 condominium
units, to be sold as VOIs, in a development being constructed in Orlando,
Florida. This project is known as Vacation Break at Star Island. These
condominium units are expected to comprise approximately 6,396 VOIs which are
being offered at an average price of $12,500 per week. At June 30, 1997, 1,578
VOIs remained available for sale at this resort. Vacation Break is obligated to
pay a per unit-week purchase price equal either to a percentage of the sales
price or a flat amount per unit week received by Vacation Break for each VOI
available for sale.
In January 1996, Vacation Break purchased a 55% interest in a general
partnership which purchased the Ocean Ranch Resort, located in Pompano, Florida
expected to comprise 5,148 VOIs. Construction has commenced and will be
completed by March 1998 with sales of VOIs anticipated to commence in the first
quarter of 1998. This property has been designated as a Five Star resort by
Interval. Pursuant to a marketing agreement with the Ocean Ranch Group,
Vacation Break has the right to serve as the exclusive marketing agent for the
Ocean Ranch Resort, recently renamed the Royal Vista Resort, for which it
receives commissions based on sales of VOIs. Vacation Break is entitled to 55%
of the net profits of the Ocean Ranch Group.
The following table presents key statistics representing VOI activities in
properties owned by Vacation Break or under marketing and purchase agreements:
<TABLE>
<CAPTION>
SEA SANTA PALM STAR ROYAL
GARDENS (1) BARBARA AIRE ISLAND (3) VISTA TOTAL
------------- -------- ------ ---------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Number of VOI's available
at June 30, 1997 11,388 4,680 5,564 5,200 5,148 31,980
Net number of VOI's sold
through June 30, 1997 6,954 4,516 3,607 3,622* -- 18,699
Percent sold through
June 30, 1997 61% 96% 65% 70%* -- 58%
Net number of VOI's sold
during the 12 months
ended December 31, 1996 825 1,997 1,467 1,914* -- 6,203
Net number of VOI's sold
during the 6 months
ended June 30, 1997 -17(2) 1,127 1,653 1,175* -- 3,938
</TABLE>
___________________
* Includes units sold at properties where revenue and income recognition were
deferred or partially deferred for financial reporting purposes.
(1) Includes 4,368 unit weeks at the Ocean Palms phase under construction.
(2) Unit/weeks returned to inventory through process of foreclosure --net of
such unit/weeks resold.
(3) An additional 1196 unit weeks were contracted for in August 1997.
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ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean-
up costs incurred by each party in connection with the contamination. Such laws
typically impose clean-up responsibility and liability without regard to whether
the owner knew or caused the presence of the contaminants, and the liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
cost of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate the contamination on such property, may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances at a disposal or treatment facility also may be liable for the
costs of removal or remediation of a release of hazardous or toxic substances at
such disposal or treatment facility, whether or not such facility is owned or
operated by such person. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it incurs
in connection with the contamination. Finally, the owner of a site may be
subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site. In connection
with its ownership and operation of properties, Vacation Break may be
potentially liable for such costs.
Certain federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials
("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with its ownership and operation of
properties, Vacation Break may be potentially liable for such costs.
In addition, recent studies have linked radon, a naturally-occurring
substance, to increased risks of lung cancer. While there are currently no state
or federal requirements regarding the monitoring for, presence of, or exposure
to, radon in indoor air, the Environmental Protection Agency (the "EPA") and the
Surgeon General recommend testing residences for the presence of radon in indoor
air, and the EPA further recommends that concentrations of radon in indoor air
be limited to less than 4 picocuries per liter of air (Pci/L) (the "Recommended
Action Level"). The presence of radon in concentrations equal to or greater
than the Recommended Action Level in one or more of Vacation Break's properties
may adversely affect Vacation Break's ability to sell VOIs at such properties
and the market value of such property. Recently enacted federal legislation will
require Vacation Break to disclose to potential purchasers of VOIs at Vacation
Break's resorts that were constructed prior to 1978 any known lead-paint hazards
and will impose treble damages for failure to so notify.
Electric transmission lines are located in the vicinity of Vacation Break's
properties. Electric transmission lines are one of many sources of electro-
magnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of electric and magnetic fields
emanating from electric transmission lines, while others have required
transmission facilities to measure for levels of EMFs. In addition, Vacation
Break understands that lawsuits have, on occasion, been filed (primarily against
electric utilities) alleging personal injuries resulting from exposure as well
as fear of adverse effects. In addition, fear of adverse health effects from
transmission lines has been a factor considered in determining property values
in obtaining financing and in condemnation proceedings in eminent domain brought
by power companies seeking to construct transmission lines. Therefore, there is
a potential for the value of a property to be adversely affected as a result of
its proximity to a transmission line and for Vacation Break to be exposed to
damage claims by persons exposed to EMFs.
Vacation Break has conducted Phase I assessments of each of its resorts in
order to identify potential environmental concerns. These Phase I assessments
have been carried out in accordance with accepted industry practices and
consisted of non-invasive investigations of environmental conditions at the
properties, including a preliminary investigation of the sites and
identification of publicly known conditions concerning properties in the
vicinity of the sites, physical site inspections, review of aerial photographs
and relevant government records where readily available, interviews with
knowledgeable parties, investigation for the presence of above ground and
underground storage tanks
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presently or formerly at the sites, a visual inspection of potential lead-based
paint and suspect friable ACMs where appropriate, a radon survey, and the
preparation and issuance of written reports. Vacation Break's assessments of its
properties have not revealed any environmental liability that Vacation Break
believes would have a material adverse effect on Vacation Break's business
assets or results of operations, nor is Vacation Break aware of any such
material environmental liability. Nevertheless, it is possible that Vacation
Break's assessments do not reveal all environmental liability or that there are
material environmental liabilities of which Vacation Break is unaware. Vacation
Break does not believe that compliance with applicable environmental laws or
regulations will have a material adverse effect on Vacation Break or its
financial condition or results of operations.
Vacation Break believes that its properties are in compliance with all
material respects of all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. Vacation Break has not
been notified by any governmental authority or any third party, and is not
otherwise aware, of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
its present properties.
EMPLOYEES
As of June 30, 1997, Vacation Break employed approximately 900 full-time
employees. In addition, Vacation Break has agreements with approximately 300
independent real estate agents, which grant them the right to sell VOIs in
Vacation Break's resort properties.
LEGAL PROCEEDINGS
The Attorneys General of Connecticut, Illinois, Massachusetts, New Mexico,
New York, North Carolina, Texas, Minnesota, Washington, West Virginia and
Wisconsin (collectively, the "Multi-State Group") have been engaged in a multi-
state investigation of Vacation Break's marketing and sales practices involving
vacation packages. The Attorneys General of Washington, Illinois, Connecticut
and Vermont commenced lawsuits in March 1997. The Attorney General of Michigan
issued a notice of intent to proceed absent a settlement of outstanding issues.
In addition, the Attorney General of Idaho has commenced a post-settlement
action against Vacation Break. Such actions in Vermont, Michigan and Idaho
involved allegations similar to the actions brought or contemplated by the
Multi-State Group.
With respect to the above referenced actions or contemplated actions,
Vacation Break is alleged to have violated certain state laws in connection with
certain of its marketing and sales practices. These actions generally seek
injunctive relief, damages, civil penalties and related fees and costs
incidental thereto. Vacation Break will vigorously defend these actions at the
same time that it seeks settlement of each of the above described actions.
Vacation Break does not anticipate that its legal and settlement costs will have
a material impact on the business and financial condition of Vacation Break.
On March 28, 1997, Vacation Break was served with a lawsuit filed in the
Circuit Court for Pinellas County, Florida by Market Response Group and Laser
Company, Inc. (MRG&L) against Vacation Break and Kevin M. Sheehan, its
President. MRG&L was a former vendor to Vacation Break with respect to direct
mail marketing. The complaint alleges that the defendants, in concert with
other companies, conspired to boycott MRG&L and to fix prices for mailings in
violation of the Florida Antitrust Act, and in concert with others, engaged in
various acts of unfair competition, deceptive trade practices and common law
conspiracy. The complaint also alleges that the defendants breached various
provisions of a Sales and Marketing Agreement with plaintiff and interfered with
and caused other companies to breach Sales and Marketing Agreements with MRG&L
and that the defendants misappropriated proprietary information. The complaint
also demands that Vacation Break indemnify plaintiff for costs incurred by MRG&L
to defend a 1996 Federal Trade Commission action. MRG&L claims to have suffered
substantial damages. The actual aggregate amount of damages claimed is not
calculable but appears to exceed $50 million. Vacation Break intends to defend
each and every claim vigorously, and will file counterclaims if appropriate.
Vacation Break is currently a defendant in certain litigation arising in
the ordinary course of business. However, except as described above, there is
no other material pending or threatened litigation involving Vacation Break or
any of its properties.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of Vacation Break.
<TABLE>
<CAPTION>
Name Age Position with Vacation Break
---- --- ----------------------------
<S> <C> <C>
Ralph Muller 56 Chairman of the Board of Directors and Chief
Executive Officer
Kevin Sheehan 39 President
Joyce North 54 Executive Vice President - Sales
Henry M. Cairo 49 Chief Financial Officer and Chief Operating Officer
Marco Manzie 39 Vice President - Resort Services
Steven McPhee 55 Senior Vice President - Corporate Development
</TABLE>
Ralph Muller co-founded Vacation Break, and he has been serving Vacation
Break full-time since its inception in 1985 as Chairman of the Board and Chief
Executive Officer, and served as President of Vacation Break from its inception
until May 1995. Mr. Muller is also the President, Chief Executive Officer and
Director of each of Serenity Homes, Inc., a company engaged in the business of
purchasing and developing for sale residential real property, Sea America, Inc.,
a company engaged in the business of owning and administering a fleet of fishing
and recreational boats as part of a 400 member boat club and USA Today Realty, a
full-service real estate brokerage firm. Mr. Muller has over 25 years of
experience in the vacation/leisure industry.
Kevin M. Sheehan co-founded Vacation Break and has served as President of
Vacation Break since May 1995. Mr. Sheehan served as Executive Vice President of
Vacation Break from January 1991 until May 1995. From October 1987 to January
1991, Mr. Sheehan served as Vacation Break's Vice President - Marketing. Prior
to joining Vacation Break in 1987, Mr. Sheehan served in various positions in
the vacation interval ownership industry.
Joyce North has served as the Executive Vice President - Sales of Vacation
Break since January 1991. From 1980 to 1990, Ms. North marketed and sold
vacation interval ownership interests for independent developers in the Pocono
Mountains in Pennsylvania, Williamsburg, Virginia and French Lick, Indiana.
Henry M. Cairo, a certified public accountant and an attorney-at-law, has
served as Chief Financial Officer and Chief Operating Officer of Vacation Break
since June 1995 and has been a Director of Vacation Break since December 1995.
From December 1990 to May 1995, Mr. Cairo was a partner with the certified
public accounting firm of Checkers Simon & Rosner and was a partner with the
certified public accounting firm of Laventhol & Horwath previous to 1990. Mr.
Cairo has over 17 years of experience in the vacation interval ownership
industry, representing developers, lenders, marketing and management companies
and homeowner associations. Mr. Cairo is a member of ARDA, where he has spoken
at numerous conferences on subjects relating to the vacation interval ownership
industry, including developer profitability and operational matters. Mr. Cairo
currently serves as a member of the ARDA Finance Committee, and formerly served
as the Chairman of the ARDA Accounting and Taxation Committee and Finance
Committee.
Marco Manzie has served as Vice President - Resort Services of Vacation
Break since December 1992. From April 1989 to December 1992, Mr. Manzie was the
general manager of the Sheraton Design Center Hotel in Fort Lauderdale, Florida.
Mr. Manzie has served in management positions with the Hyatt Corporation and the
Stouffer and Hilton Hotels. Mr. Manzie is an American Hotel Administrator and a
licensed condominium manager. In addition, Mr. Manzie is a member of the Resort
Development Committee of ARDA and an Advisory Member of the Greater Fort
Lauderdale Convention and Visitors Bureau.
Steven McPhee has served as Senior Vice President - Corporate Development
of Vacation Break since February 1996. Mr. McPhee served as a consultant to
Vacation Break from March 1994 to January 1996. Prior to joining Vacation
Break, Mr. McPhee operated his own consulting company providing services to the
vacation interval ownership industry in the areas of business and people
development, sales, marketing and organizational development. Mr. McPhee is a
member of ARDA where he has spoken at numerous conferences on subjects relating
to the vacation interval
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<PAGE>
ownership industry. Mr. McPhee currently represents Vacation Break as an ARDA
Committee member. Mr. McPhee has been in the resort development business since
1976.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth, for the years
ended December 31, 1996, 1995 and 1994, the aggregate compensation awarded to,
earned by or paid to Vacation Break's Chief Executive Officer and each of
Vacation Break's four other most highly compensated executive officers employed
by Vacation Break at the end of 1996 (the "Named Executive Officers") based on
salary and bonus earned during 1996. Vacation Break did not grant any
restricted stock awards or stock appreciation rights or make any long-term
incentive plan payouts during such fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------ -------------------------------------
ALL OTHER
ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) (1)
- ------------------------------- ---- ----------- ----------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
Ralph Muller 1996 $ 375,000 -- -- --
Chairman of the Board and 1995 $1,297,643 $ 75,000 -- --
Chief Executive Officer 1994 -- $1,351,547 $266,344(2) --
Kevin Sheehan 1996 $ 365,000 -- -- --
President 1995 $1,105,215 $ 75,000 -- 75,000
1994 -- $1,205,597 -- --
Joyce North 1996 $ 350,000 $ 330,000 -- --
Executive Vice President - 1995 $ 175,564 $ 858,072 -- 100,000
Sales 1994 -- $ 992,500 -- --
Henry M. Cairo (3) 1996 $ 250,000 -- -- --
Chief Financial Officer and 1995 $ 138,640 $ 75,000 -- 50,000
Chief Operating Officer 1994 -- -- -- --
Marco Manzie 1996 $ 166,000 $ 170,000 -- --
Vice President - Resort 1995 $ 184,462 $ 75,000 -- 35,000
Services 1994 $ 141,254 -- -- --
</TABLE>
_________________
(1) The amounts in this column represent options granted pursuant to Vacation
Break's 1995 Stock Option Plan.
(2) Represents premiums paid by Vacation Break under insurance policies on the
lives of Mr. Muller and his spouse.
(3) Mr. Cairo joined Vacation Break in June 1995. Therefore, compensation
information for the fiscal year 1995 represents the period from June 1995
through December 1995, and no compensation information is presented for Mr.
Cairo for 1994.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
Vacation Break has entered into employment agreements, effective as of July
1, 1995 (January 1, 1996 with respect to Mr. McPhee), with Ralph Muller,
Chairman of the Board and Chief Executive Officer, Kevin Sheehan, President,
Joyce North, Executive Vice President - Sales, Henry M. Cairo, Chief Financial
Officer and Chief Operating Officer, Marco Manzie, Vice President - Resort
Operations, and Steven McPhee, Senior Vice President - Corporate Development.
In the case of Messrs. Muller, Sheehan, Cairo, McPhee, Manzie and Ms. North,
these agreements will expire in December 1997, subject to automatic one-year
renewal periods unless 60 days prior written notice is given by Vacation Break
or such executive. These agreements provide for an annual base salary to Mr.
Muller, Mr. Sheehan,
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<PAGE>
Ms. North, Mr. Cairo, Mr. Manzie and Mr. McPhee of $375,000, $365,000, $350,000,
$250,000, $166,000 and $200,000, respectively. The employment agreements of
Messrs. Muller, Sheehan, Cairo and McPhee also provide for an annual bonus as
determined by a majority of disinterested members of Vacation Break's Board of
Directors, subject to a maximum bonus during the first two years of each such
agreement commencing January 1, 1996 of $375,000, $365,000, $250,000 and
$200,000, respectively. The employment agreement of Ms. North provides for an
annual bonus equal to (A) 3.0% of Vacation Break's income before taxes, and (B)
an additional amount equal to $100,000 if Vacation Break's net income before
taxes exceeds $12.5 million, and an additional $100,000 for each incremental
increase of $5,000,000 of net income before taxes in excess of $12.5 million,
subject to a maximum bonus during the first two years of her employment
agreement commencing January 1, 1996 of $625,000. Upon Vacation Break's
termination of the employment of any of the named executives for any reason
other than for cause, as specified in their respective employment agreements,
each of the executives shall be entitled to receive a payment equal to (A) 12
months' base salary at the then prevailing rate plus (B) 100% of the most recent
annual bonus paid to the executive under his or her employment agreement. Upon
termination for "cause" or upon voluntary resignation, each of these executives
shall be entitled to receive his or her base salary through the date of such
termination and, in the case of voluntary resignation, subject to the approval
of Vacation Break's Board of Directors, his or her bonus, reduced, pro rata, to
reflect the duration of his or her employment by Vacation Break prior to such
resignation. In addition, upon the actual or constructive termination of
employment of Ms. North, Mr. Cairo, Mr. Manzie or Mr. McPhee following the
occurrence of a change in effective control of Vacation Break, each of Ms.
North, Mr. Cairo and Mr. McPhee shall be entitled to receive a payment equal to
(A) 200% of his or her base salary at the rate prevailing at the time of such
change in control plus (B) 200% of the most recent annual bonus paid to him or
her under his or her employment agreement and Mr. Manzie shall be entitled to
receive a payment equal to (A) 100% of his base salary at the rate prevailing at
the time of such change in control plus (B) 100% of the bonus paid to him under
his employment agreement. Each of these executives is prohibited from competing
with Vacation Break in the State of Florida for the duration of their respective
employment agreements and, if terminated for cause or upon voluntary
resignation, for a period of one year thereafter. Mr. Sheehan's employment
agreement was amended and restated as of July 1, 1997 to provide for the
termination of his employment agreement on September 30, 1997 and a right of
first refusal by Vacation Break to engage the services of Mr. Sheehan prior to
December 31, 1997. In exchange for such right of refusal, Vacation Break agreed
to pay Mr. Sheehan the sum of $100,000.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE.
The following table sets forth certain information concerning unexercised
stock options held by the Named Executive Officers as of December 31, 1996. No
stock options were exercised by the Named Executive Officers during the year
ended December 31, 1996. No stock appreciation rights have been granted or are
outstanding.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
SHARES UNEXERCISED OPTIONS AT FY-END (#) MONEY OPTIONS AT FY-END ($)(1)
ACQUIRED ON VALUE -------------------------------- ------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------- ------------ ------------ -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Kevin Sheehan 0 $0 37,500 37,500 $553,125 $553,125
Joyce North 0 $0 50,000 50,000 $762,500 $762,500
Henry M. Cairo 0 $0 25,000 25,000 $381,250 $381,250
Marco Manzie 0 $0 17,500 17,500 $266,875 $266,875
</TABLE>
(1) The closing price for the Common Stock as reported on the NASDAQ National
Market System on December 31, 1996 was $20.25. Value is calculated by
multiplying (i) the difference between $20.25 and the option price of $5.00
(with the exception of Kevin Sheehan, as to whom such option price is $5.50)
by (ii) the number of shares of Common Stock underlying the option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Ralph P. Muller, the Chairman of the Board of Directors and Chief Executive
Officer of Vacation Break, and Kevin Sheehan, the President of Vacation Break,
participated in deliberations of Vacation Break's Board of Directors concerning
executive compensation during 1996.
71
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.
PHILOSOPHY. The Compensation Committee's executive compensation philosophy
is to provide competitive levels of compensation, integrate the compensation of
its executive officers with the achievement of Vacation Break's annual and long-
term performance goals, reward above average corporate performance, recognize
individual initiative and achievement and assist Vacation Break in attracting
and retaining qualified management. To meet these objectives, the Compensation
Committee attempts to set the compensation of its executive officers at levels
that it believes are competitive with other companies of the same size in
Vacation Break's industry, in light of Vacation Break's then current and
anticipated performance. The Compensation Committee endorses the position that
equity interest in Vacation Break by management is beneficial in aligning
executive officers' and stockholders' interests in the enhancement of
stockholder value.
COMPONENTS OF EXECUTIVE COMPENSATION. Compensation of Vacation Break's
executive officers consists of both cash payments and grants of stock options.
The annual cash compensation consists of a base salary and a bonus. Long-term
incentives are provided through the grant of stock options under Vacation
Break's 1995 Stock Option Plan.
BASE SALARIES AND BONUSES. The Compensation Committee attempts to set base
salaries and bonuses of its executive officers at levels that it believes are
competitive with other companies of the same size in Vacation Break's industry.
Information about appropriate salary and bonus levels has been determined by
reviewing the public disclosure of Vacation Break's competitors and through
Vacation Break's recruiting activities. Except as described below, salaries and
bonuses are reviewed annually, and any adjustments are based on competitive
practices as well as the performance of Vacation Break and the executive
officer.
STOCK OPTIONS. The Compensation Committee grants stock options to Vacation
Break's executive officers pursuant to Vacation Break's 1995 Stock Option Plan.
The Compensation Committee has the authority to determine the individuals to
whom stock options are awarded, the terms at which option grants are made, the
duration of the options and the number of shares subject to each option. The
size of the option grants are generally based on the position level of the
recipient. Through the award of stock options, the objective of aligning
executive officers' long range interests with those of the stockholders is met
by providing the executive officers with the opportunity to build a meaningful
stake in Vacation Break.
It is the Compensation Committee's intention that, over time, compensation
opportunities from option grants will constitute a significant portion of each
executive officer's total compensation. However, there are not automatic grants
to each executive officer every year. Instead, the Compensation Committee
reviews the performance of Vacation Break overall and of each individual
executive officer, as well as past option grants to each executive officer, and
makes decisions about recipients and grant sizes for the year.
In December 1994, the Internal Revenue Service issued amendments to the
proposed regulations previously issued under Section 162(m) ("Section 162(m)")
of the Internal Revenue Code of 1996, as amended. In general, Section 162(m)
disallows a public company's deduction for compensation to any employee in
excess of $1.0 million per year, unless such compensation is paid in connection
with the attainment of performance goals established by the compensation
committee of the board of directors and approved by the stockholders of such
company in advance of the period during which services relating to such
compensation were rendered. None of the executive officers of Vacation Break
presently receives, and the Compensation Committee does not anticipate that such
persons will receive, annual cash compensation in excess of the $1 million cap
provided in Section 162(m). The Compensation Committee intends to take the
necessary steps to ensure compliance with Section 162(m).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COCONUT BAY RESORT. Mr. Muller, the Chairman of the Board, Chief Executive
Officer and the majority stockholder of Vacation Break, owns 49% of the issued
and outstanding capital stock of Coconut Bay Resort Properties, Inc. ("Coconut
Bay"). In 1992, Coconut Bay developed the Coconut Bay Resort, located in Ft.
Lauderdale, Florida, consisting of 52 units which were sold as approximately
2,300 VOIs. Vacation Break serves as exclusive sales agent for the sale of VOIs
at this resort, for which it receives a net commission equal to 45% of the
purchase price of each VOI sold. During the year ended December 31, 1996,
Vacation Break received sales commissions from Coconut Bay of approximately
$54,000. Substantially all VOIs in this resort were sold as of December 1993.
However, Vacation Break
72
<PAGE>
may in the future serve as sales agent with respect to VOIs which are re-
acquired by Coconut Bay upon foreclosure or otherwise, although it does not
anticipate that the revenues form such activities will be significant. Vacation
Break believes that the marketing fees it receives in connection with sales of
VOIs in the Coconut Bay Resort are at rates which are no less favorable than the
rates it receives in connection with sales of VOIs in properties owned by
unaffiliated developers.
SURFSIDER AND SURFRIDER RESORTS. Mr. Muller also owns approximately 33% of
the issued and outstanding capital stock of Intracoastal Resorts, Inc.
("Intracoastal"). In 1993, Intracoastal developed the Surfsider Resort, in
Pompano, Florida, consisting of 17 units for sale as 884 VOIs. Vacation Break
serves as exclusive sales and marketing agent for the sale of VOIs at this
resort, for which it receives a commission equal to 46% of the purchase price of
each VOI sold. Vacation Break did not receive any sales commissions for
Intracoastal from sales of VOIs at the Surfsider Resort during the year ended
December 31, 1996. As of December 31, 1993, substantially all of the VOIs had
been sold at this resort.
In addition to Surfsider Resort, in 1994 Intracoastal developed the
Surfrider Resort, in Pompano Beach, Florida. Surfrider consists of 15 units for
sale as 780 VOIs. As with the Surfsider Resort, Vacation Break serves as
exclusive sales and marketing agent for the sale of VOIs at this resort, for
which it receives a net commission equal to 46% of the purchase price of each
VOI sold. For the year ended December 31, 1996, Vacation Break received sales
commissions from Intracoastal of approximately $20,000 from sales of VOIs at the
Surfrider Resort. As of December 31, 1995, substantially all of the VOIs had
been sold at this resort.
Vacation Break believes that the commissions it receives in connection with
sales of VOIs in the Surfsider and Surfrider resorts are at rates which are no
less favorable than the rates it receives in connection with sales of VOIs in
properties owned by unaffiliated developers.
COCONUT BAY LOAN. During 1993, Coconut Bay loaned Vacation Break an
aggregate principal amount of $1,250,000. This loan was evidenced by a
promissory note, bearing interest at an annual rate of prime plus 3.25% and is
due and payable in August 1998. In August 1996, Vacation Break made principal
payments of $125,000 to Coconut Bay on account of this loan. As of December 31,
1996, $435,000 of the principal amount of this loan remained outstanding.
Vacation Break believes that the loan from Coconut Bay is on terms which are no
less favorable than Vacation Break could obtain from an unaffiliated lender.
DIRECTOR'S FEE. During the years ended December 31, 1993, 1994 and 1995,
Vacation Break paid Alice Muller, Ralph Muller's wife, an annual director's fee
of approximately $104,000, $104,000 and $76,000, respectively. Mrs. Muller
resigned as a director of Vacation Break in June 1995 and no longer receives any
compensation from Vacation Break.
LOAN TO EXECUTIVE OFFICER. In 1994, Vacation Break made a loan to Kevin
Sheehan, Vacation Break's President, in the principal amount of $440,000,
bearing interest at an annual rate of prime plus 3.25%. The entire amount of
this loan, together with all accrued interest, was paid by Mr. Sheehan in March
1995.
SEA AMERICAN OPTION. In March 1995, Mr. Muller granted Vacation Break an
option, exercisable at any time during the three-year period following the
consummation of Vacation Break's initial public offering, to purchase all of the
outstanding capital stock of Sea America, Inc. for $10,000.
TAX INDEMNIFICATION AGREEMENTS. Mr. Muller has entered into Tax Allocation
and Indemnification Agreements with certain affiliates of Vacation Break which
were S corporations prior to the consummation of Vacation Break's initial public
offering. These agreements generally provide that Mr. Muller will be
indemnified by each of the S Companies for any taxes due from Mr. Muller with
respect to income derived by the S Companies during periods covered thereby, and
the S Companies will be indemnified by Mr. Muller with respect to any
overpayment to Mr. Muller in connection with estimated tax obligations of the S
Companies. The amount of Mr. Muller's obligation to indemnify any of the S
Companies, however, is limited to the amount of any corresponding reduction in
Mr. Muller's liability for tax, interest or penalties (reduced by any related
costs he incurs), while the S Companies are obligated to indemnify Mr. Muller by
paying him an amount that, after taking into account the tax effects to Mr.
Muller of his payment of tax, interest or penalties and of his receipt of the
indemnification payment made to him, equals the increase in Mr. Muller's
liability for tax, interest and penalties. In addition, Mr. Muller need not
make any indemnification payment to any of the S Companies until he receives a
refund or credit in respect of his corresponding liability for tax, interest or
penalties,
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although the S Companies are obligated to indemnify Mr. Muller at the time he
pays tax, interest or penalties, irrespective of when the S Companies receive a
corresponding refund or credit. Finally, if Mr. Muller receives a refund or
credit of tax, interest or penalties in respect of which he has been
indemnified, he is obligated to repay the entity that indemnified him, upon
receipt of the refund or credit, but the amount of his repayment cannot exceed
an amount that, after giving effect to the tax consequences to Mr. Muller of the
repayment and of the refund or credit he received (together with any interest or
other amounts received), does not exceed the amount of that refund or credit
(together with any interest or other amounts received), while the corresponding
obligation of the S Companies is to repay Mr. Muller the amount of the
indemnification payment it received from him (together with any interest or
other amounts received), irrespective of the amount of the refund or credit or
the tax consequences of the refund or credit or of the repayment to Mr. Muller.
In 1995, Vacation Break adopted a policy that it will not enter into any
transaction with any officer, director or principal stockholder of Vacation
Break or any entity controlled by such persons other than transactions which
have been approved by a majority of the then outstanding shares of Common Stock
held by stockholders who do not have an interest in such transaction, excluding
shares owned by Ralph P. Muller, Vacation Break's Chairman of the Board and
Chief Executive Officer.
SHARE OWNERSHIP OF MANAGEMENT AND PRINCIPAL
STOCKHOLDERS OF VACATION BREAK
The following table sets forth information, as of October 31, 1997,
with respect to the beneficial ownership of shares of Vacation Break Common
Stock by (i) each person known by Vacation Break to beneficially own more than
5% of the outstanding shares of Vacation Break Common Stock, (ii) each director
of Vacation Break, (iii) Vacation Break's Chief Executive Officer and each named
executive officer listed in the Summary Compensation Table below (collectively,
the "Named Executive Officers") and (iv) all directors and executive officers of
Vacation Break as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF
NAME AND ADDRESS OF OF BENEFICIAL OUTSTANDING SHARES
BENEFICIAL OWNER(1) OWNERSHIP(2) OWNED
------------------- -------------------- ------------------
<S> <C> <C>
Ralph P. Muller................................ 5,172,026 (3) 59.6%
Kevin Sheehan.................................. 1,428,572 (4) 16.5%
Joyce North.................................... 475,000 (5) 5.5%
Henry M. Cairo................................. 47,500 (6) *
Marco Manzie................................... 29,250 (7) *
Steven McPhee.................................. 22,750 (8) *
Richard Adrey.................................. 16,000 (9) *
Ronald J. Korn................................. 17,500 (10) *
Michael K. Kollender........................... 30,000 (11) *
Edward R. Allen................................ 3,000 (12) *
Francis X. Maguire............................. 2,000 (13) *
All directors and executive officers as a group
(11 persons) (14).......................... 6,843,598 78.9%
</TABLE>
_______________
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified above is c/o Vacation Break U.S.A., Inc., 6400 N. Andrews
Avenue, Park Plaza - Suite 200, Ft. Lauderdale, Florida 33309.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options or
warrants. Each beneficial owner's percentage ownership is determined by
assuming that options or warrants that person (but not those held by any
other person) and that are exercisable within 60 days have been exercised.
Unless otherwise noted, Vacation Break believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Vacation Break Common Stock beneficially owned by them.
(3) Includes 5,150,526 shares of Vacation Break Common Stock held by R & A
Partnership, Ltd., a Texas limited partnership (the "Partnership"). RPM
Investments, Inc., a Texas corporation wholly-owned by Mr. Muller, is the
sole general partner of the Partnership. Mr. Muller along with his wife
and children hold limited partnership interests in the Partnership. Also
includes (i) 21,500 shares of Vacation Break Common Stock owned by Ralph P.
Muller and Alice Muller, his wife, as joint tenants with rights of
survivorship and (ii) 350,000 shares of Vacation Break Common Stock subject
to an option granted to Joyce North. See Note (5)
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below. Does not include 156,902 shares of Vacation Break Common Stock
beneficially owned by The Ralph Muller Irrevocable Trust established for
the benefit of Mr. Muller's children.
(4) Includes 75,000 shares of Vacation Break Common Stock issuable at $5.50 per
share and 100,000 shares of Vacation Break Common Stock issuable at $7.975
per share upon the exercise of currently exercisable options. Also
includes 50,000 shares subject to an option granted to Joyce North. See
note (5) below.
(5) Includes: (i) 75,000 shares of Vacation Break Common Stock issuable at
$5.00 per share upon the exercise of currently exercisable options; (ii)
350,000 outstanding shares of Vacation Break Common Stock purchasable at
$5.00 per share upon the exercise of a currently exercisable option granted
to Ms. North by Mr. Muller; and (iii) 50,000 outstanding shares of Vacation
Break Common Stock purchasable at $5.00 per share upon the exercise of a
currently exercisable option granted to Ms. North by Mr. Sheehan.
(6) Represents 37,500 shares of Vacation Break Common Stock issuable at $5.00
per share and 6,250 shares of Vacation Break Common Stock issuable at $7.25
per share and 3,750 shares of Vacation Break Common Stock issuable at
$9.125 per share upon the exercise of currently exercisable options.
(7) Represents 26,250 shares of Vacation Break Common Stock issuable at $5.00
per share and 3,000 shares of Vacation Break Common Stock issuable at $7.25
per share upon the exercise of currently exercisable options.
(8) Includes 12,500 shares of Vacation Break Common Stock issuable at $6.50 per
share and 6,250 shares of Vacation Break Common Stock issuable at $9.125
per share upon the exercise of currently exercisable options.
(9) Includes 2,000 shares of Vacation Break Common Stock issuable at $6.50 per
share, 2,000 shares of Vacation Break Common Stock issuable at $9.125 per
share and 10,000 shares of Vacation Break Common Stock issuable at $8.625
per share upon the exercise of currently exercisable options granted under
the Directors' Option Plan.
(10) Includes 2,000 shares of Vacation Break Common Stock issuable at $6.50 per
share, 2,000 shares of Vacation Break Common Stock issuable at $9.125 per
share and 10,000 shares of Vacation Break Common Stock issuable at $8.625
per share upon the exercise of currently exercisable options granted under
the Directors' Option Plan.
(11) Includes currently exercisable options to purchase 2,000 shares of Vacation
Break Common Stock at $10.00 per share, 2,000 shares of Vacation Break
Common Stock issuable at $9.125 per share and 10,000 shares of Vacation
Break Common Stock issuable at $8.625 per share upon the exercise of
currently exercisable options granted pursuant to Vacation Break's
Directors' Option Plan and currently exercisable warrants to purchase 5,000
and 10,000 shares of Vacation Break Common Stock at $6.00 and $7.50 per
share, respectively.
(12) Includes 2,000 shares of Vacation Break Common Stock issuable at $9.125
per share upon the exercise of currently exercisable options granted under
the Director's Option Plan.
(13) Represents 2,000 shares of Vacation Break Common Stock issuable at $9.125
per share upon the exercise of currently exercisable options granted under
the Director's Option Plan.
(14) Calculation based on 8,676,214 shares outstanding as of October 31, 1997.
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SELECTED CONSOLIDATED FINANCIAL DATA OF VACATION BREAK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Vacation ownership interests $ -- $20,583 $27,644 $ 40,291 $ 80,020
Resort operations and other 1,671 4,203 7,602 9,086 12,343
Interest earned on mortgages receivable -- 871 2,508 4,704 8,657
Commissions earned on marketing agreements 14,385 12,629 8,839 4,502 1,721
------- ------- ------- -------- --------
Total revenues 16,056 38,286 46,593 58,583 102,741
Cost of units sold - VOIs -- 5,729 6,076 9,500 22,136
Sales and marketing costs - VOIs -- 5,070 5,413 12,446 34,683
Total costs and operating expenses 15,322 28,073 35,056 49,538 90,909
Operating income 734 10,213 11,537 9,045 11,832
Net income 666 10,423 12,283 6,053 7,240
Pro forma net income (1) 199 5,676 7,765 5,845
Pro forma net income per share (1) $0.03 $0.87 $1.19 $0.90
Net income per share
Primary $0.82
Fully diluted $0.80
Pro forma weighted average number 6,500 6,500 6,500 6,525
of common shares outstanding
Weighted average number of
common shares outstanding -
Primary 8,843
Fully diluted 9,092
BALANCE SHEET DATA:
Total assets $21,173 $32,146 $55,886 $107,092 $138,480
Total liabilities $25,301 $31,097 $44,231 $ 87,833 $110,653
Stockholders' equity $(4,128) $ 1,049 $11,655 $ 19,259 $ 27,827
</TABLE>
_________________
(1) Effective November 1, 1995, Vacation Break terminated all S Corporation
elections. The effect of these conversions to C Corporations was the
recognition of a deferred tax provision of $3,090,000 in the quarter ended
December 31, 1995 in the historical financial statements. Pro forma net
income reflects the effect on historical statement of operations data,
assuming the companies had been treated as C Corporations rather than as S
Corporations for income tax purposes, and assuming that combined federal and
state effective income tax rates aggregate 37.7% for 1992 and 38.6% for
1993, 1994 and 1995.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF VACATION BREAK
The following discussion and analysis should be read in conjunction with
the Vacation Break Consolidated Condensed Financial Statements, including the
notes thereto set forth elsewhere herein. See "Index to Consolidated Financial
Statements of Vacation Break."
INTRODUCTION
Vacation package revenues less vacation package costs have been included as
vacation ownership interests - sales and marketing costs in the statement of
operations for the six month period ended June 30, 1997 and for the year ended
December 31, 1996. Previous years' amounts have been reclassified to reflect
this change in presentation, which more closely correlates to the presentation
of other companies in the VOI industry.
In 1993, Vacation Break began to develop its own properties and sell VOIs
in these properties while continuing to sell VOIs in properties owned by other
developers, thereby adding a new source of revenues and earnings, including
sales of vacation ownership interests and interest earned on mortgages
receivable. Vacation Break generates additional revenues from resort
operations, which include room rental operations and ancillary resort operations
such as food and beverage sales and from management fees. In the three and six
month periods ended June 30, 1997, Vacation Break realized no commission
revenues from the sale of VOIs in properties owned by other developers.
Generally, VOIs are sold under binding sales contracts executed by Vacation
Break and the purchaser requiring a 10% down payment and monthly installments
for periods of up to 7 years. VOI revenue is recognized when a 10% down payment
has been received and the 10 day rescission period has expired. During the 10
day rescission period, a customer may cancel for any reason and have the down
payment returned. Revenue relating to sales of VOIs in projects under
development is recognized using the percentage of completion method. Under this
method, the portion of revenues applicable to costs incurred, as compared to
total estimated construction and acquisition costs, is recognized in the period
of sale. The remaining revenue is deferred and recognized as the remaining
costs are incurred. As Vacation Break is currently in the development stage of
certain projects, it is anticipated that certain VOI sales in these projects
will generate deferred revenue as Vacation Break completes sales at a more rapid
pace than the completion of the related VOI units. Costs associated with the
acquisition and development of vacation ownership resorts, including carrying
costs such as interest, are generally capitalized and subsequently recorded as a
cost of sales as the related revenues are recognized.
The following table sets forth certain consolidated operating information
for the entities comprising Vacation Break and its consolidated subsidiaries for
the three years ended December 31, 1994, 1995 and 1996 and for the six months
ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1994 1995 1996 1996 1997
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
AS A PERCENTAGE OF TOTAL REVENUES
Sales of vacation ownership interests 59.3 68.8 77.9 79.8 81.2
Resort operations and other 16.3 15.5 12.0 12.3 9.4
Interest earned on mortgages receivable 5.4 8.0 8.4 6.1 9.4
Commissions earned on marketing agreements 19.0 7.7 1.7 1.8 .0
----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
AS A PERCENTAGE OF VACATION OWNERSHIP
INTEREST SALES
Vacation ownership interests costs of units sold 22.0 23.6 27.7 28.4 28.7
Sales and marketing 19.6 30.9 43.3 38.4 40.6
Provision for doubtful accounts 2.5 3.8 3.0 1.3 3.6
AS A PERCENTAGE OF REVENUES FROM RESORT
OPERATIONS AND OTHER
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Resort operations and other expense 101.6 103.4 102.4 100.1 90.4
AS A PERCENTAGE OF INTEREST EARNED ON
MORTGAGES RECEIVABLE
Interest expense on financed mortgages 33.6 23.6 29.5 27.6 35.6
receivable
AS A PERCENTAGE OF COMMISSIONS EARNED ON
MARKETING AGREEMENTS
Commission and related expenses on marketing 52.3 74.5 106.7 75.5 n/a
agreements
AS A PERCENTAGE OF TOTAL REVENUES
General and administrative 18.4 16.6 11.3 10.5 11.4
Depreciation and amortization 1.9 2.9 1.8 1.8 1.7
Interest expense - other 0.5 1.3 1.2 0.9 0.6
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
1996.
- ----
Vacation Break's total revenues for the three months ended June 30, 1997
were $33.8 million, a decrease of $5.2 million or 13.3% from the three months
ended June 30, 1996. Vacation Break sold 2,232 VOIs in completed and pre-
construction units at Vacation Break-owned properties during the three months
ended June 30, 1997, an increase of 28.8% from 1,733 VOIs sold during the three
months ended June 30, 1996. Vacation Break's revenues from the sale of VOIs was
$28.5 million during the three months ended June 30, 1997, of which $28.2
million was recognized as earned revenue and $0.3 million was recorded as
additional deferred revenues - VOIs from $5.4 million recorded on Vacation
Break's balance sheet at March 31, 1997 to $5.7 million at June 30, 1997.
Vacation Break recognized revenues of $32.9 million from the sales of VOIs
during the three months ended June 30, 1996, of which $21.0 million of VOI sales
was derived from the sales in completed units and $11.9 million was derived from
the sales of VOIs in pre-construction units which had been recorded as deferred
revenue - VOIs on Vacation Break's balance sheet at March 31, 1996.
Costs of units sold as a percentage of VOI sales decreased from 30.3% for
the three months ended June 30, 1996 to 28.1% for the three months ended June
30, 1997 reflecting a decreased percentage of VOIs sold and recognized at the
Orlando project in the three months ended June 30, 1997 compared to the three
months ended June 30, 1996. The unit-week cost to Vacation Break for the
Orlando units is currently fixed by contract at 35% of the related VOI sales
price, resulting in a higher cost per unit than at other projects, but providing
protection against volatility in construction and financing costs.
Vacation package revenues less vacation package costs have been included as
Vacation ownership interests-sales and marketing costs section in the statement
of operations for the three months ended June 30, 1997. Previous years' amounts
have been reclassified to reflect this change in presentation which more closely
correlates to the presentation of other companies in the VOI industry. These
costs, which include VOI sales commissions, lead generation marketing and
vacation fulfillment costs and the administrative costs of processing VOI sales
contracts, were $10.7 million, or 38.1% of related VOI revenues (a reduction of
5.7% from the three months ended March 31, 1997 due to improved control of
vacation fulfillment costs), for the three months ended June 30, 1997 compared
to $11.7 million, or 35.6% of related VOI revenues, for the three months ended
June 30, 1996. This increase reflects Vacation Break's increased emphasis on
diversification of lead generation programs to include the fulfillment of third
party certificate programs, mini-vacations, referrals and in-house sales
programs as well as other moderate cost traditional lead procurement programs
which have the primary goal of producing a high quality, low to moderate cost
tour at a resort property and increase VOI sales. The costs of sales
commissions and administrative costs have remained relatively constant, as a
percentage of recognized sales volume for the three months ended June 30, 1997
compared to the three months ended June 30, 1996.
Vacation Break's revenues from resort and other operations decreased to
$2.6 million for the three months ended June 30, 1997 from $3.5 million for the
three months ended June 30, 1996, primarily as a result of having fewer units
78
<PAGE>
available for resort occupancy during the 1997 period, including the last phase
of Palm Aire which underwent renovations for VOI sales during the second quarter
of 1997. Cost of resort operations decreased to $2.6 million for the three
months ended June 30, 1997 from $3.7 million for the three months ended June 30,
1996 as a direct result of the reduction of related revenues due to a reduction
in available rooms. Such costs as a percentage of revenues from resort and
other operations decreased to 101.6% for the three months ended June 30, 1997
from 103.2% for the three months ended June 30, 1996.
At both June 30, 1997 and 1996, Vacation Break's weighted average interest
rate on its entire loan portfolio was 16.3%, compared to a weighted average
interest rate on borrowings against loans hypothecated by Vacation Break to
unaffiliated lenders of 10.2% at June 30, 1997 compared to 10.5% at June 30,
1996. As a result of the continued increase in sales of VOIs and the
proportionate increase of VOIs sold in Vacation Break-owned properties from 1993
through June 30, 1997, Vacation Break's interest income from financing
activities increased to $3.0 million for the three months ended June 30, 1997
from $2.0 million for the three months ended June 30, 1996. This increase was
partially offset by interest paid on increased borrowings against loans
hypothecated by Vacation Break to unaffiliated lenders of $1.3 million during
the three months ended June 30, 1997 compared to $0.5 million during the three
months ended June 30, 1996.
Vacation Break's continued development of Vacation Break-owned resort
properties and sale of VOIs in such properties resulted in the discontinuance of
commissions received in connection with the sale of VOIs for other developers.
During 1996, Vacation Break terminated its sales and marketing arrangement with
a developer in the Bahamas and curtailed the sales of VOIs in the Bahamas.
Vacation Break derived no revenues from such commissions for the three months
ended June 30, 1997 and $0.5 million for the three months ended June 30, 1996
with related costs in the 1996 period of $0.5 million or 96.9% of related
commission revenues.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead, increased to $3.9 million for the three months
ended June 30, 1997 compared to $3.6 million for the three months ended June 30,
1996, and amounted to approximately 11.5% of Vacation Break's total revenues
during the three months ended June 30, 1997 as compared to 9.2% during the three
months ended June 30, 1996. The increase for the three months ended June 30,
1997 includes an increase in reserves for various legal and regulatory matters.
The provision for doubtful accounts increased to $1.2 million for the three
months ended June 30, 1997 from $0.5 million for the three months ended June 30,
1996. This represents 4.1% of VOI sales revenues for the three months ended
June 30, 1997 compared to 1.4% for the three months ended June 30, 1996.
Vacation Break monitors its provision for doubtful accounts on a quarterly basis
to provide for future losses associated with defaults on customer mortgages
receivable. This increase was due to the increased provision against mortgages
receivable resulting from the increased mortgage receivable portfolio balance
and to reflect current trends.
Depreciation and amortization expense remained constant at $0.5 million for
the three months ended June 30, 1997 and June 30, 1996.
As a result of the foregoing, Vacation Break's net income was $2.8 million
for the three months ended June 30, 1997, a decrease of $2.1 million or 43.1%
from $4.9 million for the three months ended June 30, 1996. Net income for the
three months ended June 30, 1996 included approximately $3.4 million (net of
income taxes) relating to the recognition of deferred revenues (net of related
costs) that had been deferred at March 31, 1996 under the percentage of
completion method of accounting.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
-------------------------------------------------------------------------
Vacation Break's total revenues for the six months ended June 30, 1997 were
$62.8 million, an increase of $1.6 million or 2.6% from the six months ended
June 30, 1996. Vacation Break sold 3,938 VOIs in completed and pre-
construction units at Vacation Break-owned properties during the six months
ended June 30, 1997, an increase of 15.0% from 3,423 VOIs sold during the six
months ended June 30, 1996. Vacation Break derived revenues of $51.3 million
from the sales of VOIs during the six months ended June 30, 1997, of which $51.0
million was recognized from the sale of VOIs in completed units and was recorded
as earned revenue and $0.3 million from sales of VOIs in pre-construction units
was recorded as additional deferred revenue - VOIs on Vacation Break's balance
sheet at December 31, 1996. Vacation Break recognized revenues of $48.8 million
from the sales of VOIs during the six months ended June 30, 1996, of which $41.1
million was recognized from the sale of VOIs in completed units and was recorded
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<PAGE>
as earned revenue and $7.7 million was recognized from the sales of VOIs in pre-
construction units which was recorded as deferred revenue - VOIs on Vacation
Break's balance sheet at December 31, 1996.
Costs of units sold as a percentage of VOI sales increased slightly from
28.4% for the six months ended June 30, 1996 to 28.7% for the six months ended
June 30, 1997 reflecting an increased percentage of VOIs sold at the Orlando
project in the six months ended June 30, 1997 compared to the six months ended
June 30, 1996. The unit-week cost to Vacation Break for the Orlando units is
fixed by contract at 35% of the related VOI sales price, resulting in a higher
cost per unit than at other projects, but providing protection against
volatility in construction and financing costs.
Vacation package revenues less vacation package costs have been included as
vacation ownership interests-sales and marketing costs section in the statement
of operations for the six months ended June 30, 1997. Previous years' amounts
have been reclassified to reflect this change in presentation which more closely
correlates to the presentation of other companies in the VOI industry. These
costs, which include VOI sales commissions, lead generation marketing and
vacation fulfillment costs and the administrative costs of processing VOI sales
contracts, were $20.7 million, or 40.6% of related VOI revenues, for the six
months ended June 30, 1997 compared to $18.7 million, or 38.4% of related VOI
revenues, for the six months ended June 30, 1996. This increase reflects
Vacation Break's increased emphasis on diversification of lead generation
programs to include the fulfillment of third party certificate programs, mini-
vacations, referral and in-house sales programs as well as other moderate cost
traditional lead procurement programs which have the primary goal of producing a
high quality, low to moderate cost tour at a resort property and increase VOI
sales. The costs of sales commissions and administrative costs have remained
relatively constant, as a percentage of recognized sales volume for the six
months ended June 30, 1997 compared to the six months ended June 30, 1996.
Vacation Break's revenues from resort and other operations decreased to
$5.9 million for the six months ended June 30, 1997 from $7.5 million for the
six months ended June 30, 1996, primarily as a result of having fewer units
available for resort occupancy during the 1997 period, including the last phase
of Palm Aire which underwent renovations for VOI sales during the second quarter
of 1997. Cost of resort operations decreased to $5.3 million for the six months
ended June 30, 1997 from $7.6 million for the six months ended June 30, 1996 as
a direct result of the reduction of related revenues due to a reduction in
available rooms. Such costs as a percentage of revenues from resort and other
operations decreased to 90.4% for the six months ended June 30, 1997 from 100.1%
for the six months ended June 30, 1996.
At both June 30, 1997 and 1996, Vacation Break's weighted average interest
rate on its entire loan portfolio was 16.3%, compared to a weighted average
interest rate on borrowings against loans hypothecated by Vacation Break to
unaffiliated lenders of 10.2% at June 30, 1997 compared to 10.5% at June 30,
1996. As a result of the continued increase in sales of VOIs and the
proportionate increase of VOIs sold in Vacation Break-owned properties from 1993
through June 30, 1997, Vacation Break's interest income from financing
activities increased to $5.9 million for the six months ended June 30, 1997 from
$3.7 million for the six months ended June 30, 1996. This increase was partially
offset by interest paid on increased borrowings against loans hypothecated by
Vacation Break to unaffiliated lenders of $2.1 million during the six months
ended June 30, 1997 compared to $1.0 million during the six months ended June
30, 1996.
Vacation Break's continued development of Vacation Break-owned resort
properties and sale of VOIs in such properties resulted in the discontinuance of
commissions received in connection with the sale of VOIs for other developers.
During late 1996, Vacation Break terminated its sales and marketing arrangement
with a developer in the Bahamas and curtailed the sales of VOIs in the Bahamas.
Vacation Break derived no revenues from such commissions for the six months
ended June 30, 1997 and $1.1 million for the six months ended June 30, 1996 with
related costs in the 1996 period of $0.8 million or 75.5% of related commission
revenues.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead, increased to $7.1 million for the six months
ended June 30, 1997 compared to $6.4 million for the six months ended June 30,
1996, and amounted to approximately 11.4% of Vacation Break's total revenues
during the six months ended June 30, 1997 as compared to 10.5% during the six
months ended June 30, 1996. The increase for the six months ended June 30, 1997
includes an increase in reserves for various legal and regulatory matters.
During the six months ended June 30, 1997, Vacation Break charged
approximately $0.5 million to operations representing legal, accounting and
other costs related to the termination of the merger agreement with Lambert's
companies.
80
<PAGE>
The provision for doubtful accounts increased to $1.8 million for the six
months ended June 30, 1997 from $0.7 million for the six months ended June 30,
1996. This represents 3.6% of VOI sales revenues for the six months ended June
30, 1997 compared to 1.3% for the six months ended June 30, 1996. Vacation Break
monitors its provision for doubtful accounts on a quarterly basis to provide for
future losses associated with defaults on customer mortgages receivable. This
increase was due to the increased provision against mortgages receivable
resulting from the increased mortgage receivable portfolio balance and to
reflect current trends.
Depreciation and amortization expense remained constant at $1.1 million for
the six months ended June 30, 1997 and the six months ended June 30, 1996.
As a result of the foregoing, Vacation Break's net income was $5.1 million
for the six months ended June 30, 1997, a decrease of $1.3 million or 20.7% from
$6.4 million for the six months ended June 30, 1996. Net income for the six
months ended June 30, 1996 included approximately $2.4 million (net of income
taxes) relating to the recognition of deferred revenues (net of related costs)
that had been deferred at December 31, 1995 under the percentage of completion
method of accounting.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------------
Vacation Break's total revenues for 1996 were $102.7 million, an increase
of $44.1 million or 75.3% from revenues of $58.6 million for 1995. Vacation
Break sold 6,203 VOIs at Vacation Break-owned properties in the year ended
December 31, 1996, compared to 4,442 VOI units in 1995. This represents an
increase in sales of Vacation Break-owned VOIs of 39.6% in 1996 over 1995. This
increase reflects the acquisition and development by Vacation Break of
additional resort properties in 1995 and 1996 and the shift in Vacation Break's
emphasis from selling VOIs in resort properties owned by other developers to
selling VOIs in its own resort properties, which VOI sales are more profitable.
Vacation Break recognized revenues from the sale of VOIs of $80.0 million in
1996, of which $2.8 million was recognized from the net decrease in deferred
revenues - VOIs from $9.2 million recorded on the percentage of completion
method on Vacation Break's balance sheet at December 31, 1995 to $6.4 million of
VOI sales recorded as deferred revenue -VOIs at December 31, 1996. Vacation
Break derived revenues of $49.5 million from the sales of VOIs in completed
units in 1995, of which $40.3 million from the sales of VOIs in completed units
was recorded as earned revenue and $9.2 million from the sales of VOIs in pre-
construction units was recorded as deferred revenue - VOIs on Vacation Break's
balance sheet at December 31, 1995.
Costs of units sold as a percentage of VOI sales increased from 23.6% in
1995 to 27.7% in 1996 reflecting a larger percentage of VOIs sold in 1996
compared to 1995 from the Orlando project on which the unit-week cost is fixed
at 35% of the related VOI sales price, resulting in a higher cost per unit than
at other projects while providing less volatility in construction and financing
costs.
Vacation package revenues less vacation package costs have been included as
Vacation ownership interests-sales and marketing costs section in the statement
of operations for the year ended December 31, 1996. Previous years' amounts
have been reclassified to reflect this change in presentation which more closely
correlates to the presentation of other companies in the VOI industry. These
costs, which include VOI sales commissions, lead generation marketing and
vacation fulfillment costs and the administrative costs of processing VOI sales
contracts, increased to $34.7 million or 43.3% of related VOI revenues in 1996
from $12.4 million or 30.9% of related VOI revenues in 1995 reflecting Vacation
Break's increased emphasis on diversification of lead generation programs to
include the fulfillment of third party certificate programs, mini-vacations,
referral and in-house sales programs as well as other moderate cost traditional
lead procurement programs with the primary goal to produce a high quality, low
to moderate cost tour at a resort property and increase VOI sales. The costs of
sales commissions and administrative costs have remained constant, as a
percentage of recognized sales volume, in 1996 compared to 1995. The lead
generation marketing and fulfillment costs (net of revenues recognized from the
sale of Vacation Break's vacation packages) have increased. This increase
relates to numerous factors, including Vacation Break's decision to increase the
quality of the vacation package in order to provide a vacation with a more
positive experience that will produce increased VOI sales, decreasing response
rates to certain direct mail programs and, during the quarter ended September
30, 1996, approximately 65% of all vacation package travelers toured Vacation
Break-owned resorts, a decrease of approximately 20% from Vacation Break's
historical experience. This decrease in tours was primarily the result of
Vacation Break's reservation system conversion and a fire aboard a third party
vendor's cruise ship, which materially altered the itinerary of vacation package
travelers commencing in May 1996. Vacation Break has rectified these problems
during the fourth quarter of 1996.
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<PAGE>
Vacation Break's revenues from resort and other operations increased to
$12.3 million in 1996 from $9.1 million in 1995, primarily as a result of an
increase in the occupancy rate and food and beverage sales at the Port Lucaya
Resort and Yacht Club and the commencement of operations at the Palm Aire Resort
& Spa and the Santa Barbara Resort. Cost of resort operations increased to
$12.6 million in 1996 from $9.4 million in 1995. Such costs as a percentage of
revenues from resort and other operations decreased to 102.4% in 1996 from
103.4% in 1995. This decrease in costs was primarily the result of Vacation
Break's increased rental operations as well as improved operating efficiency at
the Port Lucaya Resort and Yacht Club.
At December 31, 1996 and 1995, Vacation Break's weighted average interest
rate on its entire loan portfolio was 16.3% and 16.4%, respectively, compared to
a weighted average interest rate on borrowings against loans hypothecated by
Vacation Break to unaffiliated lenders of 10.4% and 11.7%, respectively. As a
result of the continued increase in sales of VOIs and the proportionate increase
of VOIs sold in Vacation Break-owned properties from 1993 through December 31,
1996, Vacation Break's interest income from financing activities increased to
$8.7 million for the year ended December 31, 1996 from $4.7 million for the year
ended December 31, 1995. This increase was partially offset by interest paid on
increased borrowings against loans hypothecated by Vacation Break to
unaffiliated lenders of $2.6 million during 1996 compared to $1.1 million during
1995.
Vacation Break's continued development of resort properties and sale of
VOIs in such properties resulted in a decrease in commissions received in
connection with the sale of VOIs for other developers. Vacation Break derived
revenues from such commissions of $1.7 million in 1996, a decrease of $2.8
million or 62.2% from 1995. Furthermore, commissions as a percentage of
revenues decreased to 1.7% in 1996 from 7.7% in 1995. Commissions and related
expenses under marketing agreements decreased to $1.8 million in 1996 from $3.4
million in 1995. Such expenses as a percentage of revenues from commissions
increased to 106.7% in 1996 from 74.5% in 1995 as a result of a sustained level
of fixed expenses and a decrease in commission revenue, reflecting Vacation
Break's shift in its emphasis from selling VOIs in properties owned by other
developers to selling VOIs in Vacation Break-owned resort properties. During
the year, Vacation Break terminated its sales and marketing arrangement with a
developer in the Bahamas and curtailed selling VOIs in the Bahamas.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead including costs related to Vacation Break's
expansion of its information systems area, as well as executive compensation,
increased to $11.6 million in 1996 compared to $9.7 million in 1995, and
amounted to approximately 11.2% of Vacation Break's total revenues during 1996
as compared to 16.6% in 1995.
The provision for doubtful accounts increased to $2.4 million for the year
ended December 31, 1996 from $1.5 million for the year ended December 31, 1995.
This represents 3.0% of VOI sales revenues in 1996 compared to 3.8% in 1995.
Vacation Break annually monitors its provision for doubtful accounts to provide
for future losses associated with any defaults on customer mortgages receivable.
This increase was primarily due to the increased provision against mortgages
receivable resulting from the increased mortgage receivable portfolio balance.
Depreciation and amortization expense increased 5.9% to $1.8 million for
the year ended December 31, 1996 from $1.7 million for the year ended December
31, 1995, primarily due to increased purchases of computer hardware, software
and other equipment.
As a result of the foregoing, Vacation Break's net income was $7.2 million
for the year ended December 31, 1996, an increase of $1.1 million or 18.0% from
the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------------
Vacation Break's total revenues for 1995 were $58.6 million, an increase of
$12.0 million or 25.8% from revenues of $46.6 million for 1994. Vacation Break
sold 4,442 VOIs in the year ended December 31, 1995, compared to 2,396 VOIs in
1994. This represents an increase in sales of Vacation Break-owned VOIs of
63.1% (exclusive of pre-construction sales) in 1995 over 1994 and represents
68.8% of total revenues in 1995 (exclusive of deferred revenues from sales in
pre-construction units) and 59.3% of total revenues in 1994. This increase
reflects the acquisition and development by Vacation Break of additional resort
properties in 1994 and 1995 and the shift in Vacation Break's emphasis from
selling VOIs in resort properties owned by other developers to selling VOIs in
its own resort properties, which VOI sales are more profitable. Vacation Break
derived revenues from the sale of VOIs of $49.5 million in 1995,
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of which $40.3 million from the sales of VOIs in completed units was recorded as
earned revenue and $9.2 million from the sales of VOIs in pre-construction units
was recorded as deferred revenue - VOIs on Vacation Break's balance sheet.
Vacation Break derived revenues of $27.6 million from the sales of VOIs in
completed units in 1994.
Cost of units sold as a percentage of VOI sales increased slightly from
22.0% in 1994 to 23.6% in 1995 reflecting the commencement of sales in three new
developments, commencement of sales in a new purpose built phase of the Sea
Gardens Resort and the higher product costs associated with the Orlando (Star
Island) project.
Vacation package revenues less vacation package costs have been included as
Vacation ownership interests-sales and marketing costs section in the statement
of operations for the year ended December 31, 1995. Previous years' amounts
have been reclassified to reflect this change in presentation which more closely
correlates to the presentation of other companies in the VOI industry. These
costs, which include VOI sales commissions, lead generation marketing and
vacation fulfillment costs and the administrative costs of processing VOI sales
contracts, increased to $12.4 million or 30.9% of related VOI revenues in 1995
from $5.4 million or 19.6% of related VOI revenues in 1994 reflecting Vacation
Break's initiation of emphasis on diversification of lead generation programs to
include the fulfillment of third party certificate programs, mini-vacations,
referral and in-house sales programs as well as other moderate cost traditional
lead procurement programs with the primary goal to produce a high quality, low
to moderate cost tour at a resort property and increase VOI sales. The costs of
sales commissions and administrative costs have remained constant, as a
percentage of recognized sales volume, in 1995 compared to 1994. The lead
generation marketing and fulfillment costs (net of revenues recognized from the
sale of Vacation Break's vacation packages) have increased. This increase
relates to numerous factors, including Vacation Break's decision to increase the
quality of the vacation package in order to provide a vacation with a more
positive experience that will produce increased VOI sales and decreasing
response rates to certain direct mail programs.
Vacation Break's revenues from resort and other operations increased to
$9.1 million in 1995 from $7.6 million in 1994, primarily as a result of an
increase in the occupancy rate and food and beverage sales at the Port Lucaya
Resort and Yacht Club and the commencement of operations at the Palm Aire Resort
& Spa. Cost of resort operations increased to $9.4 million in 1995 from $7.7
million in 1994. Such costs as a percentage of revenues from resort and other
operations increased to 103.4% in 1995 from 101.6% in 1994. This increase in
costs was primarily the result of Vacation Break's commencement of operations at
the Palm Aire Resort and Spa.
At December 31, 1995 and 1994, Vacation Break's weighted average interest
rate on its entire loan portfolio was 16.4% and 16.0%, respectively, compared to
a weighted average interest rate on borrowings against loans hypothecated by
Vacation Break to unaffiliated lenders of 11.7% and 11.6%, respectively. As a
result of the continued increase in sales of VOIs and the proportionate increase
of VOIs sold in Vacation Break-owned properties from 1993 through December 31,
1995, Vacation Break's interest income from financing activities increased to
$4.7 million for the year ended December 31, 1995 from $2.5 million for the year
ended December 31, 1994. This increase was partially offset by interest paid on
increased borrowings against loans hypothecated by Vacation Break to
unaffiliated lenders of $1.1 million during 1995 compared to $843,000 during
1994.
Vacation Break's continued development of resort properties and sale of
VOIs in such properties resulted in a decrease in commissions received in
connection with the sale of VOIs for other developers. Vacation Break derived
revenues from such commissions of $4.5 million in 1995, a decrease of $4.3
million or 49.1% from 1994. Furthermore, commissions as a percentage of
revenues decreased to 7.7% in 1995 from 19.0% in 1994. Commissions and related
expenses under marketing agreements decreased to $3.4 million in 1995 from $4.6
million in 1994. Such expenses as a percentage of revenues from commissions
increased to 74.5% in 1995 from 52.3% in 1994 as a result of a sustained level
of fixed expenses and a decrease in commission revenue, reflecting Vacation
Break's shift in its emphasis from selling VOIs in properties owned by other
developers to selling VOIs in Vacation Break-owned resort properties.
General and administrative expenses, consisting primarily of expenses
relating to corporate overhead including costs related to Vacation Break's
expansion of its information systems area, as well as executive compensation,
increased to $9.7 million in 1995 compared to $8.6 million in 1994, and amounted
to approximately 16.6% of Vacation Break's total revenues during 1995.
The provision for doubtful accounts increased to $1.5 million for the year
ended December 31, 1995 from $679,000 for the year ended December 31, 1994.
This increase was due to the increased provision against mortgages
83
<PAGE>
receivable resulting from the increased mortgage balance. Vacation Break also
provided additional reserves at December 31, 1995 against commissions receivable
under marketing agreements.
Depreciation and amortization expense increased 87.8% to $1.7 million for
the year ended December 31, 1995 from $905,000 for the year ended December 31,
1994, primarily due to increased purchases of computer hardware, software and
other equipment.
In connection with Vacation Break's IPO, Vacation Break terminated the S
Corporation tax status elections for all of the affiliated companies reporting
under this tax provision effective November 1, 1995. Net income includes a one
time non-recurring charge to earnings in the amount of $3.1 million in 1995
associated with the tax effect of the conversion of these companies from S
Corporation tax status to C Corporation tax status.
As a result of the foregoing, Vacation Break's net income was $6.1 million
for the year ended December 31, 1995 after a non-recurring charge of $3.1
million associated with the conversion of S Corporations to C Corporation
status, a decrease of $6.2 million or 50.7% from the year ended December 31,
1994.
LIQUIDITY AND CAPITAL RESOURCES
Vacation Break offers financing to the purchasers of VOIs in Vacation
Break's resort properties who make a down payment generally equal to at least
10% of the purchase price. This financing bears interest at fixed rates, unless
the down payment equals at least 50% of the purchase price and the purchaser
agrees to pay the balance of the purchase price within one year from the date of
purchase, in which case Vacation Break's loan bears no interest. This financing
is collateralized by a mortgage on the underlying VOI. Vacation Break has
entered into agreements with three lenders for the financing of customer
receivables which provide an aggregate of up to approximately $90.0 million of
available financing (of which $53.2 million was outstanding as of June 30, 1997)
to Vacation Break bearing interest at variable rates tied to the "prime" rate
plus 2.00% to 2.50% or a rate ranging between 375 and 475 basis points over
LIBOR. Included in this availability is up to $20.0 million of pre-construction
sales financing (financing of sales of units under construction which have not
been deeded), of which $5.0 million was outstanding at June 30, 1997. A
significant portion of this indebtedness has been guaranteed by Ralph Muller,
the Chairman, Chief Executive Officer and majority stockholder of Vacation
Break. Under these arrangements, Vacation Break hypothecates, or pledges as
security, qualified purchaser promissory notes to these lenders, who lend
Vacation Break 75% to 85% of the principal amount of such notes or, in the case
of pre-sale financing, 60% of the purchase price of the underlying VOI or 65% of
the outstanding balance of such notes. Payments under these promissory notes are
made by the purchaser borrowers directly to a `lockbox,' or payment processing
center, and such payments are credited against Vacation Break's outstanding
balance with the respective lenders. Of the aggregate availability of $90.0
million, $10.0 million of such financing is a revolving loan with scheduled
availability until December 1997; $15.0 million of such financing is a revolving
loan with scheduled availability until March 1998, $40.0 million of such
financing is a revolving loan with scheduled availability until November 1998
and $25.0 million of such financing is a revolving loan with scheduled
availability until May 1999. Vacation Break is in the process of consolidating
the $15.0 million line and the $25.0 million line into a $40.0 million warehouse
facility. After the respective termination of the availability period, the
respective outstanding borrowings under the aggregate agreements are required to
be repaid over a period of five to eight years. Vacation Break believes that,
for the four presently active selling resorts, it has substantial loan
availability to provide financing of new VOI purchases through 1997. Although
Vacation Break believes it can obtain additional financing from other lenders if
necessary, other than as set forth herein, it does not presently have binding
agreements to extend the terms of such financing or for any replacement
financing, and there can be no assurance that alternative or additional
arrangements can be made on terms that are satisfactory to Vacation Break.
Accordingly, future sales of VOIs may be limited by both the availability of
funds to finance the initial negative cash flow that results from sales that are
financed by Vacation Break and by reduced demand which may result if Vacation
Break is unable to provide financing to purchasers of VOIs. If Vacation Break is
required to sell its customer receivables, discounts from the face value of such
receivables may be required. At June 30, 1997, Vacation Break had a portfolio of
13,339 loans to VOI purchasers, which loans had a weighted average maturity of
approximately 5.2 years, and a weighted average interest rate of 16.3%, compared
to a weighted average interest rate of 10.2% on borrowings against loans
hypothecated by Vacation Break to unaffiliated lenders. Vacation Break has
historically derived substantial income from its financing activities.
Vacation Break also requires funds to finance the future purchases of and
improvements to resort properties. Such funds have been provided from operations
and from secured term loans under existing credit facilities, as well as
84
<PAGE>
from the proceeds of Vacation Break's initial public offering ("IPO"). Vacation
Break presently has no commitments to make capital expenditures other than (i) a
$13.0 million construction facility from SunTrust and Finova Capital Corporation
to finance the construction of the ten story, 84 unit Ocean Palms addition to
the Sea Gardens Resort and (ii) a $12.7 million construction facility from Bank
Atlantic to finance the construction of the 99 unit renovation and new
construction to Royal Vista Resort (formerly known as Ocean Ranch) and (iii) an
unconditional $8.8 million obligation to purchase units at Star Island, complete
construction of such units and guarantee a maximum of $6.5 million of
construction debt.
Vacation Break intends to continue to provide financing to purchasers of
VOIs and to obtain funds to finance the negative cash flow resulting from the
payment of sales commissions and other selling expenses and to make release
payments on bank indebtedness relating to development of its resort properties.
For the six months ended June 30, 1997 and 1996, Vacation Break derived interest
income of $5.9 million and $3.7 million, respectively, from the financing of
purchaser notes receivable and incurred interest expense of $2.1 million and
$1.0 million, respectively, relating to loans secured by notes hypothecated to
these unaffiliated lenders.
During the six months ended June 30, 1997 and 1996, Vacation Break's
operating activities provided approximately $1.3 million and used approximately
$11.3 million, respectively, in cash and cash equivalents and its investing
activities used approximately $10.7 million and $4.7 million, respectively, in
cash. During these periods $6.7 million and $15.2 million, respectively, was
provided through Vacation Break's financing activities, resulting in a net
decrease in cash and cash equivalents of $2.7 million for the six months ended
June 30, 1997 and $0.8 million for the six months ended June 30, 1996.
During the years ended December 31, 1996 and 1995, Vacation Break's
operating activities used approximately $32.7 million and $4.3 million,
respectively, in cash and cash equivalents and its investing activities provided
approximately $2.5 million and used approximately $10.7 million, respectively,
in cash. During these periods $28.0 million and $22.9 million, respectively,
was provided through Vacation Break's financing activities, resulting in a net
decrease in cash and cash equivalents of $2.2 million in 1996 and a net increase
in cash and cash equivalents of $7.9 million during 1995.
Vacation Break believes that funds from operating and financing activities,
borrowings under its existing credit facilities and the net remaining proceeds
from the IPO are sufficient to satisfy its contemplated cash requirements
through 1997, and that its long-term financing requirements will be met through
operating and financing activities in the normal course of its business and, if
deemed necessary or appropriate, through additional financing. No assurance can
be given that additional financing will be available on terms and conditions
acceptable to Vacation Break.
The foregoing Management's Discussion and Analysis contains various
"forward looking statements" within the meaning of Section 21E of the Exchange
Act which represent Vacation Break's expectations or beliefs concerning future
events, including, but not limited to, statements regarding increased sales of
VOIs in Vacation Break-owned resorts and the sufficiency of Vacation Break's
cash flow, as well as receivables financing, for its future liquidity and
capital resource needs. These forward looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements. These factors include, without
limitation, Vacation Break's ability to continue to develop and market resort
properties, increases in marketing costs, the availability of favorable
financing agreements, increases in sales of vacation packages, fluctuations in
interest rates and the effects of governmental regulation. Results actually
achieved may differ materially from expected results included in these
statements as a result of these or other factors.
EXPERTS
The consolidated financial statements and schedule of Fairfield
Communities, Inc. at December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, incorporated by reference in the Joint
Proxy Statement/Prospectus of Fairfield Communities, Inc., which is referred to
and made a part of this Prospectus and Registration Statement, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
incorporated by reference herein, and are incorporated by reference in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
85
<PAGE>
The consolidated balance sheets of Vacation Break U.S.A., Inc. and
consolidated subsidiaries as of December 31, 1996 and 1995 and the consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996, included in this Joint
Proxy/Prospectus, have been included in reliance on the report of Coopers &
Lybrand, L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
Representatives of Ernst & Young LLP and Coopers & Lybrand L.L.P. are
expected to be present at the Fairfield Special Meeting and the Vacation Break
Special Meeting, respectively, will have the opportunity to make a statement if
they desire to do so and will be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of Fairfield Common Stock being offered hereby
will be passed upon for Fairfield by Jones, Day, Reavis & Pogue, Dallas, Texas,
counsel to Fairfield.
Certain federal income tax consequences of the Merger will be passed upon
by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., counsel to Vacation
Break.
86
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF VACATION BREAK
PAGE
----
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-6
Notes to Fiscal Year End Consolidated Financial Statements F-7
Statement regarding Computation of per share Earnings F-26
Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets at December 31,
1996 and June 30, 1997 F-27
Consolidated Condensed Statements of Operations for the
six months ended June 30, 1996 and 1997 F-28
Consolidated Condensed Statement of Cash Flows for the
six months ended June 30, 1996 and 1997 F-29
Notes to Interim Period Consolidated Condensed Financial Statements F-30
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Vacation Break U.S.A., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Vacation Break
U.S.A., Inc. and Subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1994, 1995 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vacation Break U.S.A., Inc. and Subsidiaries as of December 31, 1995 and 1996
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1994, 1995 and 1996 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Fort Lauderdale, Florida
March 14, 1997, except Notes 22 and 24, as to which the date is October 9, 1997.
F-2
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................... $ 8,499,386 $ 6,307,928
Certificates of deposit........................................... 747,817 124,235
Restricted cash................................................... 4,090,766 1,647,236
Cash in escrow from vacation ownership interests sales............ 10,580,907 8,055,543
Mortgages receivable on vacation ownership interests sales - net.. 45,423,680 73,028,510
Receivables - net................................................. 3,381,460 3,757,385
Note receivable................................................... -- 1,993,883
Vacation ownership interests held for sale and real estate and
development costs................................................ 18,302,622 25,310,450
Prepaid expenses and other assets................................. 4,521,714 5,919,983
Investment in unconsolidated affiliates........................... 1,584,417 1,946,917
Due from unconsolidated affiliates................................ 84,050 54,369
Income tax receivable............................................. 8,238 58,238
Property and equipment - net...................................... 9,866,702 10,274,870
------------ ------------
TOTAL ASSETS...................................................... $107,091,759 $138,479,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.......................... $ 10,240,733 $ 13,210,543
Due to unconsolidated affiliates.................................. 522,607 5,578
Notes and mortgages payable....................................... 28,900,694 53,302,723
Note payable to unconsolidated affiliate.......................... 560,000 532,778
Capital lease obligations......................................... 1,320,695 1,349,426
Deferred income taxes............................................. 2,498,088 6,207,527
Advance deposits.................................................. 4,369,244 2,948,884
Deferred revenues - vacation packages............................. 20,534,417 16,588,264
Deferred revenues - vacation ownership interests.................. 9,233,181 6,407,050
Due to affiliate of joint ventures................................ 6,227,875 7,517,719
Tax distribution payable to majority stockholder.................. 3,388,205 --
Minority interest in joint ventures............................... 37,222 2,582,436
------------ ------------
Total Liabilities................................................. 87,832,961 110,652,928
------------ ------------
Commitments and contingencies (Notes 12, 13, 15 and 22)
Stockholders' Equity:
Preferred stock ($.01 par value; 25,000,000 shares authorized; no
shares issued and outstanding at December 31, 1995 and 1996,
respectively)
Common stock ($.01 par value; 25,000,000 shares authorized;
8,300,000 and 8,593,725 shares issued and outstanding at
December 31, 1995 and 1996, respectively)........................ 83,000 85,937
Additional paid in capital........................................ 12,089,288 13,414,457
Retained earnings................................................. 7,086,510 14,326,225
------------ ------------
Total Stockholders' Equity........................................ 19,258,798 27,826,619
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $107,091,759 $138,479,547
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Vacation ownership interests $27,644,415 $40,290,672 $ 80,020,405
Resort operations and other 7,601,805 9,085,790 12,342,683
Interest earned on mortgages receivable 2,507,822 4,704,111 8,657,255
Commissions earned on marketing agreements (1) 8,839,229 4,502,905 1,720,841
----------- ----------- ------------
46,593,271 58,583,478 102,741,184
----------- ----------- ------------
Costs and operating expenses:
Vacation ownership interests - cost of units sold 6,076,497 9,500,289 22,135,634
Vacation ownership interests - sales & marketing
costs 5,412,522 12,445,671 34,682,902
Resort operations and other 7,722,634 9,398,743 12,636,161
Interest expense on financed mortgages receivable 843,083 1,108,741 2,550,656
Commissions and related expenses on marketing
agreements 4,623,456 3,353,682 1,835,501
Interest expense - other 237,636 770,992 1,220,627
General and administrative 8,556,066 9,712,220 11,591,523
Provision for doubtful accounts 679,205 1,525,214 2,436,748
Depreciation and amortization 904,611 1,722,502 1,819,564
----------- ----------- ------------
35,055,710 49,538,054 90,909,316
----------- ----------- ------------
Income from operations before income
taxes, minority interest and equity in earnings of
unconsolidated affiliates 11,537,561 9,045,424 11,831,868
Minority interest in earnings of joint ventures -- (37,222) (1,045,214)
Equity in earnings of unconsolidated affiliates 149,698 161,851 162,500
----------- ----------- ------------
Income before income taxes 11,687,259 9,170,053 10,949,154
Income tax (expense) benefit 595,480 (26,709) (3,709,439)
Non-recurring charge associated with the
conversion of S Corporations to C Corporation
tax status -- (3,090,000) --
----------- ----------- ------------
Net income $12,282,739 $ 6,053,344 $ 7,239,715
=========== =========== ============
Net income per share:
Primary $ 0.82
============
Assuming full dilution $ 0.80
============
Average number of common and common
equivalent shares outstanding:
Primary 8,843,247
============
Assuming full dilution 9,091,851
============
Pro forma income data (unaudited):
Income before income tax provision, as reported $11,687,259 $ 9,170,053
Pro forma income tax provision 3,922,745 3,324,598
----------- -----------
Pro forma net income $ 7,764,514 $ 5,845,455
=========== ===========
Pro forma net income per share $ 1.19 $ 0.90
=========== ===========
Pro forma common and common equivalent
shares outstanding 6,500,000 6,524,658
=========== ===========
</TABLE>
- --------------------
(1) Commissions earned on marketing agreements with related parties were
$2,200,000, $1,509,000 and $74,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
See accompanying notes to consolidated financial statements
F-4
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL RETAINED
PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1993 5,100 $ 5,100 $ 5,127,489 $(4,083,444) $ 1,049,145
Issuance of common stock:
Vacation Break Resorts, Inc. 500 500 -- -- 500
Vacation Break Construction, Inc. 500 500 -- -- 500
Stockholder contribution -- -- 55,925 -- 55,925
Stockholder distributions -- -- -- (1,733,898) (1,733,898)
Net income -- -- -- 12,282,739 12,282,739
--------- ------- ----------- ----------- -----------
Balance - December 31, 1994 6,100 6,100 5,183,414 6,465,397 11,654,911
Issuance of common stock:
Resorts Title, Inc. 500 500 -- -- 500
Vacation Break Resorts at
Palm-Aire, Inc. 500 500 -- -- 500
Vacation Break Resorts at Star
Island, Inc. 500 500 -- -- 500
Vacation Break Welcome Centers, Inc. 500 500 -- -- 500
Proceeds from initial public offering
- net 1,800,000 18,000 6,962,774 -- 6,980,774
Effect of 65,000-to-1 stock split 6,499,900 64,900 (64,900) -- --
Exchange of common stock in
connection with mergers (8,000) (8,000) 8,000 -- --
Stockholder distributions -- -- -- (5,432,231) (5,432,231)
Net income -- -- -- 6,053,344 6,053,344
--------- ------- ----------- ----------- -----------
Balance - December 31, 1995 8,300,000 83,000 12,089,288 7,086,510 19,258,798
Issuance of common stock:
Exercise of stock options 23,725 237 145,380 -- 145,617
Exercise of underwriter's
overallotment - net 270,000 2,700 1,179,789 -- 1,182,489
Net income -- -- -- 7,239,715 7,239,715
--------- ------- ----------- ----------- -----------
Balance - December 31, 1996 8,593,725 $85,937 $13,414,457 $14,326,225 $27,826,619
========= ======= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net income $ 12,282,739 $ 6,053,344 $ 7,239,715
Adjustments to reconcile net income to net cash used in
operating activities:
Provisions for doubtful accounts 679,205 1,525,214 2,436,748
Depreciation and amortization 904,611 1,722,502 1,819,564
Equity in earnings of unconsolidated affiliates (149,698) (161,851) (162,500)
Provision for deferred taxes (549,065) 3,124,987 3,709,439
Minority interest in earnings of joint ventures -- 37,222 1,045,214
Changes in operating assets and liabilities:
Mortgages receivable on vacation ownership interests sales (12,209,629) (24,421,233) (29,891,578)
Receivables (529,309) (1,265,021) (525,925)
Note receivable -- -- (1,993,883)
Income tax receivable (354,782) 588,173 (50,000)
Vacation ownership interests held for sale and real estate
and development costs (4,271,719) (7,667,072) (5,897,334)
Prepaid expenses and other assets (471,318) (3,276,664) (1,398,269)
Due to/from unconsolidated affiliates -net 602,210 (113,653) (487,348)
Accounts payable and accrued liabilities 2,128,655 3,665,191 2,969,810
Income tax payable (173,683) -- --
Tax distributions to majority stockholder -- -- (3,388,205)
Deferred revenues - vacation ownership interests -- 9,233,181 (2,826,131)
Deferred revenues - vacation packages 363,440 6,250,324 (3,946,153)
Advance deposits 870,586 412,888 (1,420,360)
------------ ------------ ------------
Net cash used in operating activities (877,757) (4,292,468) (32,767,196)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,548,194) (3,540,801) (2,880,954)
Additions to restricted cash (4,713,629) (7,117,723) (3,682,716)
Releases of restricted cash 3,499,424 6,155,984 6,126,246
Decrease (Increase) in cash in escrow from vacation
ownership interests sales - net (2,072,785) (6,878,841) 2,525,364
Purchases of certificates of deposit (1,237,895) (602,817) (121,293)
Maturities of certificates of deposit 595,660 1,323,402 744,875
Investment in unconsolidated affiliates (91,214) -- (200,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (6,568,633) (10,660,796) 2,511,522
------------ ------------ ------------
Cash Flows from Financing Activities:
Borrowings of notes and mortgages payable 13,820,261 20,456,101 63,013,765
Repayments of notes and mortgages payable (5,432,336) (8,308,722) (38,611,736)
Borrowings from affiliate of joint ventures -- 6,227,875 1,289,844
Repayment of note payable to unconsolidated affiliate (125,000) (125,000) (27,222)
Payments on capital lease obligations (283,219) (353,258) (428,541)
Equity investment from joint venture partner -- -- 1,500,000
Stockholder contributions 55,925 -- --
Stockholder distributions (1,733,898) (2,044,026) --
Proceeds from initial public offering - net -- 6,980,774 --
Proceeds from issuance of common stock 1,000 2,000 1,328,106
------------ ------------ ------------
Net cash provided by financing activities 6,302,733 22,835,744 28,064,216
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,143,657) 7,882,480 (2,191,458)
Cash and cash equivalents at beginning of year 1,760,563 616,906 8,499,386
------------ ------------ ------------
Cash and cash equivalents at end of year $ 616,906 $ 8,499,386 $ 6,307,928
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO FISCAL YEAR END CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Vacation Break U.S.A., Inc. and consolidated subsidiaries ("Vacation
Break") is engaged in the sale of vacation packages, hotel operations and the
renovation, construction, sale and financing of resort vacation ownership
interests ("VOIs"). At December 31, 1996, the entities comprising the
consolidated Vacation Break are as follows:
Vacation Break U.S.A., Inc.
Atlantic Marketing Realty, Inc.
Sea Gardens Beach and Tennis Resort, Inc.
Vacation Break International Limited
Vacation Break Marketing Company Limited
Vacation Break Management, Inc.
Resort Yachts of America, Inc.
Serenity Yacht Club, Inc.
Vacation Break Construction, Inc.
Vacation Break Resorts, Inc.
Resorts Title, Inc.
Vacation Break Welcome Centers, Inc.
Vacation Break Resorts at Palm Aire, Inc.
Vacation Break Resorts at Ocean Ranch, Inc.
Vacation Break Resorts at Star Island, Inc.
Palm Vacation Group (a Florida general
partnership)
Ocean Ranch Vacation Group (a Florida
general partnership)
Vacation Break Marketing Consultants, Inc.
For the year ended December 31, 1995, Vacation Break Resorts at Ocean
Ranch, Inc., Ocean Ranch Vacation Group and Vacation Break Marketing
Consultants, Inc. had not been formed and, accordingly, did not form part of the
consolidated 1995 financial statements. For the year ended December 31, 1994,
Vacation Break Resorts at Star Island, Inc., Vacation Break Resorts at Palm
Aire, Inc., Vacation Break Resorts at Ocean Ranch, Inc., Resorts Title, Inc.,
Palm Vacation Group and Vacation Break Welcome Centers, Inc. had not been formed
and, accordingly, did not form part of the consolidated 1994 financial
statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Vacation Break and the companies listed in Note 1, which are
wholly-owned or majority-owned by Vacation Break. All significant intercompany
transactions and balances have been eliminated from these consolidated financial
statements. The 1994 financial statements reflect the accounts of Vacation
Break as if consolidation had occurred prior to this date.
CASH AND CASH EQUIVALENTS. All highly liquid cash investments with a
maturity of three months or less from the date of purchase are considered cash
equivalents.
CERTIFICATES OF DEPOSIT. Certificates of deposit have original maturities
in excess of three months but not exceeding one year at the time of purchase.
The carrying amounts approximate market value due to their short maturities.
REVENUE RECOGNITION
VACATION OWNERSHIP INTERESTS: VOIs consist of specified fixed week
----------------------------
interval ownership in fully furnished units. Generally, VOIs are sold under
contracts for deed requiring a 10 % down payment and monthly installments for
periods of up to 7 years. VOI revenue is recognized when a 10 % down payment
has been received and a 10 day rescission
F-7
<PAGE>
period has expired. During the 10 day rescission period, a customer may cancel
for any reason and have the down payment refunded. Revenue relating to sales of
VOIs in projects under development is recognized using the percentage of
completion method. Under this method, the portion of revenues applicable to
costs incurred, as compared to total estimated construction and acquisition
costs, is recognized in the period of sale. The remaining revenue is deferred
and recognized as the remaining costs are incurred. Sales commissions and direct
marketing costs relating to VOI's accounted for under the percentage of
completion method are deferred until the associated revenues are recognized.
As part of Vacation Break's strategy associated with the marketing of VOIs,
vacation package certificates are sold on a non-refundable basis. The customer
has up to eighteen months to exercise the certificate, at which time the
certificate expires, if not extended for an additional twelve months generally
upon payment of a nominal fee. All revenues, and direct costs incurred relating
to the sale of vacation package certificates, are deferred until either the
vacation is taken or the eighteen month period has expired and Vacation Break is
no longer contractually obligated to fulfill the vacation. To the extent that
vacation package certificates are extended beyond the eighteen month period,
revenues, including fees received upon extension and related direct costs, are
deferred until either the vacation is taken or the extended period has expired.
Revenues and related costs from vacation packages are included net in "Vacation
ownership interests--sales & marketing costs."
ADVANCE DEPOSITS: Customers have the opportunity to purchase upgrades to
----------------
their basic vacation package. Upgrades primarily include more luxurious
accommodations and car rentals. Upgrades are paid, generally within 45 days of
the scheduled vacations, and are recognized as revenue when the vacations are
taken.
COMMISSIONS ON MARKETING AGREEMENTS: Vacation Break has entered into
-----------------------------------
marketing agreements with certain non-affiliated companies and certain non-
consolidated affiliated companies to sell vacation ownership interests on their
behalf. Commissions are recognized as revenue after a 10 day rescission period.
ALLOWANCES FOR DOUBTFUL ACCOUNTS. Vacation Break has established
allowances for doubtful accounts for receivables and for mortgages receivable on
vacation ownership interests. The allowance for mortgages receivable is based
on industry and Vacation Break's historical default experience and is net of
anticipated cost recoveries on the underlying vacation ownership interests. The
allowance for receivables is based primarily upon prior loss experience and the
identification of specific accounts deemed uncollectible. Cancellations of
prior years sales are charged against the provision while cancellation of
current years sales are charged against VOI sales revenues in the period of
cancellation.
VACATION OWNERSHIP INTERESTS HELD FOR SALE AND REAL ESTATE AND DEVELOPMENT
COSTS. VOIs held for sale and real estate and development costs represent the
costs of unsold units, recorded at cost which is lower than estimated net
realizable value. Costs include land, land improvements, construction,
including capitalized interest and real estate taxes, furnishing of the facility
and a portion of the costs of amenities constructed for the use and benefit of
the VOI owners. Cost of VOI units sold is determined using the relative sales
value method. Real estate acquisition costs are allocated to specific projects
based on their relative fair value before development.
PROPERTY AND EQUIPMENT. Property and equipment, which relate primarily to
Vacation Break's hotel, spa and corporate operations and do not relate to
vacation ownership interests, are stated on the basis of cost less accumulated
depreciation and amortization. Vacation Break provides for depreciation on a
straight-line basis over the following estimated useful lives: building and
improvements, 27.5 years; software costs, 5 years; equipment, furniture and
fixtures, 5 to 7 years; and yachts, 10 years.
During 1996, management changed the estimates of the useful lives of
computer hardware from 5 to 7 years and software costs from 3 to 5 years. These
changes resulted in an increase to income before income taxes of $415,000, an
increase to net income of approximately $255,000 and an increase to primary and
fully diluted earnings per share of $0.03.
Assets under capital leases are capitalized using an implicit interest rate
appropriate at the inception of each lease and are amortized over the shorter of
the applicable lease term or the useful life of the asset.
When assets are retired or otherwise disposed of, the costs and accumulated
depreciation are removed from the respective accounts and any related gain or
loss is recognized. Maintenance and repair costs are charged to expense as
incurred, and renewals and improvements that extend the useful lives of assets
are capitalized.
F-8
<PAGE>
Long-lived assets to be held and used are reviewed for impairment whenever
changes in circumstances indicate that the related carrying amounts may not be
recoverable under the provisions of Statement of Financial Accounting Standard
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." When required, impairment losses on assets to be held
and used are recognized based on the fair value of the asset. Vacation Break
determined that there was no impairment as of December 31, 1996 and 1995.
INVESTMENT IN UNCONSOLIDATED AFFILIATES. Vacation Break has a 50% interest
in the Port Lucaya Resort Company Limited and a 25% interest in Vacation
Marketing Consultants, Inc., which are accounted for under the equity method.
INCOME TAXES. Vacation Break and its consolidated subsidiaries utilize the
asset and liability method of accounting for deferred income taxes. Under this
method, deferred tax assets and liabilities are established based on the
differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Vacation Break provides a valuation allowance against deferred tax assets
if, based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
Additionally, certain of Vacation Break's consolidated subsidiaries include
Bahamian corporations which are not currently subject to income taxation for
Bahamian tax purposes or for U.S. federal and state income tax purposes.
Prior to November, 1995, Vacation Break and its consolidated subsidiaries
were either taxed as regular corporations at the corporate level or elected to
be taxed as S Corporations under provisions of the Internal Revenue Code. The
consolidated subsidiaries which were taxed as S Corporations prior to November
1995, were not subject to federal and state income taxes at the corporate level.
Instead, the taxable income of the S Corporations for the period of time prior
to November 1995 was included in the individual income tax return of their sole
stockholder. On October 31, 1995, Vacation Break's S Corporation subsidiaries
terminated their S Corporation elections and, accordingly, became subject to
federal and state income taxes.
ADVERTISING AND PROMOTION EXPENSE. Advertising expenses are charged to
operations during the year in which they are incurred. Such expenses relate
principally to a direct mail advertising program. For the years ended December
31, 1994, 1995 and 1996, these costs were approximately $3,712,000, $3,716,000
and $2,067,000 respectively. Such costs are primarily included in vacation
package costs.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Vacation Break's financial
instruments consist of certificates of deposit, mortgages receivable on VOI
sales, note receivable, notes and mortgages payable and amounts due to affiliate
of Palm Vacation Group. Certificates of deposit have maturity dates of one year
or less. Accordingly, their carrying values approximate their fair values. The
fair values of mortgages receivable on VOI sales, note receivable and amounts
due to affiliate of Palm Vacation Group have been estimated based on interest
rates available for similar credit and debt instruments and approximate their
carrying values. Of the total balance of notes and mortgages payable, 98% bear
interest at variable rates. Accordingly, their carrying values approximate
their fair values. The remaining notes and mortgages payable bear interest at
rates available for similar instruments.
NEW ACCOUNTING PRONOUNCEMENTS. For the year ended December 31, 1996,
Vacation Break adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
This pronouncement establishes financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Vacation Break has chosen to account for stock-based compensation under
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations, as permitted under SFAS No.
123. Accordingly, the adoption of this standard did not affect Vacation Break's
results of operation, financial position or liquidity.
SFAS No. 128, "Earnings per Share" must be implemented by Vacation Break in
1997. This pronouncement specifies the computation, presentation and disclosure
requirements for earnings per share. It requires presentation of earnings per
share for entities that have issued common stock or potential common stock if
those securities trade in the public market.
F-9
<PAGE>
RECLASSIFICATIONS. Certain amounts in the 1994 and 1995 financial
statements have been reclassified to conform to the 1996 presentation. Vacation
package revenues, less vacation package costs, have been included as vacation
ownership interests-sales & marketing costs in the statement of operations for
the year ended December 31, 1996. This change in presentation more closely
correlates to the presentation method of other companies in the vacation
ownership industry.
NET INCOME PER SHARE. For the year ended December 31, 1996, primary
earnings per share are based on the weighted average number of shares
outstanding and the assumed exercise of dilutive stock options less the number
of treasury shares assumed to be purchased from the proceeds using the average
market price of Vacation Break's common stock. Fully diluted earnings per share
were computed using the higher of the average market price or the end of the
year market price.
For the years ended December 31, 1994 and 1995, primary earnings per share
were computed on net income decreased by pro forma reductions resulting from a
tax provision relating to an S Corporation to C Corporation status, divided by
the weighted average number of common shares outstanding.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Such estimates consist of the allowances for
doubtful accounts on mortgages receivable on VOI sales and receivables, revenue
recognition under the percentage of completion method on VOI sales, depreciation
and amortization of property and equipment, accrued liabilities and deferred
revenues on vacation packages and VOIs. Actual results could differ from those
estimates.
3. RESTRICTED CASH
All cash received on VOI sales is recorded as restricted cash pending the
execution and recording of the contract.
Vacation Break engages an outside service organization to process all
credit card charges received by Vacation Break. This organization retains a
revolving reserve for charge backs against these credit card charges.
4. RECEIVABLES - NET
Receivables - net consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Commissions on sales under marketing agreements $ 902,343 $ 606,834
Vacation package sales 844,553 874,681
Hotel operations 222,998 438,624
Due from Condo Association 395,870 650,788
Interest receivable - VOI mortgages 465,784 862,649
Other 137,361 393,700
Due from officers and employees 563,513 160,688
---------- ----------
3,532,422 3,987,964
Less: allowance for doubtful accounts (150,962) (230,579)
---------- ----------
$3,381,460 $3,757,385
========== ==========
</TABLE>
Vacation Break generates commissions on sales under marketing agreements
through the sale of vacation ownership interests at a non-related company and at
Coconut Bay Resort Properties, Inc. and Intracoastal Resorts, Inc., which are
non-consolidated companies in which the majority stockholder has an interest
(Note 18). Receivables relating to Coconut Bay Resort Properties, Inc. and
Intracoastal Resorts, Inc. are recorded separately on the balance sheet under
the caption, "Due from unconsolidated affiliates." Commissions receivable are
paid over a three to four year period by the above companies as the purchasers
of the vacation ownership interests pay down their mortgage notes.
F-10
<PAGE>
Receivables for vacation package sales represent credit card sales being
processed and amounts due from an independent marketing company. Credit card
receivables are generally remitted to Vacation Break within 3 days from the date
of sale and are subject to a reserve (Note 3).
Activity in the allowance for doubtful accounts, which relates primarily to
commissions under marketing agreements, was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance - Beginning of year $ 496,757 $ 320,691 $150,692
Provision 80,430 223,811 150,000
Receivables charged off (256,496) (393,810) (70,113)
--------- --------- --------
Balance - End of year $ 320,691 $ 150,692 $230,579
========= ========= ========
</TABLE>
5. NOTE RECEIVABLE
During December 1996, Vacation Break sold certain exclusive marketing
agreements with a number of independent telemarketing operators (ITO's) to an
outside travel group for $200,000 in cash and an 8% promissory note due December
31, 1998 in the amount of $2,300,000. As additional consideration, Vacation
Break assigned receivables from the ITO's of approximately $2 million to the
travel group. The note will be paid through deductions of sales commissions due
to the travel group resulting from VOI sales generated through leads from the
travel group, with any remaining balance due December 31, 1998.
6. MORTGAGES RECEIVABLE ON VACATION OWNERSHIP INTERESTS
Vacation Break provides financing to the purchasers of its VOIs which is
collateralized by their interest in such VOIs. These mortgages receivable are
generally payable over a period of one to seven years, bearing interest at rates
ranging from 8% to 18% and requiring equal monthly installments of principal and
interest. Vacation Break also offers non-interest bearing mortgages to
purchasers who pay at least 50% of the purchase price at the time of sale or
within thirty days from the date of sale and who repay the balance within one
year.
Vacation Break has entered into agreements with certain financial
institutions for the financing of mortgages receivable at weighted average
interest rates of 11.7% and 10.4% as of December 31, 1995 and 1996,
respectively. These agreements provide for advances on a recourse basis for 75 %
to 85 % of the face value of the mortgages receivable. The principal and
interest payments made by the mortgagees on any mortgages financed with these
financial institutions are remitted directly to the financial institutions and
are applied against Vacation Break's loan obligation.
Mortgages receivable on VOIs consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
$21,639,731 $50,591,503
Hypothecated mortgages receivable 25,055,159 24,715,007
----------- -----------
46,694,890 75,306,510
Less: Allowance for doubtful accounts (1,271,210) (2,278,000)
----------- -----------
$45,423,680 $73,028,510
=========== ===========
</TABLE>
F-11
<PAGE>
For the years ended December 31, 1994, 1995 and 1996 activity in the
allowance for doubtful accounts which relates to VOI sales was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ------------ ------------
<S> <C> <C> <C>
Balance - Beginning of year $ 300,000 $ 689,335 $ 1,271,210
Provision 598,775 1,301,403 2,286,748
Receivables charged off (209,440) (719,528) (1,279,958)
--------- ---------- -----------
Balance - End of year $ 689,335 $1,271,210 $ 2,278,000
========= ========== ===========
</TABLE>
7. VACATION OWNERSHIP INTERESTS HELD FOR SALE AND REAL ESTATE AND DEVELOPMENT
COSTS
At December 31, 1995 and 1996, Vacation Break had the following VOI units
available for sale:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
------ ------
<S> <C> <C>
Competed Units 3,737 3,914
Units under construction 10,169 8,937
------ ------
13,906 12,851
====== ======
</TABLE>
In January 1996, Vacation Break purchased a 55% interest in a general
partnership which acquired the Ocean Ranch Resort for the amount of $3.3 million
to construct a 99 unit facility (5,148 VOIs) at an estimated construction cost
of $12.7 million.
In connection with the renovation and construction of various projects
under development, Vacation Break has entered into a number of non-cancelable
construction contracts. At December 31, 1996, approximately $8,900,000
remained on these contracts. In addition, Vacation Break has an unconditional
$8.8 million obligation to purchase units at Star Island and is obligated to
complete construction of such units. Further, Vacation Break has guaranteed
construction debt associated with these units of up to $6.5 million.
For the years ended December 31, 1994, 1995 and 1996, interest capitalized
in project costs was approximately $36,000, $1,400,000 and $2,265,000,
respectively.
8. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Prepaid cruises $ 286,681 $ 158,340
Prepaid insurance 579,960 467,505
Inventory for hotel operations 110,786 114,726
Deposits 429,199 436,185
Prepaid vacation fulfillment costs 695,832 1,075,295
Deferred financing costs 606,377 1,157,391
Deferred commissions & expenses - VOIs 1,634,930 1,685,868
Barter credits -- 550,000
Other 177,949 274,673
---------- ----------
$4,521,714 $5,919,983
========== ==========
</TABLE>
F-12
<PAGE>
9. PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation and
amortization consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
Land $ 361,183 $ 136,195
Buildings and improvements 2,094,316 1,269,166
Equipment, furniture and fixtures 3,746,869 4,392,388
Purchased software costs 2,382,959 3,111,881
Yachts - resort activities 2,297,797 2,297,797
Leasehold improvements 583,227 942,271
Equipment held under capital leases 1,775,919 2,263,688
----------- -----------
13,242,270 14,413,386
Less: Accumulated depreciation and amortization (3,375,568) (4,138,516)
----------- -----------
Total $ 9,866,702 $10,274,870
=========== ===========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1994, 1995 and 1996 was $904,611, $1,722,502 and $1,819,564, respectively.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Accounts payable $ 5,849,923 $ 4,149,481
Commissions, accrued wages, vacation pay and payroll
taxes 2,946,468 1,877,425
Marketing costs (barter) -- 550,000
Accrued construction costs 300,000 5,025,889
Accrued interest 547,443 723,286
Other liabilities 596,899 884,462
----------- -----------
Total $10,240,733 $13,210,543
=========== ===========
</TABLE>
11. DEBT AND FINANCING ARRANGEMENTS
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Revolving lines of credit not to exceed $77,500,000 in the
aggregate (limited by eligible collateral) - collateralized
by VOI mortgages receivable with interest at rates
ranging from prime plus 2.00% to 2.50% or 425 to 475
basis points over the three month LIBOR, floating,
maturing through the year 2005, substantially all of which
has been personally guaranteed by the majority
stockholder of Vacation Break. At December 31, 1995
and 1996, the weighted average interest rates on these
notes were 11.7% and 10.4%, respectively. $17,541,335 $42,394,175
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Mortgage payable - Specified unit week release prices
required for each VOI sold with final payment due June,
1997. Collateralized by land, buildings and vacation
ownership development costs, with interest payable
monthly at prime plus 1% and personally guaranteed by
the majority stockholder of Vacation Break. At
December 31, 1995 and 1996, the interest rates were
9.5% and 9.25%, respectively 1,131,726 1,200,000
Mortgage payable - final payment of principal plus
accrued interest on February 3, 1996. 4,500,000 --
Mortgage payable - Specified unit release prices required
for each unit sold with final payment due April, 1998.
Collateralized by land, buildings and vacation ownership
development costs, with interest payable monthly at prime
plus 1.5%; interest at December 31, 1996 was 9.75%.(1) -- 3,973,050
Mortgage payable - Specified unit release prices required
for each unit sold with final payment due April, 1998.
Collateralized by land, buildings and vacation ownership
development costs, with interest payable monthly at prime
plus 1.5%; interest at December 31, 1996 was 9.75%.(1) -- 2,440,000
Construction mortgage loan payable - specified unit-week
release prices required for each unit week sold with final
payment due June, 2000. The maximum borrowing
amount under this facility is $12,700,000; Collateralized
by land, buildings and vacation ownership development
costs, with interest capitalized through completion of
construction then payable monthly at prime plus 1.0%;
interest at December 31, 1996 was 9.25% -- 1,500,000
Mortgage payable - paid in 1996 through sales of VOI
interests 3,188,569 --
Mortgage payable - principal plus accrued interest at 9%
fixed rate due August 1996. 905,298 --
Mortgage payable - monthly installments of $7,196 at 8%
fixed rate, plus a final payment of $600,100 due in
August 1998, collateralized by a yacht and personally
guaranteed by the majority stockholder of Vacation
Break. 686,105 650,702
Mortgage payable - monthly installments of $2,596 at
8.51% fixed rate, plus a final payment of $211,981 due in
July 1999, collateralized by a yacht and personally
guaranteed by the majority stockholder of Vacation
Break. 250,318 240,073
Mortgage payable - monthly installments of $2,033 at 9%
fixed rate plus a final payment of $98,488 due in July,
2000, collateralized by a yacht and personally guaranteed
by the majority stockholder of Vacation Break. 159,168 148,674
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Mortgage payable - monthly installments of $1,508 plus
interest at prime plus 1%, plus a final payment of
$92,009 due and paid in May 1996, collateralized by a
yacht. 98,042 --
Other 440,133 756,049
----------- -----------
$28,900,694 $53,302,723
=========== ===========
</TABLE>
The notes payable of $42,394,175 require, among other things, a minimum net
worth of $7,500,000, as defined, to be maintained.
Estimated maturities of existing outstanding debt for each of the next five
years are as follows:
<TABLE>
<S> <C>
1997 $23,811,000
1998 19,702,000
1999 8,970,000
2000 769,000
2001 50,723
-----------
$53,302,723
===========
</TABLE>
_______________
(1) In March 1997 Vacation Break borrowed an additional $4.0 million from the
same lender, the proceeds of which were used to paydown amounts due to
affiliate of Palm Vacation Group. The unit release prices required were
increased with final payment extended to September 1998 and interest payable
monthly at prime plus 1.5%.
Additionally, Vacation Break has entered into a participation construction
mortgage loan agreement to finance the construction of the Ocean Palms phase of
the Sea Gardens project. The maximum to be borrowed will be $13.0 million (none
outstanding at December 31, 1996) with sixty percent of the loan bearing
interest at prime plus 1.0% and forty percent of the loan bearing interest at
prime plus 2% with interest capitalized during construction and paid monthly
thereafter. Specific unit-week release prices required for each unit-week sold
with final payment due November 2000. Collateralized by land, buildings and
vacation ownership development costs.
FINANCING AGREEMENTS. Under the terms of the revolving lines of credit
agreements, Vacation Break may borrow up to 75% to 85% of the balances of
pledged VOI receivables relating to the sales of completed units. Additionally,
the revolving lines of credit agreements allow Vacation Break to borrow up to
60% to 65% of the balances of pledged VOI receivables for units under
construction (presold units). The loans must be repaid over 4 to 8.5 year
periods from the last borrowing or when the availability expires. The following
is a summary of the $77,500,000 borrowings available and outstanding debt at
December 31, 1996 under these credit agreements:
<TABLE>
<CAPTION>
AVAILABILITY PRESOLD UNITS
EXPIRATION TOTAL ------------------------
AVAILABILITY DATE BORROWINGS AVAILABILITY BORROWINGS
- ------------------ ---------------- ------------ ------------ ----------
<C> <S> <C> <C> <C>
$30,000,000 December 1997 $13,864,981 $ 4,500,000 $ --
15,000,000 August 1997 6,510,904 7,000,000 --
15,000,000 March 1998 11,568,821 3,000,000 --
7,500,000 May 1996 4,576,943 -- --
5,000,000 May 1996 3,629,454 -- --
5,000,000 September 1997 2,243,072 3,000,000 --
----------- ----------- ----------- ----------
$77,500,000 $42,394,175 $17,500,000 $ --
=========== =========== =========== ==========
</TABLE>
Vacation Break is currently extending the availability dates for borrowings
through 1997 for the availability that expired in May 1996.
F-15
<PAGE>
12. CAPITAL LEASE OBLIGATIONS
Future minimum non-cancelable lease payments for equipment under capital
leases as of December 31, 1996 together with the capital lease obligations are:
<TABLE>
<S> <C>
1997 $ 626,208
1998 619,899
1999 241,106
2000 66,876
----------
Total minimum payments 1,554,089
Interest amount (204,663)
----------
Capital lease obligations $1,349,426
==========
</TABLE>
13. INCOME TAXES
Prior to November 1995, Vacation Break and its consolidated subsidiaries
were either taxed as regular corporations at the corporate level or elected to
be taxed as S Corporations under provisions of the Internal Revenue Code. The
consolidated subsidiaries, which were taxed as S Corporations prior to November
1995, were not subject to federal and state income taxes at the corporate level.
Net income, as presented in the accompanying consolidated financial statements,
includes a provision (benefit) for income taxes for the entities which are
subject to federal and state income taxes at the corporate level.
The provision (benefit) for income taxes for Vacation Break and its
consolidated subsidiaries consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
Current:
Federal $ (37,346) $ (7,097) $ --
State (9,069) (1,181) --
--------- ---------- ----------
(46,415) (8,278) --
--------- ---------- ----------
Deferred:
Federal (442,285) 2,679,399 3,501,860
State (106,780) 445,588 207,579
--------- ---------- ----------
(549,065) 3,124,987 3,709,439
--------- ---------- ----------
Provision (benefit) for income taxes $(595,480) $3,116,709 $3,709,439
========= ========== ==========
</TABLE>
The significant components of the net deferred tax (liability) asset were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 1,030,385 $ 747,280
Allowance for doubtful accounts 668,845 856,370
Deferred revenue 5,115,131 6,573,190
Vacation ownership interests held for sale 385,920 101,953
Other 11,680 50,494
Net operating loss carryforwards 2,918,255 5,029,521
State tax -- 78,611
</TABLE>
F-16
<PAGE>
<TABLE>
<S> <C> <C>
Valuation allowance (44,338) (44,338)
------------ ------------
10,085,878 13,393,081
------------ ------------
Deferred tax liabilities:
Property and equipment (452,056) (707,459)
Installment method of accounting for income tax
reporting purposes (10,911,802) (17,024,508)
Conversion to accrual method of accounting (762,538) (520,441)
Investment in partnership (457,570) (1,348,200)
------------ ------------
(12,583,966) (19,600,608)
------------ ------------
Net deferred tax liability $ (2,498,088) $ (6,207,527)
============ ============
</TABLE>
Vacation Break provides a valuation allowance against deferred tax assets
if, based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. Vacation Break and
its consolidated subsidiaries have established a valuation allowance against
deferred tax assets of $44,338 at December 31, 1995 and 1996. At December 31,
1996, Vacation Break has net operating losses available for carryforward of
approximately $13,400,000 and $8,070,000 for federal and state purposes,
respectively. Such carryforwards expire beginning in the year 2006.
The reconciliation between the statutory provision for income taxes and the
actual provision (benefit) for income taxes is shown as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income tax at federal statutory rate $ 4,090,541 $ 3,209,519 $3,832,204
State taxes, net of federal benefit (75,302) 288,871 134,926
(Decrease) increase in valuation allowance (445,390) (68,859) --
Income not subject to federal and state income
tax (4,128,599) (3,413,985) (261,476)
Deferred taxes recorded due to change in tax
status -- 3,090,000 --
Nontaxable income (36,730) -- --
Nondeductible expenses -- 11,163 3,785
----------- ----------- ----------
Provision (benefit for income taxes) $ (595,480) $ 3,116,709 $3,709,439
=========== =========== ==========
</TABLE>
Prior to the consummation of the initial public offering ("IPO"), the S
Corporations in the affiliated group entered into S Corporation Tax Allocation
and Indemnification Agreements (the "Tax Agreements") with their sole
stockholder prior to November 1995, relating to their respective income tax
liabilities. Because the S Corporations became subject to corporate income
taxation on November 1, 1995, the reallocation of income and deductions between
the periods during which the entities were treated as S Corporations and the
periods during which the entities will be subject to corporate income taxation
may increase the taxable income of one party while decreasing that of another
party. Subject to certain limitations, the Tax Agreements provide that the
stockholder will be indemnified by the entities with respect to federal and
state income taxes (plus interest and penalties) shifted from an S Corporation
taxable year subsequent to the consummation of this offering to a taxable year
in which the company was an S Corporation, and the entities will be indemnified
by the stockholder with respect to federal and state income taxes (plus interest
and penalties) shifted from an S Corporation taxable year to a Vacation Break
taxable year subsequent to the consummation of the IPO. Any payment made by the
entities to the stockholder pursuant to the Tax Agreements may be considered by
the Internal Revenue Service or the state taxing authorities to be nondeductible
by the entities for income tax purposes.
F-17
<PAGE>
14. PRO FORMA DISCLOSURES
PRO FORMA INCOME TAXES. As described in Note 2, prior to November 1995,
some of Vacation Break's consolidated subsidiaries elected to be taxed as S
Corporations under provisions of the Internal Revenue Code. On October 31,
1995, those S Corporations terminated their S Corporation elections and,
accordingly, became subject to federal and state income taxes. Upon termination
of the S Corporation elections, deferred income taxes reflecting the tax effect
of temporary differences between Vacation Break's financial statement and tax
bases of certain assets and liabilities became a net liability of Vacation Break
and are reflected on the consolidated balance sheet with a corresponding non-
recurring expense in the consolidated statement of income. Deferred taxes
relate primarily to accrued expenses, accounts receivable, deferred income, the
capitalization of costs to vacation ownership interests and the use of the
installment method of accounting for income tax reporting purposes. The amount
of such deferred tax liability computed using the asset and liability method of
accounting for deferred income taxes was $3,090,000 at October 31, 1995.
The following unaudited information reflects the reconciliation between the
statutory provision for income taxes and the actual provision relating to the
income tax expense that Vacation Break's consolidated subsidiaries incurred for
the tax years ended December 31, 1994 and 1995 and the pro forma income tax
expense that would have been incurred had they been subject to federal and state
income taxes for the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1995
---------------- ----------------
<S> <C> <C>
Income tax at federal statutory rate $ 4,090,541(1) $ 3,209,519(1)
State taxes, net of federal benefit 420,741 330,122
Change in valuation allowance (445,390) (68,859)
Foreign entities not yet subject to income tax 38,525 (131,191)
Other (181,672) (14,993)
------------ ------------
Provision for income taxes $ 3,922,745(1) $ 3,324,598(1)
============ ============
</TABLE>
_______________
(1) Pro Forma provision for income taxes, as calculated, assuming a combined
Federal and state income tax rate of 38.6% for the years ended December 31,
1994 and 1995.
PRO FORMA NET INCOME PER SHARE. Pro forma net income per share has been
computed by dividing pro forma net income by the weighted average number of
common shares outstanding, after a 65,000-to-1 stock split effected prior to the
closing of the aforementioned offering and the issuance of 1,800,000 shares of
Common Stock at December 27, 1995.
15. OPERATING LEASES
Vacation Break leases office space located in Fort Lauderdale, Florida and
Johnson City, Tennessee under operating leases expiring in various years through
2001.
Minimum future rental payments under various non-cancelable operating
leases as of December 31, 1996, for each of the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
CONSOLIDATED AFFILIATED
COMPANIES COMPANY TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
1997 $1,143,660 $ 916,595 $2,060,255
1998 1,021,046 853,353 1,874,399
1999 931,272 790,110 1,721,382
2000 507,858 726,867 1,234,725
2001 31,130 316,653 347,783
---------- ---------- ----------
Total future minimum
rental payments $3,634,966 $3,603,578 $7,238,544
========== ========== ==========
</TABLE>
F-18
<PAGE>
For the years ended December 31, 1994, 1995 and 1996 rent expense was,
$1,622,000, $1,728,000 and $2,182,000, respectively.
Lease payments to the affiliated company represent a lease obligation
associated with a hotel property operated by a subsidiary of Vacation Break and
owned by Port Lucaya Resort Company Limited, a 50% owned unconsolidated
subsidiary reported on the equity method of accounting.
16. EMPLOYEE BENEFITS
Vacation Break has provided a 401(k) plan option to employees effective
January 1, 1994. This plan allows employees to contribute up to 15 % of their
earnings to the plan on a pre-tax basis. Full time employees are eligible for
enrollment into this plan after the completion of one year of service with
Vacation Break. Employee contributions are limited to the current annual
maximum contribution allowed by the Internal Revenue Service. Vacation Break
matches 50% of employee contributions up to a maximum of 3% of employee
earnings. Vacation Break contributed approximately $24,000, $25,000 and $72,000
to the plan for the years ended December 31, 1994, 1995 and 1996, respectively.
17. STOCK OPTION PLAN
Vacation Break's 1995 Stock Option Plan (the "1995 Plan") provides for the
granting of incentive stock options, which may only be granted to employees and
of non-statutory stock options, which may also be granted to consultants and to
independent contractors. The Chairman of the Board and Chief Executive Officer
has been excluded from participation in the 1995 Plan. Prices of the options
are determined by the Board of Directors. However, the exercise price of
options granted can not be less than the fair market value of Vacation Break's
common stock on the date of the grant, except that incentive stock granted to a
10% stockholder must have an exercise price of at least 110% of the fair market
value of Vacation Break's common stock at the date of the grant. Options vest
over 0 to 3 year periods and expire either 5 years or 10 years from date of
grant.
Under the 1995 Plan, 600,000 common shares were reserved for issuance upon
exercise of the options. The Board of Directors granted options to purchase
364,500 common shares to employees when Vacation Break went public in December
1995.
On March 25, 1996, the Board of Directors granted options to purchase
189,025 common shares to employees of Vacation Break and 8,000 common shares and
another 2,000 common shares in August 1996 to the outside members of the Board
of Directors.
Vacation Break has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the 1995 plan. Had compensation cost for the 1995 plan been
determined based on the fair value at the grant dates for the awards consistent
with the provisions of SFAS No. 123, Vacation Break's net income and net income
per share would have been reduced to the pro forma amounts indicated below:
Information regarding Vacation Break's stock option plan is summarized
below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
-------------- -----------
<S> <C> <C>
Net income
As reported $5,845,455(1) $7,239,715
========== ==========
Pro forma $5,614,378 $6,774,122
========== ==========
Net income per share
As reported
Primary $ 0.90(1) $ 0.82
========== ==========
Assuming full dilution $ 0.80
==========
</TABLE>
F-19
<PAGE>
<TABLE>
<S> <C> <C>
Pro forma
Primary $ 0.86 $ 0.77
========== ==========
Assuming full dilution $ 0.75
==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: Dividend yield of 0%, expected volatility of 45%, risk-free
interest rates of 6.25% and 8.0% and expected lives of 5 years.
(1) Represents pro forma (unaudited) net income and net income per share
assuming that Vacation Break had C Corporation status during 1995 and that
the common shares were outstanding for the entire year.
<TABLE>
<CAPTION>
1995 STOCK OPTION PLAN
------------------------
WEIGHTED AVG.
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C>
Outstanding at December 31, 1994 -- --
Granted 364,500 $5.10
Exercised -- --
Canceled (15,500) $5.00
-------
Outstanding at December 31, 1995 349,000 $5.11
Granted 199,025 $6.54
Exercised (23,725) $6.13
Canceled (10,283) $6.17
-------
Outstanding at December 31, 1996 514,017 $5.47
=======
Exercisable at December 31, 1996 254,668 $5.56
=======
Options available to grant at 36,475
December 31, 1996 =======
</TABLE>
Option price range at December 31, 1996 was $5.00 to $6.50
18. RELATED PARTIES
The majority stockholder of Vacation Break owns a 49 % interest in the
Coconut Bay Resort Properties, Inc. ("Coconut Bay"), a VOI facility. For the
years ended December 31, 1994, 1995 and 1996, Vacation Break received sales
commissions relating to VOI sales of $200,000, $128,000 and $54,000,
respectively, from Coconut Bay.
During 1993, Coconut Bay loaned Vacation Break $1,250,000 to be repaid in
annual installments of $125,000. The effective interest rates on this note were
12.25% and 11.25% at December 31, 1995 and 1996, respectively. At December
31, 1996, the balance owing on this note amounted to approximately $533,000,
including accrued interest.
The principal stockholder of Vacation Break also owns a 33 % interest in
Intracoastal Resorts, Inc., which develops and sells VOIs. For the years ended
December 31, 1994, 1995 and 1996, Vacation Break received sales commissions
from Intracoastal Resorts, Inc. relating to VOI sales of $2,000,000, $1,381,000
and $20,000, respectively.
19. CASH DEPOSITS IN EXCESS OF INSURED LIMITS
Vacation Break maintains cash balances (including restricted cash and cash
in escrow) and certificates of deposit at several financial institutions in
excess of the amounts insured by the Federal Deposit Insurance Corporation. At
December 31, 1995 and 1996, Vacation Break's uninsured cash balances and
certificates of deposit in excess of insured
F-20
<PAGE>
amounts totaled $10,617,556 and $12,737,574, respectively. Vacation Break has
not historically suffered any losses from its uninsured cash balances.
20. CASH FLOWS
Cash paid during the years ended December 31, 1994, 1995 and 1996 for
interest, net of amounts capitalized, amounted to, $1,383,721, $1,472,455 and
$5,015,784, respectively.
Income taxes paid during the years ended December 31, 1994, 1995 and 1996
were $480,000, $0, and $50,000, respectively.
Significant non-cash investing and financing activities are as follows:
During 1996, property and equipment having a net book value of $1,110,494
were transferred to "Vacation ownership interest held for sale and real estate
and development costs."
During December 1995, a $3,388,205 distribution payable was declared to the
majority stockholder. This amount represented federal and state taxes payable
to the majority stockholder for taxable S Corporation income included in his
individual tax returns through termination of the S Corporation elections. This
amount was distributed to the stockholder during 1996.
During the years ended December 31, 1994, 1995, and 1996, Vacation Break
entered into capital lease agreements for $1,327,459, $456,526 and $457,272,
respectively.
21. STOCKHOLDERS' EQUITY
The IPO registration of 1,800,000 shares of common stock of Vacation Break
included an over-allotment option of 270,000 additional shares of common stock
to the Representatives at the initial offering price of $5.00 per share. During
January 1996, the Representatives purchased these shares at the offering price
less Representatives' discount and non-accountable expense allowance. Vacation
Break's proceeds from these sales were $1,182,489.
Vacation Break has granted warrants to the Representatives to purchase from
Vacation Break 180,000 shares of Common Stock. These warrants are initially
exercisable at an exercise price of $6.00 per share commencing one year from the
consummation of the Initial Public Offering.
The consolidated financial statements of Vacation Break are comprised of a
number of companies. During each of the years in the three year period ended
December 31, 1996, new companies were added to the consolidated financial
statements in order to augment existing operations. A summary of such additions
follows:
. During 1994, two companies were added to Vacation Break's consolidated
financial statements, Vacation Break Construction, Inc. was formed (500
common shares; $1 par value) to manage the construction and renovation
of additional vacation ownership interests facilities. Vacation Break
Resorts, Inc. was formed (500 common shares; $1 par value) to purchase,
develop and sell the Santa Barbara Resort and Yacht Club.
. During 1995, four companies were added to Vacation Break's consolidated
financial statements. Each company's capital consisted of 500 shares of
common stock; par value $1. Resorts Title, Inc. was formed to process
the legal and title work operations for the various developer operations
under the control of Vacation Break U.S.A., Inc. or its wholly-owned
subsidiaries. Vacation Break Resorts at Palm Aire, Inc. was formed to
hold a 55% interest in Palm Vacation Group, a Florida general
partnership, which purchased and is developing and selling VOIs at the
Palm Aire Resort and Spa located in Pompano Beach, Florida. Vacation
Break at Star Island, Inc. was formed to acquire, develop and sell VOIs
at the Star Island facility in Orlando, Florida. Vacation Break Welcome
Centers, Inc. was formed to develop lead generation and tour processing
operations in the Orlando, Florida area.
. During 1996, three companies were added to Vacation Break's consolidated
financial statements. Vacation Break Resorts at Ocean Ranch, Inc. was
formed to hold a 55% interest in Ocean Ranch Vacation Group,
F-21
<PAGE>
a Florida general partnership, which purchased and is developing VOIs at
the Ocean Ranch property in Pompano Beach, Florida. Vacation Break
Marketing Consultants, Inc. was formed to hold a 25% interest in
Vacation Marketing Consultants, Inc. whose purpose is to generate
prospects to purchase VOIs.
22. COMMITMENTS AND CONTINGENCIES
Vacation Break is currently a defendant in certain litigation arising in
the ordinary course of business. In the opinion of management, based on the
advice of legal counsel, the outcome of these actions will not have a material
effect on the financial statements of Vacation Break.
Vacation Break is a party to two state actions related to Vacation Break's
marketing program alleging that Vacation Break violated their consumer
protection or telemarketing laws. Vacation Break is and will actively attempt
to settle with each of these states over the next few months and does not
anticipate its legal and settlement costs will have a material impact on the
results of operations, liquidity or financial condition of Vacation Break.
Accordingly, no provision has been recorded in the financial statements. As of
September 30, 1997, Vacation Break settled proceedings with the counties of Napa
and Ventura, California and the States of California and Maryland, New York,
Connecticut, Massachusetts, Texas, North Carolina, West Virginia, New Mexico,
Wisconsin, Minnesota, Illinois and Washington relating to the same marketing
practice as the pending proceedings. In connection with such settlements
(excluding the counties of Napa and Ventura, California and the States of
California and Maryland), Vacation Break has agreed to provide a fund of up to
$225,000 to satisfy claims from eligible consumers who submit a written request
for a refund within a 60 day period of time. In addition, Vacation Break has
also agreed to pay the states an aggregate of $332,500 in reimbursement of their
investigative costs and related fees.
23. SIGNIFICANT RISK FACTORS
The ability of Vacation Break to expand its business through the
acquisition and development of new resort properties, as well as Vacation
Break's ability to provide attractive financing to its customers, depends to a
large extent upon the availability of financing at acceptable interest rates. A
significant decrease in the availability of such financing or a significant
increase in interest rates could have a material adverse impact on Vacation
Break's business.
Vacation Break's VOI properties are concentrated in the South and Central
Florida areas. A natural disaster, such as a hurricane, could have an adverse
impact on Vacation Break's ability to conduct business.
24. SUBSEQUENT EVENTS
Vacation Break has entered into an Agreement and Plan of Merger (the
"Acquisition Agreement") dated as of November 26, 1996, as amended through March
22, 1997, among Vacation Break, Westview Resorts Corporation ("Westview"),
Williamsburg Plantation, Inc. ("Williamsburg"), The Berkley Group, Inc.
("Berkley"), and Ocean Ranch Development, Inc. ("Ocean Ranch", and collectively
with Westview, Williamsburg and Berkley, the "Lambert Companies"). The Lambert
Companies are all majority owned and/or controlled by James E. Lambert.
Pursuant to the Acquisition Agreement, Vacation Break will acquire existing
developments and resorts at Bonaventure at Westview in Ft. Lauderdale and
Williamsburg, Virginia. In addition, Vacation Break will acquire (i) Berkley
Vacation Resorts, Inc. ("BVRI"), and Cocowalk Development, Inc. ("CDI") both of
which are wholly-owned subsidiaries of Berkley which own land adjacent to the
Bonaventure resort, (ii) a 45% interest in each of two properties, the Palm Aire
Resort and Spa ("Palm Aire") such 45% interest held by a wholly-owned subsidiary
of Berkley, and Royal Vista ("Royal Vista") (formerly known as Ocean Ranch) in
each of which Vacation Break currently owns the remaining 55% interest and (iii)
a 25% interest in Daily Management, Inc. ("DMI").
Vacation Break will (i) issue a total of 8.7 million shares of Vacation
Break's Common Stock, 7.7 million of which (the "Lambert Shares") will be issued
to James E. Lambert and members of his family and 1.0 million of which (the
"Berkley Shares," and together with the Lambert Shares, the "Merger Shares")
will be issued to Berkley, (ii) distribute $19.0 million in cash to James E.
Lambert, and (iii) distribute to Berkley in cash an amount equal to the actual
costs incurred for the land and construction in progress on the date of closing
of the transactions contemplated by the Acquisition Agreement for the land owned
by BVRI and CDI.
F-22
<PAGE>
Consummation of the transaction is subject to, among other things, approval
of Vacation Break's stockholders. Upon approval of the transaction, Vacation
Break's Board of Directors will consist of two designees chosen by James E.
Lambert, one designee chosen by the Berkley Group, three designees chosen by
Vacation Break and two independent designees to be chosen by James E. Lambert
and Berkley.
In connection with the Mergers, Vacation Break and Berkley will enter into
a Marketing, Sales and Administrative Services Agreement pursuant to which
Berkley will continue to perform marketing and related services for Vacation
Break at Westview and Williamsburg. In addition, pursuant to an employment
agreement to be entered into between Vacation Break and James E. Lambert, Mr.
Lambert will serve as Vacation Break's Chief Executive Officer for an initial
period of three years following consummation of the transactions contemplated by
the Acquisition Agreement.
As a result of the Acquisition Agreement, the Lambert Companies, including
James E. Lambert, will own approximately 50.3% of the outstanding shares of
Common Stock of Vacation Break.
On March 28, 1997, Vacation Break was served with a lawsuit filed in the
Circuit Court for Pinellas County, Florida by Market Response Group and Laser
Company, Inc. (MRG&L) the plaintiff, against Vacation Break and Kevin M.
Sheehan, its President. MRG&L was a former vendor to Vacation Break with
respect to direct mail marketing. The complaint alleges that the defendants, in
concert with other companies, conspired to boycott MRG&L and to fix prices for
mailings in violation of the Florida Antitrust Act, and in concert with others,
engaged in various acts of unfair competition, deceptive trade practices and
common law conspiracy. The complaint also alleges that the defendants breached
various provisions of a Sales and Marketing Agreement with plaintiff and
interfered with and caused other companies to breach Sales and Marketing
Agreements with MRG&L and that the defendants misappropriated proprietary
information. The complaint also demands that Vacation Break indemnify plaintiff
for costs incurred by MRG&L to defend a 1996 Federal Trade Commission action.
MRG&L claims to have suffered substantial damages. The actual aggregate amount
of damages claimed is not calculable but appears to be in excess of $50 million.
Vacation Break intends to defend each and every claim vigorously, and will file
counterclaims if appropriate. Vacation Break's management does not believe that
the resolution of the lawsuit filed by MRG&L will have a material adverse impact
on the financial condition or liquidity of Vacation Break; however, it should be
noted that such litigation is in the early stages of discovery.
F-23
<PAGE>
EXHIBIT 11.1
VACATION BREAK U.S.A., INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1996
----------- ------------------------
FULLY
PROFORMA PRIMARY DILUTED
----------- ----------- -----------
<S> <C> <C> <C>
Actual number of common shares outstanding 8,300,000 8,593,724 8,593,724
========== ========== ==========
Weighted average number of common shares issued and
outstanding 6,524,658 8,572,934 8,572,934
Common stock equivalents computed under the Treasury
Stock method -- 270,313 518,917
---------- ---------- ----------
6,524,658 8,843,247 9,091,851
========== ========== ==========
Net income $5,845,455 $7,239,715 $7,239,715
========== ========== ==========
Net income per share $ 0.90 $ 0.82 $ 0.80
========== ========== ==========
</TABLE>
F-24
<PAGE>
VACATION BREAK U.S.A., INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 31, 1997
1996 (UNAUDITED)
------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................................... $ 6,307,928 $ 3,649,324
Certificates of deposit......................................................... 124,235 124,235
Restricted Cash................................................................. 1,647,236 1,530,531
Cash in escrow from vacation ownership interests sales.......................... 8,055,543 18,332,988
Mortgages receivable on vacation ownership interests sales - net................ 73,028,510 90,101,757
Receivables - net............................................................... 3,757,385 2,721,536
Note receivable................................................................. 1,993,883 1,477,014
Vacation ownership interests held for sale and real estate and
development costs............................................................. 25,310,450 22,344,854
Prepaid expenses and other assets............................................... 5,919,983 5,988,777
Investment in unconsolidated affiliates......................................... 1,946,917 1,918,431
Due from unconsolidated affiliates.............................................. 54,369 87,628
Income tax receivable........................................................... 58,238 58,238
Property and equipment - net.................................................... 10,274,870 9,694,731
------------ ------------
TOTAL ASSETS............................................................... $138,479,547 $158,030,044
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities........................................ $ 13,210,543 $ 21,083,113
Due to unconsolidated affiliates................................................ 5,578 --
Notes and mortgages payable..................................................... 53,302,723 63,799,292
Note payable to unconsolidated affiliate........................................ 532,778 435,000
Capital lease obligations....................................................... 1,349,426 1,236,176
Deferred income taxes........................................................... 6,207,527 9,163,041
Advance deposits................................................................ 2,948,884 3,486,872
Deferred revenues - vacation packages........................................... 16,588,264 12,493,833
Deferred revenues - vacation ownership interests................................ 6,407,050 5,696,440
Due to affiliate of joint venture............................................... 7,517,719 3,822,685
Minority interest in joint venture.............................................. 2,582,436 3,766,146
------------ ------------
TOTAL LIABILITIES.......................................................... 110,652,928 124,982,598
------------ ------------
Commitments and contingencies (Note 6)
Stockholders' Equity:
Preferred stock ($.01 par value; 25,000,000 shares authorized; no shares
issued and outstanding at December 31, 1996 and June 30, 1997,
respectively)............................................................... -- --
Common Stock ($.01 par value; 25,000,000 shares authorized; 8,593,725 and
8,615,141 shares issued and outstanding at December 31, 1996 and June 30,
1997, respectively.......................................................... 85,937 86,151
Additional paid in capital.................................................... 13,414,457 13,540,949
Retained earnings............................................................. 14,326,225 19,420,346
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 27,826,619 33,047,446
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $138,479,547 $158,030,044
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
F-25
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1996 1997 1996 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Vacation ownership interests................................. $32,908,826 $28,219,636 $48,825,826 $50,979,066
Resort operations and other.................................. 3,543,025 2,558,402 7,547,025 5,892,399
Interest earned on mortgages receivable...................... 1,998,721 3,011,920 3,732,720 5,883,757
Commissions earned on marketing agreements................... 526,957 -- 1,068,957 --
----------- ----------- ----------- -----------
38,977,529 33,789,958 61,174,528 62,755,222
----------- ----------- ----------- -----------
Costs and operating expenses:
Vacation ownership interests - cost of units sold............ 9,987,641 7,941,238 13,871,051 14,622,633
Vacation ownership interests - sales & marketing costs....... 11,717,369 10,747,363 18,748,959 20,717,805
Resort operations and other.................................. 3,657,138 2,599,749 7,558,138 5,326,626
Interest expense on financed mortgages receivable............ 499,557 1,275,337 1,028,557 2,094,674
Commissions and related expenses on marketing agreements..... 510,698 -- 806,698 --
Interest expense - other..................................... 119,282 170,838 585,282 342,052
General and administrative................................... 3,593,209 3,901,615 6,432,209 7,148,035
Costs related to terminated merger........................... -- -- -- 463,933
Provision for doubtful accounts.............................. 458,208 1,154,494 655,208 1,808,049
Depreciation................................................. 519,680 549,224 1,088,680 1,078,070
----------- ----------- ----------- -----------
31,062,782 28,339,858 50,774,782 53,601,877
----------- ----------- ----------- -----------
Income from operations before income taxes, minority interest
and equity in earnings of unconsolidated affiliate.......... 7,914,747 5,450,100 10,399,746 9,153,345
Minority interest in earnings of joint ventures............... (208,964) (983,247) (578,964) (1,183,710)
Equity in earnings of unconsolidated affiliate................ 45,000 40,000 75,000 80,000
----------- ----------- ----------- -----------
Income before income taxes.................................... 7,750,783 4,506,853 9,895,782 8,049,635
Provision for income taxes.................................... (2,811,833) (1,698,680) (3,468,833) (2,955,514)
----------- ----------- ----------- -----------
Net income.................................................... $ 4,938,950 $ 2,808,173 $ 6,426,949 $ 5,094,121
=========== =========== =========== ===========
Net income per share
Primary....................................................... $ 0.56 $ 0.33 $ 0.73 $ 0.57
=========== =========== =========== ===========
Weighted average common stock and common stock equivalents
outstanding
Primary....................................................... 8,865,391 8,612,889 8,756,236 8,885,399
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements
F-26
<PAGE>
VACATION BREAK U.S.A., INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Cash Flow from Operating Activities:
Net income $ 6,426,949 $ 5,094,121
Adjustments to reconcile net income to net cash (provided
by) used in operating activities:
Provision for doubtful accounts 655,208 1,808,049
Depreciation and amortization 1,088,680 1,078,070
Equity in earnings of unconsolidated affiliate (75,000) (80,000)
Write down of investment in unconsolidated affiliate -- 108,486
Provision for deferred income taxes 3,410,595 2,955,514
Minority interest in earnings of joint ventures 578,964 1,183,710
Changes in operating assets and liabilities:
Mortgages receivable on vacation ownership interests sales (16,781,565) (18,881,296)
Receivables (963,504) 1,035,849
Note receivable -- 516,869
Vacation ownership interests held for sale and real estate and
development costs (2,296,007) 2,965,596
Prepaid expenses and other assets (408,934) (68,794)
Due to/from unconsolidated affiliates - net (55,278) (38,837)
Accounts payable and accrued liabilities 4,379,985 7,872,570
Deferred revenues - vacation ownership interests (7,720,213) (710,610)
Deferred revenues - vacation packages 1,433,542 (4,094,431)
Advance deposits (981,092) 537,988
------------ ------------
Net cash provided by (used in) operating activities (11,307,670) 1,282,854
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (1,494,038) (497,931)
Additions to restricted cash (2,478,894) (454,077)
Releases of restricted cash 3,535,316 570,782
Increase in cash in escrow from vacation ownership
interests sales - net (4,837,662) (10,277,445)
Maturities of certificates of deposit 629,507 --
------------ ------------
Net cash used in investing activities (4,645,771) (10,658,671)
------------ ------------
Cash Flows from Financing Activities:
Borrowings of notes and mortgages payable 23,887,334 30,186,767
Repayments of notes and mortgages payable (11,252,695) (19,690,198)
Borrowings from affiliate of joint ventures 897,583 --
Repayments to affiliate of joint ventures -- (3,695,034)
Joint venture partner's capital contributions 1,802,159 --
Repayment of note payable to unconsolidated affiliate -- (97,778)
Payments on capital lease obligations (186,172) (113,250)
Stockholder's income tax distributions (1,130,793) --
Proceeds from the exercise of employee stock options -- 126,706
Proceeds from issuance of common stock 1,182,000 --
------------ ------------
Net cash provided by financing activities 15,199,416 6,717,213
------------ ------------
Net decrease in cash and cash equivalents (754,025) (2,658,604)
Cash and cash equivalents at beginning of period 8,499,386 6,307,928
------------ ------------
Cash and cash equivalents at end of period $ 7,745,361 $ 3,649,324
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
F-27
<PAGE>
VACATION BREAK U.S.A., INC. AND SUBSIDIARIES
NOTES TO INTERIM PERIOD CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Vacation Break U.S.A., Inc. and subsidiaries ("Vacation Break") is engaged
in the sale of vacation packages, hotel operations and the renovation,
construction, sale and financing of resort vacation ownership interests (VOIs).
At June 30, 1997 the consolidated financial statements include the accounts of
Vacation Break and its consolidated subsidiaries.
In the opinion of management of Vacation Break, the unaudited consolidated
financial statements include all adjustments and accruals necessary to present
fairly Vacation Break's consolidated financial position at June 30, 1997 and the
consolidated results of its operations for the three and six months ended June
30, 1997 and 1996 and its statement of cash flows for the six month periods
ended June 30, 1997 and 1996. The interim results of operations are not
necessarily indicative of the results which may occur for the year. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. All significant intercompany accounts and transactions
are eliminated in consolidation. These unaudited consolidated condensed
financial statements and notes thereto should be read in conjunction with the
fiscal year end consolidated financial statements and notes thereto contained
elsewhere herein. See "Index to Consolidated Financial Statements of Vacation
Break.".
2. RECLASSIFICATIONS
Certain amounts in Vacation Break's 1996 financial statements have been
reclassified to conform to the 1997 presentation. Vacation package revenues,
less vacation package costs, have been included as vacation ownership interests
- - sales and marketing costs in the statement of operations for the three and six
months ended June 30, 1996. This presentation more closely correlates to the
presentation method of other companies in the vacation ownership industry.
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128).
SFAS 128 specifies new standards designed to improve the earnings per share
("EPS") information provided in financial statements by simplifying the existing
computational guidelines. Some of the changes made to simplify EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, (b) eliminating the modified treasury stock method and the three
percent materiality provision, and (c) revising the contingent share provisions
and the supplemental EPS data requirements. SFAS 128 also makes a number of
changes to existing disclosure requirements. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes standards for reporting and display of comprehensive
income. The purpose of reporting comprehensive income is to present a measure
of all changes in equity that result from recognized transactions and other
economic events of the period other than transactions with owners in their
capacity as owners. SFAS 130 requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. SFAS 130 is effective for fiscal years beginning after December 15,
1997, with earlier application permitted. Vacation Break has not yet determined
the impact of the implementation of SFAS 130.
In June 1997 the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. Once operating segments have been
determined, SFAS 131 provides for a two-tier test for determining those
operating segments that would need to be disclosed for external reporting
purposes. In addition to providing the required disclosures for reportable
segments, SFAS 131 also requires disclosure of certain "second level"
information by
F-28
<PAGE>
geographic area and for products/services. SFAS 131 also makes a number of
changes to existing disclosure requirements. SFAS 131 is effective for fiscal
years beginning after December 15, 1997, with earlier application encouraged.
Vacation Break has not yet determined the impact of the implementation of SFAS
131.
4. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Such estimates consist of the allowances for doubtful
accounts on mortgages receivable on VOI sales and receivables, revenue
recognition under the percentage of completion method on VOI sales, depreciation
and amortization of property and equipment, accrued liabilities and deferred
revenues on vacation packages and VOIs. Actual results could differ from those
estimates.
5. NET INCOME PER SHARE
Earnings per share amounts are based upon the weighted average number of
common stock and common stock equivalent shares. Common equivalent shares are
excluded from the computation for periods in which they have an anti-dilutive
effect. The dilutive effect of common stock equivalents for the computation of
earnings per share is less than 3% for the three and six months ended June 30,
1996 and the three months ended June 30, 1997. The use of common stock
equivalents for the EPS computation was anti-dilutive to the computation of the
fully diluted EPS for the six months ended June 30, 1997. Accordingly, all
earnings per share computations are reported as primary. During the six months
ended June 30, 1997, approximately 270,000 options were granted to employees,
60,000 options were granted to outside directors and 30,000 warrants were
granted to a financial advisor. An employee of the financial advisor is a
member of the Vacation Break Board of Directors.
6. COMMITMENTS AND CONTINGENCIES
Vacation Break is a party to two state actions related to Vacation Break's
marketing program alleging that Vacation Break violated their consumer
protection or telemarketing laws. Vacation Break is and will actively attempt
to settle with each of these states over the next several months and does not
anticipate its legal and settlement costs will have a material impact on the
results of operations, liquidity or financial condition of Vacation Break. As
of September 30, 1997, Vacation Break settled proceedings with the counties of
Napa and Ventura, California and the States of California, Maryland, New York,
Connecticut, Massachusetts, Texas, North Carolina, West Virginia, New Mexico,
Wisconsin, Minnesota, Illinois and Washington relating to the same marketing
practice as the pending proceedings. In connection with such settlements
(excluding the counties of Napa and Ventura, California and the States of
California and Maryland), Vacation Break has agreed to provide a fund of up to
$225,000 to satisfy claims from eligible consumers who submit a written request
for a refund within a 60 day period of time. In addition, Vacation Break has
also agreed to pay the states an aggregate of $332,500 in reimbursement of their
investigative costs and related fees.
On March 28, 1997, a lawsuit was filed against Vacation Break and Kevin M.
Sheehan, its President, in the Circuit Court for Pinellas County, Florida by
Market Response Group and Laser Company, Inc. (MRG&L). The complaint alleges
that the defendants, in concert with other companies, conspired to boycott MRG&L
and to fix prices for mailings in violation of the Florida Antitrust Act, and in
concert with others, engaged in various acts of unfair competition, deceptive
trade practices and common law conspiracy. The complaint also alleges that the
defendants breached various provisions of a Sales and Marketing Agreement with
plaintiff and interfered with and caused other companies to breach Sales and
Marketing Agreements with MRG&L and that the defendants misappropriated
proprietary information. The complaint also demands that Vacation Break
indemnify plaintiff for costs incurred by MRG&L to defend a 1996 Federal Trade
Commission action. MRG&L claims to have suffered substantial damages. The
actual aggregate amount of damages claimed is not calculable but appears to be
in excess of $50 million. Vacation Break intends to defend each and every claim
vigorously, and will file counterclaims if and when appropriate. Vacation
Break's management does not believe that the resolution of the lawsuit filed by
MRG&L will have a material adverse impact on the financial condition or
liquidity of Vacation Break; however, it should be noted that such litigation is
in the early stages of discovery.
F-29
<PAGE>
Additionally, Vacation Break is currently a defendant in certain litigation
arising in the ordinary course of business. In the opinion of management, based
on the advice of legal counsel, the outcome of these actions will not have a
material effect on the financial statements of Vacation Break.
7. PRIOR MERGER DISCUSSIONS
In November 1996 Vacation Break announced that it had entered into an
Agreement and Plan of Merger (as amended in March 1997) with various companies
owned or controlled by James E. Lambert. On April 23, 1997 Vacation Break
announced that this Agreement and Plan of Merger had been terminated by mutual
agreement of the parties. Vacation Break had incurred legal, accounting and
various other costs in anticipation of and preparation for the proposed merger.
These costs, which amounted to approximately $0.5 million, have been charged to
the operations of Vacation Break as "Costs related to terminated merger"
included on the statement of operations for the six months ended June 30, 1997.
8. SUBSEQUENT EVENTS
On August 10, 1997, Vacation Break announced that it has entered into a
definitive agreement to merge with Fairfield through a stock exchange
anticipated to be completed in the fourth quarter of 1997. The agreement calls
for Fairfield to issue .6075 shares of common stock in exchange for each share
of Vacation Break's outstanding common stock. Vacation Break will incur
substantial legal, accounting, investment banking and other expenses in
connection with the proposed merger. The completion of the acquisition is
subject to approval by both Fairfield's and Vacation Break's stockholders,
regulatory approvals, as well as the satisfactory receipt of other conditions to
closing.
The following table presents key statistics representing VOI activities in
properties owned by Vacation Break or under marketing and purchase agreements:
<TABLE>
<CAPTION>
SEA SANTA PALM STAR ROYAL
GARDENS (1) BARBARA AIRE ISLAND VISTA (2) TOTAL
------------- -------- ------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Number of VOIs available............. 11,388 4,680 5,564 5,200 5,148 31,980
Net number of VOIs sold through
June 30, 1997...................... 6,954 4,516 3,607 3,622* -- 18,699
Percent sold through June 30, 1997... 61% 96% 65% 70%* 0% 58%
Net number of VOIs sold during the
3 months ended June 30, 1997....... -14(3) 634 1,016 596* -- 2,232
Net number of VOIs sold during the
6 months ended June 30, 1997....... -17(3) 1,127 1,653 1,175* -- 3,938
</TABLE>
___________________
* Includes units sold at properties where revenue and income recognition were
deferred or partially deferred for financial reporting purposes.
(1) Includes 4,368 unit weeks at the Ocean Palms phase under construction.
(2) Acquired in January 1996 - formerly known as "Ocean Ranch."
(3) Unit/weeks returned to inventory through process of foreclosure - net of
such unit/weeks resold.
F-30
<PAGE>
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
among
FAIRFIELD COMMUNITIES, INC.,
FCVB CORP.,
and
VACATION BREAK USA, INC.
Dated as of August 8, 1997
================================================================================
A-1
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
THE MERGER............................ A-4
1.1 The Merger....................................................... A-5
1.2 Closing.......................................................... A-5
1.3 Effective Time................................................... A-5
1.4 Effect of the Merger............................................. A-5
1.5 Articles of Incorporation........................................ A-5
1.6 Bylaws........................................................... A-5
1.7 Directors........................................................ A-5
1.8 Officers......................................................... A-5
ARTICLE II
EFFECTS OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES.......... A-6
2.1 Effect on Capital Stock.......................................... A-6
2.2 Payment for Shares in the Merger................................. A-8
2.3 Fractional Shares................................................ A-10
2.4 Transfer of Shares After the Effective Time...................... A-11
ARTICLE III
REPRESENTATIONS AND WARRANTIES.................... A-11
3.1 Representations and Warranties of Vacation Break................. A-11
3.2 Representations and Warranties of Fairfield and Merger Sub....... A-24
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS.............. A-36
4.1 Conduct of Business by Vacation Break............................ A-36
4.2 Conduct of Business of Fairfield and Merger Sub.................. A-41
ARTICLE V
ADDITIONAL AGREEMENTS........................ A-44
5.1 Preparation of Proxy Statement; Shareholders Meeting............. A-44
5.2 Letters of Vacation Break's Accountants.......................... A-45
5.3 Letters of Fairfield's Accountants............................... A-46
5.4 Certain Actions.................................................. A-46
5.5 Access to Information............................................ A-47
5.6 Reasonable Efforts............................................... A-47
5.7 Fees and Expenses................................................ A-48
5.8 Public Announcements............................................. A-49
5.9 Key Officer Employment Arrangements.............................. A-49
5.10 Stock Exchange Listing........................................... A-49
5.11 Certain Litigation............................................... A-49
A-2
<PAGE>
5.12 Consents........................................................ A-49
5.13 Pooling of Interests............................................ A-49
5.14 Rule 145 Affiliates............................................. A-49
5.15 Tax Treatment................................................... A-50
5.16 New Director.................................................... A-50
5.17 Escrow.......................................................... A-50
5.18 Stock Options................................................... A-50
5.19 D&O Coverage.................................................... A-50
ARTICLE VI
CONDITIONS PRECEDENT........................ A-52
6.1 Conditions to Each Party's Obligation to Effect the Merger....... A-52
6.2 Conditions to Obligations of Vacation Break...................... A-53
6.3 Conditions to Obligations of Fairfield........................... A-54
6.4 Frustration of Closing Conditions................................ A-55
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER.................. A-55
7.1 Termination...................................................... A-55
7.2 Effect of Termination............................................ A-56
7.3 Amendment........................................................ A-56
7.4 Extension; Waiver................................................ A-57
ARTICLE VIII
GENERAL PROVISIONS.......................... A-57
8.1 Nonsurvival of Representations and Warranties.................... A-57
8.2 Notices.......................................................... A-57
8.3 Definitions...................................................... A-58
8.4 Interpretation................................................... A-59
8.5 Counterparts..................................................... A-59
8.6 Entire Agreement; No Third-party Beneficiaries................... A-59
8.7 Governing Law.................................................... A-59
8.8 Assignment....................................................... A-59
8.9 Enforcement...................................................... A-60
A-3
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of August 8, 1997 (this "Agreement"),
among FAIRFIELD COMMUNITIES, INC., a Delaware corporation ("Fairfield"), FCVB
CORP., a Florida corporation and a wholly owned subsidiary of Fairfield ("Merger
Sub") and VACATION BREAK USA, INC., a Florida corporation ("Vacation Break").
WHEREAS, the respective Boards of Directors of Fairfield, Merger Sub and
Vacation Break each have determined that it is in the best interests of their
respective stockholders for Merger Sub to merge with and into Vacation Break
(the "Merger"), upon the terms and subject to the conditions set forth in this
Agreement;
WHEREAS, the respective Board of Directors of Fairfield, Merger Sub, and
Vacation Break have each determined that the Merger and the other transactions
contemplated under this Agreement are consistent with, and in furtherance of,
their respective business strategies and goals;
WHEREAS, Fairfield, Merger Sub and Vacation Break desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated by this Agreement and also to prescribe various
conditions to the Merger;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Code;
WHEREAS, for financial accounting purposes, it is intended that the Merger
will be accounted for as a pooling of interests transaction; and
WHEREAS, Ralph P. Muller, R&A Partnership, Ltd. and Kevin Sheehan (the
"Principal Stockholders") have entered into the principal stockholders agreement
pursuant to which they have agreed (i) subject to certain conditions, to vote
their shares of capital stock of Vacation Break to approve this Agreement and
(ii) to certain other obligations.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties hereto agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the Florida Business Corporation Act (the
"FBCA"), Merger Sub shall be merged with and into Vacation Break at the
Effective Time (as hereinafter defined). Following the Merger, the separate
corporate existence of Merger Sub will cease and Vacation Break will continue as
the surviving corporation (the "Surviving Corporation") and will succeed to and
assume all the rights and obligations of Merger Sub in accordance with the FBCA.
A-4
<PAGE>
1.2 Closing. The closing of the Merger (the "Closing") will take place at
10:00 a.m. on a date to be specified by the parties, which (subject to the
fulfillment or waiver of the conditions set forth in Article VI) shall be no
later than the second business day after satisfaction or waiver of the
conditions set forth in Article VI (the "Closing Date"), at the offices of
Jones, Day, Reavis & Pogue, 2300 Trammell Crow Center, 2001 Ross Avenue, Dallas,
Texas 75201, unless another date, time or place is agreed to in writing by all
of the parties hereto.
1.3 Effective Time. Subject to the provisions of this Agreement, as soon as
practicable on or after the Closing Date the parties shall deliver Articles of
Merger (the "Articles of Merger") executed in accordance with the relevant
provisions of the FBCA to the Florida Department of State for filing as required
under the FBCA and shall make all other filings or recordings required under the
FBCA. The Merger shall become effective at such time (the "Effective Time") as
the Articles of Merger have been accepted for filing by the Florida Department
of State (or such later time as stated in the Articles of Merger and permitted
by such Department of State), which will be the Closing Date or as soon as
practicable thereafter.
1.4 Effect of the Merger. The Merger shall have the effects set forth in
Section 607.1106 of the FBCA.
1.5 Articles of Incorporation. Articles of incorporation of Vacation
Break shall be amended to read in their entirety as set forth in Exhibit A
attached hereto and shall be the articles of incorporation of the Surviving
Corporation until thereafter changed or amended as provided therein or by
applicable law.
1.6 Bylaws. The bylaws of Vacation Break shall be amended to read in
their entirety as set forth in Exhibit B and shall be the bylaws of the
Surviving Corporation following the Merger until thereafter changed or amended
as provided therein or by applicable law.
1.7 Directors. The directors of Merger Sub at the Effective Time shall be
the directors of the Surviving Corporation following the Merger, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
1.8 Officers. The officers of Vacation Break at the Effective Time shall be
the officers of the Surviving Corporation following the Merger, until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
A-5
<PAGE>
ARTICLE II
EFFECTS OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of the
capital stock of the constituent corporations:
(a) Exchange Ratio. Subject to Section 2.3, each share of Common Stock,
--------------
par value $.01 per share, of Vacation Break (the "Vacation Break Common Stock")
issued and outstanding immediately prior to the Effective Time (other than
shares of Vacation Break Common Stock, if any, to be cancelled under Section
2.1(c)), shall be converted into the right to receive .6075 (the "Exchange
Ratio") validly issued, fully paid and nonassessable shares of Common Stock, par
value $.01 per share, of Fairfield (the "Fairfield Common Stock"). If, prior to
the Effective Time, Fairfield should split, reclassify or combine the shares of
Fairfield Common Stock, or pay a stock dividend or other stock distribution in
Fairfield Common Stock, or otherwise change or convert the Fairfield Common
Stock into any other securities, or make any other dividend or distribution on
the Fairfield Common Stock (other than normal cash dividends), or if a record
date with respect to any of the foregoing shall have been set, then the Exchange
Ratio will be appropriately adjusted to reflect such split, reclassification,
combination, dividend or other distribution or change.
(b) Certificates. All shares of Vacation Break Common Stock to be
------------
converted into the right to receive shares of Fairfield Common Stock pursuant to
this Section 2.1 shall cease to be outstanding, shall be cancelled and retired
and shall cease to exist, and each holder of a certificate representing any such
shares of Vacation Break Common Stock shall thereafter cease to have any rights
with respect to such shares of Vacation Break Common Stock, except the right to
receive for each of the shares of Vacation Break Common Stock, upon the
surrender of such certificate in accordance with Section 2.2, the amount of
Fairfield Common Stock specified in Section 2.1(a) (the "Share Consideration")
and cash in lieu of fractional shares of Fairfield Common Stock as contemplated
by Section 2.3.
(c) Treasury Shares. Shares of Vacation Break Common Stock, if any, held
---------------
by Fairfield, Merger Sub or any other Subsidiary (as defined in Rule 12b-2
promulgated under the Exchange Act (as hereinafter defined)) of Fairfield and
each share of Vacation Break Common Stock held by Vacation Break as treasury
stock or by any of its Subsidiaries immediately prior to the Effective Time
shall cease to be outstanding, shall be cancelled and retired without payment of
any consideration therefor, and shall cease to exist.
(d) Stock of Merger Sub. Each share of common stock, par value of $.01 per
-------------------
share, of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one validly issued, fully paid
and nonassessable share of common stock of the Surviving Corporation.
A-6
<PAGE>
(e) Assumed Options and Warrants.
----------------------------
(i) Each outstanding option to purchase shares of Vacation Break
Common Stock listed in Section 2.1(e) of the Vacation Break Disclosure
Statement (as defined below) issued pursuant to Vacation Break's 1995 stock
option plan (the "Option Plan") filed as an exhibit to the registration
statement on Form S-8 (No. 333-11345) filed by Vacation Break with the
Securities and Exchange Commission ("SEC") and the Vacation Break
Directors' Option Plan ("Directors' Plan") filed with the SEC as an exhibit
to Vacation Break's Form 10-K for the year ended December 31, 1996, or
otherwise set forth in Section 2.1(e) of the Vacation Break Disclosure
Statement (each an "Option"), whether or not vested or exercisable, shall
be assumed by Fairfield and shall constitute an option to acquire, on the
same terms and conditions as were applicable under such Option, the number
of shares of Fairfield Common Stock rounded up or down to the nearest whole
share equal to the product of the Exchange Ratio multiplied by the number
of shares of Vacation Break Common Stock subject to such Option immediately
prior to the Effective Time, at a price per share equal to the aggregate
exercise price for the shares of Vacation Break Common Stock subject to
such Option divided by the number of shares of Fairfield Common Stock
deemed to be purchasable pursuant to such Option ("Assumed Options");
provided that the conversion of any Option into an Assumed Option with an
exercise price less than $.01 per share of Fairfield Common Stock will be
subject to the optionee's agreement that upon exercise, (x) to the extent
Fairfield is holding Fairfield Common Stock as treasury shares that are not
reserved for any other purpose, Fairfield shall issue the appropriate
number of such treasury shares to the optionee and (x) to the extent that
no such treasury shares are available, such optionee shall pay an exercise
price of $.01 per share of Fairfield Common Stock; provided, further, that
from and after the Effective Time the Assumed Options shall be vested and
fully exercisable in accordance with their terms. As soon as practicable
after the Effective Time, Fairfield shall deliver to holders of Assumed
Options an appropriate notice setting forth such holders' rights pursuant
thereto and shall deliver appropriate option agreements representing the
right to acquire Fairfield Common Stock on the same terms and conditions as
contained in the Options (subject to any adjustments required by the
preceding sentence), upon surrender of the outstanding Options. Fairfield
shall comply with the terms of the Option Plan as they apply to the Assumed
Options. Fairfield shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Fairfield Common Stock for
delivery upon exercise of the Assumed Options in accordance with this
Section 2.1(e). Fairfield shall file a registration statement on Form S-8
(or any successor form) or another appropriate form, effective as of the
Effective Time, with respect to Fairfield Common Stock subject to Assumed
Options and shall use commercially reasonable efforts to maintain the
effectiveness of such registration statement or registration statements
(and maintain the current status of the prospectus or prospectuses
contained therein) for so long as the Assumed Options remain outstanding. A
holder of an Assumed Option may exercise such Assumed Option in whole or in
part in accordance with its terms by delivering a properly executed notice
of exercise to Fairfield, together with the consideration therefor and the
federal withholding tax information, if any, required in accordance with
the related Option Plan and the Directors' Plan. Except as otherwise
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contemplated by this Section 2.1(e), all restrictions or limitations on
transfer and vesting with respect to Options awarded under the Option Plan
and the Directors' Plan or any other plan, program or arrangement of
Vacation Break or any of its Subsidiaries, to the extent that such
restrictions or limitations shall not have already lapsed, shall remain in
full force and effect with respect to such options after giving effect to
the Merger and the assumption by Fairfield as set forth above.
(ii) Promptly after the Effective Time, the Surviving Corporation
shall execute and deliver to each holder of a warrant (a "Warrant") to
purchase shares of Vacation Break Common Stock pursuant to the warrant
agreement dated as of December 27, 1995, among Vacation Break, Josephthal
Lyon & Ross Incorporated ("Josephthal") and Cruttenden Roth Incorporated
(the "Warrant Agreement"), upon such holder's delivery of its Warrant to
the Surviving Corporation, a supplemental warrant agreement (a
"Supplemental Warrant") representing the right (until the expiration of
such holder's Warrant) to receive, upon the exercise of such holder's
Supplemental Warrant, such number of shares of Fairfield Common Stock
rounded up or down to the nearest whole share that is equal to the product
of the Exchange Ratio multiplied by the number of shares of Vacation Break
Common Stock subject to such Warrant immediately prior to the Effective
Time, at a price per share equal to the aggregate exercise price for the
shares of Vacation Break Common Stock subject to such Warrant divided by
the number of shares of Fairfield Common Stock deemed to be purchasable
pursuant to such Warrant. Except as otherwise contemplated by this Section
2.1(e)(ii), all terms, conditions and obligations of a Warrant will remain
in full force and effect with respect to the Warrant after giving effect to
the Merger and as set forth above.
2.2 Payment for Shares in the Merger. The manner of making payment for
shares of Vacation Break Common Stock in the Merger shall be as follows:
(a) Exchange Agent. At the Effective Time, Fairfield shall deposit or
cause to be deposited with BostonEquiServe, L.P., or such other bank or trust
company reasonably acceptable to Vacation Break (the "Exchange Agent"), for the
benefit of those persons or entities (each a "Person") who immediately prior to
the Effective Time were the holders of shares of Vacation Break Common Stock,
for exchange in accordance with this Article II, a sufficient number of
certificates representing Fairfield Common Stock required to effect the delivery
of the aggregate Share Consideration to be issued pursuant to Section 2.1 and,
if elected under Section 2.3(d), the amount of cash required under that Section
(the certificates representing Fairfield Common Stock comprising such aggregate
Share Consideration (and if elected, the cash required under Section 2.3(d))
being hereinafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions to be given by Fairfield at or prior to the
Effective Time following approval thereof by Vacation Break, such approval not
to be unreasonably withheld, deliver the shares of Fairfield Common Stock
contemplated to be issued pursuant to Section 2.1 out of the Exchange Fund.
Subject to Section 2.3, the Exchange Fund will not be used for any other
purpose.
(b) Surrender of Certificates. As soon as practicable after the Effective
Time, Fairfield shall cause the Exchange Agent to mail to each holder of record
(other than holders
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of certificates for shares of Vacation Break Common Stock referred to in Section
2.1(c)) of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Vacation Break Common Stock
(the "Certificates") (i) a form of letter of transmittal (which shall specify
that delivery will be effected, and risk of loss and title to the Certificates
will pass, only upon proper delivery of the Certificates to the Exchange Agent)
and (ii) instructions for use in effecting the surrender of the Certificates for
payment therefor. Subject to the obligation of the Principal Stockholders to
deposit shares of Common Stock with an escrow agent under the terms of the
Principal Stockholders Agreement, upon surrender of Certificates for
cancellation to the Exchange Agent, together with such letter of transmittal
duly executed and any other documents as may be reasonably required, the holder
of such Certificates will be entitled to receive for each of the shares of
Vacation Break Common Stock represented by such Certificates the Share
Consideration and the Certificates so surrendered will forthwith be cancelled.
Until so surrendered, Certificates will represent solely the right to receive
the Share Consideration and any cash in lieu of fractional shares of Fairfield
Common Stock as contemplated by Section 2.3 with respect to each of the shares
of Vacation Break Common Stock represented thereby. No dividends or other
distributions that are declared after the Effective Time on Fairfield Common
Stock and payable to the holders of record thereof after the Effective Time will
be paid to Persons entitled by reason of the Merger to receive Fairfield Common
Stock until such Persons surrender their Certificates. Upon such surrender, but
subject to the Principal Stockholders' obligations described above, there shall
be paid to the Person in whose name shares of the Fairfield Common Stock are
issued any dividends or other distributions having a record date after the
Effective Time and payable with respect to such shares of Fairfield Common Stock
between the Effective Time and the time of such surrender. After such surrender
there shall be paid to the Person in whose name the shares of Fairfield Common
Stock are issued any dividends or other distributions on such shares of
Fairfield Common Stock which shall have a record date after the Effective Time
and prior to such surrender and a payment date after such surrender and such
payment shall be made on such payment date. In no event shall the Persons
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions. If any cash or any
certificate representing shares of Fairfield Common Stock is to be paid to or
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such exchange that
the Certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer and that the Person requesting such exchange shall pay
to the Exchange Agent any transfer or other taxes required by reason of the
issuance of certificates for such shares of Fairfield Common Stock in a name
other than that of the registered holder of the Certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable. Notwithstanding the foregoing, neither the Exchange
Agent nor any party hereto shall be liable to a holder of shares of Vacation
Break Common Stock for any shares of Fairfield Common Stock or dividends thereon
or, in accordance with Section 2.3, cash in lieu of fractional interests,
delivered to a public official pursuant to applicable escheat law. The Exchange
Agent shall not be entitled to vote or exercise any rights of ownership with
respect to the shares of Fairfield Common Stock held by it from time to time
hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares of Fairfield
Common Stock for the account of the Persons entitled thereto.
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(c) Rule 145 Affiliates. Certificates surrendered for exchange by any
Person constituting a Rule 145 Affiliate of the Company shall not be exchanged
for certificates representing Fairfield Common Stock until Fairfield has
received an Affiliate Letter (as hereinafter defined) from such Person as
provided in Section 5.14.
(d) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains unclaimed by the former stockholders of Vacation Break for one year
after the Effective Time shall be delivered to Fairfield, upon demand of
Fairfield, and any former stockholders of Vacation Break shall thereafter look
only to Fairfield for payment of their claim for the Share Consideration for the
shares of Vacation Break Common Stock or for any cash in lieu of fractional
shares of Fairfield Common Stock and Fairfield shall make those payments in
accordance with the terms of Section 2.2(b).
(e) Lost Certificates. If any certificates representing shares of Vacation
Break Common Stock shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed certificates, upon
the making of an affidavit of that fact by the record holder thereof or the
delivery of such other documents and instruments (including, without limitation,
any indemnity bond) as the Exchange Agent or the Surviving Corporation may
require, such shares of Fairfield Common Stock as may be required pursuant to
this Section 2.2.
2.3 Fractional Shares.
(a) No Fractional Shares. No certificates or scrip representing fractional
shares of Fairfield Common Stock shall be issued upon the surrender for exchange
of Certificates, no dividend or distribution of Fairfield shall relate to such
fractional share interests and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of Fairfield.
(b) Excess Shares. As promptly as practicable following the Effective
Time, the Exchange Agent will determine the excess of (i) the number of whole
shares of Fairfield Common Stock delivered to the Exchange Agent by Fairfield
pursuant to Section 2.2(a) over (ii) the aggregate number of whole shares of
Fairfield Common Stock to be distributed to holders of shares of Vacation Break
Common Stock pursuant to Section 2.2(b) (such excess being herein called the
"Excess Shares"). Following the Effective Time, the Exchange Agent will sell the
Excess Shares at then-prevailing prices on the New York Stock Exchange, Inc.
(the "NYSE"), all in the manner provided in Section 2.3(c).
(c) Sale of Excess Shares. The sale of the Excess Shares by the Exchange
Agent will be executed on the NYSE through one or more member firms of the NYSE
and will be executed in round lots to the extent practicable. The Exchange Agent
will use reasonable efforts to complete the sale of the Excess Shares as
promptly following the Effective Time as, in the Exchange Agent's sole judgment,
is practicable consistent with obtaining the best execution of such sales in
light of prevailing market conditions. Until the net proceeds of such sale or
sales have been distributed to the holders of shares of Vacation Break Common
Stock, the Exchange Agent will hold such proceeds in trust for the holders of
shares of Vacation Break Common Stock (the "Common Shares Trust"). Fairfield
will pay all
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commissions, transfer taxes and other out-of-pocket transaction costs, including
the expenses and compensation of the Exchange Agent incurred in connection with
such sale of the Excess Shares. The Exchange Agent will determine the portion of
the Common Shares Trust to which each holder of shares of Vacation Break Common
Stock is entitled, if any, by multiplying the amount of the aggregate net
proceeds comprising the Common Shares Trust by a fraction, the numerator of
which is the amount of the fractional shares interest to which such holder of
shares of Vacation Break Common Stock is entitled (after taking into account all
shares of Vacation Break Common Stock held at the Effective Time by such holder)
and the denominator of which is the aggregate amount of fractional share
interests to which all holders of shares of Vacation Break Common Stock are
entitled.
(d) Cash Election. Notwithstanding the provisions of Section 2.3.(b) and
2.3.(c), Merger Sub may elect at its option, exercised prior to the Effective
Time, in lieu of the issuance and sale of Excess Shares and the making of the
payments hereinabove contemplated, to pay each holder of shares of Vacation
Break Common Stock an amount in cash equal to the product obtained by
multiplying (i) the fractional share interest to which such holder (after taking
into account all shares of Vacation Break Common Stock held at the Effective
Time by such holder) would otherwise be entitled by (ii) the closing price for a
share of Fairfield Common Stock as reported on the NYSE Composite Transaction
Tape (as reported in The Wall Street Journal, or, if not reported thereby, any
other authoritative source) on the Closing Date, and, in such case, all
references herein to the cash proceeds of the sale of the Excess Shares and
similar references will be deemed to mean and refer to the payments calculated
as set forth in this Section 2.3(d).
(e) Payment by Exchange Agent. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of shares of
Vacation Break Common Stock with respect to any fractional share interests, the
Exchange Agent will make available such amounts to such holders of shares of
Vacation Break Common Stock subject to and in accordance with the terms of
Section 2.2(a).
2.4 Transfer of Shares After the Effective Time. No transfers of shares
of Vacation Break Common Stock shall be made on the stock transfer books of
Vacation Break after the close of business on the day prior to the date of the
Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Vacation Break. Except as set forth
in the specified section of the disclosure statement dated the date of this
Agreement and delivered by Vacation Break to Fairfield concurrently with this
Agreement (the "Vacation Break Disclosure Statement"), Vacation Break hereby
represents and warrants to Fairfield and Merger Sub, as follows:
(a) Organization, Standing and Corporate Power. Vacation Break and each of
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated and has
the requisite corporate power and
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authority to carry on its business as now being conducted. Vacation Break and
each of its Subsidiaries is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary other than in such jurisdictions where the failure to be so qualified
or licensed or to be in good standing (individually or in the aggregate) would
not have a material adverse effect on Vacation Break. Vacation Break has
delivered to Fairfield true, correct and complete copies of its articles of
incorporation and bylaws, in each case as amended to the date hereof.
(b) Subsidiaries. Section 3.1(b) of the Vacation Break Disclosure
Statement lists each Subsidiary of Vacation Break and each partnership, joint
venture or other Person in which Vacation Break owns any equity interest (each a
"Venture") together in each case with its jurisdiction of incorporation or
organization. All the outstanding shares of capital stock of each such
Subsidiary and Vacation Break's equity interest in each Venture have been
validly issued and are fully paid and nonassessable and owned directly or
indirectly by Vacation Break, free and clear of all pledges, claims, liens,
charges, encumbrances and security interests of any kind or nature whatsoever
(collectively, "Liens"), other than as set forth in the Venture's organizational
document with respect to Vacation Break's interests in that Venture. Except for
the capital stock of such Subsidiaries and equity interests in such Venture,
Vacation Break does not own, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, joint venture or other
entity. Vacation Break has delivered to Fairfield true, correct and complete
copies of the articles of incorporation and bylaws or other similar
organizational documents for each Subsidiary and Venture.
(c) Capital Structure. The authorized capital stock of Vacation Break
consists of 25,000,000 shares of Vacation Break Common Stock and 25,000,000
shares of the Preferred Stock, $.01 par value per share of Vacation Break (the
"Vacation Break Preferred Stock"). At the close of business on August 8, 1997,
(i) 8,615,841 shares of Vacation Break Common Stock were issued and outstanding,
(ii) no shares of Vacation Break Common Stock were held by Vacation Break in its
treasury, (iii) no shares of Vacation Break Preferred Stock were issued and
outstanding, (iv) no shares of Vacation Break Preferred Stock were held by
Vacation Break in its treasury, and (v) 553,259 shares of Vacation Break Common
Stock were reserved for issuance pursuant to the Option Plan, 100,000 shares
were reserved for issuance pursuant to the Directors' Plan, 146,536 shares were
reserved for issuance pursuant to options granted outside the Option Plan and
the Directors' Plan on the same terms as options granted under the Option Plan,
and 210,000 shares were reserved for issuance pursuant to the Warrant Agreement.
Except as set forth above, as of the date of this Agreement, no shares of
capital stock or other voting securities of Vacation Break are issued, reserved
for issuance or outstanding. As of the date of this Agreement, all outstanding
shares of capital stock of Vacation Break have been duly authorized and validly
issued, and are fully paid and nonassessable and not subject to preemptive
rights. As of the date of this Agreement, there are no bonds, debentures, notes
or other indebtedness of Vacation Break having the right to vote (or convertible
into securities having the right to vote) on any matters on which shareholders
of Vacation Break may vote. As of the date of this Agreement, there are no
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which Vacation Break or any of the
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Subsidiaries of Vacation Break is a party or by which any of them is bound
obligating Vacation Break or any of such Subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock or
other voting securities of Vacation Break or of any of such Subsidiaries or
obligating Vacation Break or any of such Subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking other than pursuant to the Options and the
Warrant Agreement. As of the date of this Agreement, there are no outstanding
contractual obligations of Vacation Break or any Subsidiaries of Vacation Break
to repurchase, redeem or otherwise acquire any shares of capital stock of
Vacation Break or such Subsidiaries.
(d) Authority; Noncontravention. Vacation Break has all requisite corporate
power and authority to enter into this Agreement and, subject to the Vacation
Break Stockholder Approval (as hereinafter defined), to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by Vacation Break and the consummation by Vacation Break of the
transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of Vacation Break, subject, in the case
of the adoption of this Agreement, to Vacation Break Stockholder Approval. This
Agreement has been duly executed and delivered by Vacation Break and constitutes
a legal, valid and binding obligation of Vacation Break, enforceable against
Vacation Break in accordance with its terms. The execution and delivery of this
Agreement do not, and, except as described in Section 3.1(d) of the Vacation
Break Disclosure Statement (the "Vacation Break Consents") the consummation of
the transactions contemplated by this Agreement and compliance with the
provisions of this Agreement will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of a material benefit under, or result in the creation of any Lien upon
any of the properties or assets of Vacation Break or any of its Subsidiaries or
the Ventures under, (i) the articles of incorporation or bylaws of Vacation
Break or the comparable organizational documents of any of its Subsidiaries or
the Ventures, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to Vacation Break or any of its Subsidiaries or the
Ventures or their respective properties or assets, or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Vacation Break or any of its Subsidiaries or the Ventures or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii), any such conflicts, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not (x) have a material adverse effect on
Vacation Break, (y) impair the ability of Vacation Break to perform its
obligations under this Agreement, or (z) prevent or materially delay the
consummation of the transactions contemplated by this Agreement. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any federal, state, local or foreign government or any court,
administrative or regulatory agency or commission or other governmental
authority or agency (a "Governmental Entity") is required by or with respect to
Vacation Break or any of its Subsidiaries or the Ventures in connection with the
execution and delivery of this Agreement by Vacation Break or the consummation
by Vacation Break of the transactions contemplated by this Agreement, except for
(1) the filing of a premerger notification and report form by Vacation Break
under the
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Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"); (2) the filing with the SEC of (A) the Proxy Statement/Prospectus (as
hereinafter defined) relating to the Vacation Break Stockholders Meeting (as
hereinafter defined), and (B) such reports under Section 13(a), 13(d), 15(d) or
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as may be required in connection with this Agreement and the transactions
contemplated by this Agreement; (3) the filing of the Articles of Merger with
the Florida Department of State and appropriate documents with the relevant
authorities of other states in which Vacation Break is qualified to do business
and such filings with Governmental Entities to satisfy the applicable
requirements of state securities or "blue sky" laws; (4) such other filings and
consents as may be required under any environmental law or any health or safety
law or regulation pertaining to any notification, disclosure or required
approval necessitated by the Merger or the transactions contemplated by this
Agreement; and (5) such consents, approvals, orders or authorizations the
failure of which to be made or obtained would not reasonably be expected to have
a material adverse effect on Vacation Break.
(e) SEC Documents; Undisclosed Liabilities. Vacation Break has filed all
required reports, schedules, forms, statements and other documents with the SEC
since December 21, 1995 (the "Vacation Break SEC Documents"). As of their
respective dates, the Vacation Break SEC Documents complied in all material
respects with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such Vacation Break
SEC Documents, and none of the Vacation Break SEC Documents when filed contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent that information contained in any Vacation
Break SEC Document has been revised or superseded by a later Vacation Break
Filed SEC Document (as hereinafter defined), none of the Vacation Break SEC
Documents contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Vacation Break included in the
Vacation Break SEC Documents comply as to form, as of their respective dates of
filing with the SEC, in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present in all
material respects the consolidated financial position of Vacation Break and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal recurring year-end audit adjustments).
Except (i) as reflected in such financial statements or in the notes thereto,
(ii) as contemplated hereunder, (iii) for liabilities incurred in connection
with this Agreement or the transactions contemplated hereby, (iv) for
liabilities and obligations incurred since December 31, 1996, in the ordinary
course of business consistent with past practice, and (v) as set forth in
Section 3.1(e) of the Vacation Break Disclosure Statement, neither Vacation
Break nor any of its Subsidiaries has any material liabilities or obligations of
any nature (whether accrued, absolute, contingent or otherwise), including
liabilities arising under any environmental laws
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or laws relating to the protection of health or safety, required by generally
accepted accounting principles to be reflected in a consolidated balance sheet
of Vacation Break and its consolidated subsidiaries and which, individually or
in the aggregate, could reasonably be expected to have a material adverse effect
on Vacation Break.
(f) Information Supplied. None of the information supplied or to be
supplied by Vacation Break specifically for inclusion or incorporation by
reference in (i) the Form S-4 Registration Statement (as hereinafter defined) to
be filed with the SEC by Fairfield in connection with the issuance of Fairfield
Common Stock in the Merger will, at the time the Form S-4 Registration Statement
is filed with the SEC or at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) the Proxy Statement/Prospectus (as hereinafter
defined) will, at the date it is first mailed to Vacation Break's stockholders
or at the time of the Vacation Break Stockholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. The Proxy
Statement/Prospectus will comply as to the Exchange Act and the rules and
regulations thereunder, except that no representation or warranty is made by
Vacation Break with respect to statements made or incorporated by reference
therein based on information supplied by Fairfield specifically for inclusion or
incorporation by reference in the Proxy Statement/Prospectus.
(g) Absence of Certain Changes Or Events. Except (i) as disclosed in the
Vacation Break SEC Documents filed and publicly available prior to the date of
this Agreement (as amended to the date of this Agreement, the "Vacation Break
Filed SEC Documents"), (ii) for the transactions provided for herein, (iii) as
set forth in Section 3.1(g) of the Vacation Break Disclosure Statement, and (iv)
for liabilities incurred in connection with or as a result of this Agreement,
since the date of the most recent financial statements included in the Vacation
Break Filed SEC Documents, Vacation Break has conducted its business only in the
ordinary course, and there has not been (1) any material adverse change in
Vacation Break, (2) any declaration, setting aside or payment of any dividend or
other distribution (whether in cash, stock or property) with respect to any of
Vacation Break's capital stock, (3) any split, combination or reclassification
of any of Vacation Break's capital stock or any issuance or the authorization of
any issuance of any other securities in respect of, in lieu of or in
substitution for shares of Vacation Break's capital stock, (4) (A) any granting
by Vacation Break or any of its Subsidiaries to any director, executive officer
or other key employee of Vacation Break or any of its Subsidiaries of any
increase in compensation, except for normal increases in the ordinary course of
business consistent with past practice or as was required under employment
agreements in effect as of the date of the most recent financial statements
included in the Vacation Break Filed SEC Documents, (B) any granting by Vacation
Break or any of its Subsidiaries to any such director, executive officer or key
employee of any increase in severance or termination pay, except as was required
under any employment, severance or termination agreements in effect as of the
date of the most recent financial statements included in the Vacation Break
Filed SEC Documents, (C) any entry by Vacation Break or any of its Subsidiaries
into any employment, severance or termination agreement with any such executive
officer or key employee, or (D) any
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granting by Vacation Break or any of its Subsidiaries of any material increase
in the commissions payable to any of their sales agents, or (5) except insofar
as may have been disclosed in the Vacation Break Filed SEC Documents or required
by a change in generally accepted accounting principles, any change in
accounting methods, principles or practices by Vacation Break materially
affecting its assets, liabilities or business.
(h) Litigation. Except as set forth in Section 3.1(h) of the Vacation Break
Disclosure Statement or disclosed in the Vacation Break Filed SEC Documents,
there are no actions, suits, investigations or proceedings pending or, to the
knowledge of Vacation Break, threatened, against Vacation Break or any of its
Subsidiaries, or any property of Vacation Break or any such Subsidiary in any
court or before any arbitrator of any kind or before or by any Governmental
Entity, except actions, suits, investigations or proceedings which, in the
aggregate, do not have and would not be reasonably expected (so far as can be
foreseen at the time) to (a) have a material adverse effect on Vacation Break or
(b) have the effect of preventing or materially delaying the performance by
Vacation Break of its obligations under this Agreement.
(i) Compliance With Laws. Except as described in Section 3.1(i) of the
Vacation Break Disclosure Statement or the Vacation Break Filed SEC Documents,
Vacation Break and its Subsidiaries and the Ventures hold all permits, licenses,
variances, exemptions, orders and approvals of all Governmental Entities which
are material to the operation of the businesses of Vacation Break and its
Subsidiaries and the Ventures, taken as a whole (the "Vacation Break Permits").
Vacation Break and its Subsidiaries and the Ventures are in compliance with the
terms of the Vacation Break Permits and all applicable statutes, laws,
ordinances, rules and regulations (including, without limitation, the Federal
Trade Commission Act, the Truth-in-Lending Act and Regulation Z promulgated
thereunder, the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Interstate Land Sales Full Disclosure Act, the Civil Rights Acts
of 1964 and 1968, environmental laws, federal and state telemarketing laws,
state time share laws, and seller of travel or travel agency laws) except for
possible violations which could not reasonably be expected to have a material
adverse effect on Vacation Break. Except as described in Section 3.1(i) of the
Vacation Break Disclosure Statement or the Vacation Break Filed SEC Documents,
as of the date of this Agreement, no action, demand, requirement or
investigation by any Governmental Entity with respect to Vacation Break or any
of its Subsidiaries or the Ventures is pending or, to the knowledge of Vacation
Break, threatened, other than, in each case, those the outcome of which,
individually or in the aggregate, could not reasonably be expected to have a
material adverse effect on Vacation Break.
(j) Absence of Changes in Benefit Plans; Labor Relations.
(i) The Vacation Break Filed SEC Documents or Section 3.1(j)(i) of the
Vacation Break Disclosure Statement sets forth a true and complete list of
all the following: (x) each "employee benefit plan," as such term is
defined in Section 3(3) of ERISA, pursuant to which Vacation Break or any
of its Subsidiaries has (A) any liability in respect of current or former
employees, agents, directors, or independent contractors of Vacation Break
or its Subsidiaries ("Vacation Break Employees") or any beneficiaries or
dependents of any Vacation Break Employees or (B) any
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obligation to issue capital stock of Vacation Break or any of its
Subsidiaries (each, a "Vacation Break Employee Plan"), and (y) each other
plan, program, policy, contract or arrangement providing for bonuses,
pensions, deferred pay, stock or stock related awards, severance pay,
salary continuation or similar benefits, hospitalization, medical, dental
or disability benefits, life insurance or other employee benefits, or
compensation to or for any Vacation Break Employees or any beneficiaries or
dependents of any Vacation Break Employees (other than directors' and
officers' liability policies), whether or not insured or funded, (A)
pursuant to which Vacation Break or any of its Subsidiaries has any
material liability or (B) constituting an employment or severance agreement
or arrangement with any officer or director of Vacation Break or any such
Subsidiary or with any holder of shares of Vacation Break Common Stock
(each, a "Vacation Break Benefit Arrangement"). Vacation Break has provided
to Fairfield with respect to each Vacation Break Employee Plan and Vacation
Break Benefit Arrangement: (i) a true and complete copy of all written
documents comprising such Vacation Break Employee Plan or Vacation Break
Benefit Arrangement and any related trust agreement, insurance contract or
other funding vehicle (including amendments and individual agreements
relating thereto, or, if there is no such written document, an accurate and
complete description of such Vacation Break Employee Plan or Vacation Break
Benefit Arrangement); (ii) the most recent Form 5500 or Form 5500-C/R
(including all schedules thereto), if applicable; (iii) the most recent
financial statements and actuarial reports or valuations, if any; (iv) the
summary plan description currently in effect and all material modifications
thereof, if any; and (v) the most recent Internal Revenue Service
determination letter, if any.
(ii) Each Vacation Break Employee Plan and Vacation Break Benefit
Arrangement has been established, operated and maintained in all material
respects in accordance with its terms and in material compliance with all
applicable laws and the rules and regulations thereunder, including, but
not limited to, ERISA and the Code. Neither Vacation Break nor any of its
Subsidiaries or former Subsidiaries nor any of their respective current or
former directors, officers, or employees, nor, to the best knowledge of
Vacation Break, any other disqualified person or party-in-interest with
respect to any Vacation Break Employee Plan, have engaged directly or
indirectly in any "prohibited transaction," as such term is defined in
Section 4975 of the Code or Section 406 of ERISA, with respect to which
Vacation Break or its Subsidiaries could reasonably be expected to have or
has any material liability. All contributions and other payments required
to be made for any period through the date to which this representation
speaks to the Vacation Break Employee Plans and Vacation Break Benefit
Arrangements (or to any person pursuant to the terms thereof) have been
made or paid in a timely fashion, or, to the extent not required to be made
or paid on or before the date to which this representation speaks, have
been reflected in Vacation Break's financial statements. Each Vacation
Break Employee Plan that is intended to be qualified under Section 401(a)
of the Code has been determined by the Internal Revenue Service to be so
qualified or an application for such a determination, which was filed
before the expiration of the applicable remedial amendment period, is
pending, and, to the best knowledge of Vacation Break, no circumstances
exist that are reasonably expected by Vacation Break to result in the
revocation of any such determination.
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(iii) With respect to each Vacation Break Employee Plan that is
subject to Title IV of ERISA: (i) as of the last applicable annual
valuation date, the present value of all benefits under such Vacation Break
Employee Plan did not exceed the value of the assets of such Vacation Break
Employee Plan allocable to such benefits, on a projected benefits basis,
using the actuarial methods, factors and assumptions used for the most
recent actuarial report with respect to such Vacation Break Employee Plan;
and (ii) there has been no termination, partial termination or "reportable
event" (as defined in Section 4043 of ERISA) with respect to any such
Vacation Break Employee Plan. No Vacation Break Employee Plan that is
subject to Section 412 of the Code has incurred any "accumulated funding
deficiency" (as defined in Section 412 of the Code), whether or not waived.
No event has occurred, and, to the best knowledge of Vacation Break, there
do not exist any circumstances, that could reasonably be expected to
subject Vacation Break or any Subsidiary of Vacation Break to any material
liability arising under ERISA. With respect to the Vacation Break Employee
Plans and Vacation Break Benefit Arrangements, individually and in the
aggregate, no event has occurred, and, to the best knowledge of Vacation
Break, there do not exist any circumstances, that could reasonably be
expected to subject Vacation Break or any Subsidiary of Vacation Break to
any material liability under the Code or other applicable law, or under any
indemnity agreement to which Vacation Break or any Subsidiary of Vacation
Break is a party, excluding liability for benefit claims, administrative
expenses and funding obligations payable in the ordinary course.
(iv) No Vacation Break Employee Plan is a "multiemployer plan" as that
term is defined in Section 3(37) of ERISA or a "multiple employer plan"
described in Section 4063(a) of ERISA, nor has Vacation Break or any ERISA
Affiliate of Vacation Break at any time since January 1, 1992, contributed
to or been obligated to contribute to such a multiemployer plan or multiple
employer plan.
(v) Except with respect to a Vacation Break Employee Plan, neither
Vacation Break nor any ERISA Affiliate of Vacation Break has any Controlled
Group Liability, nor do any circumstances exist that could result in any of
them having any Controlled Group Liability. "Controlled Group Liability"
means any and all liabilities under (i) Title IV of ERISA, (ii) Section 302
of ERISA, (iii) Sections 412 and 4971 of the Code and (iv) the continuation
coverage requirements of Section 601 et seq. of ERISA and Section 4980B of
the Code.
(vi) Neither the execution or delivery of this Agreement, nor the
consummation of the transactions contemplated hereby (either alone or
together with any additional or subsequent events), constitutes an event
under any Vacation Break Employee Plan, Vacation Break Benefit Arrangement,
loan to, or individual agreement or contract with, a Vacation Break
Employee that may result in any payment (whether of severance pay or
otherwise), restriction or limitation upon the assets of any Vacation Break
Employee Plan or Vacation Break Benefit Arrangement, acceleration of
payment or vesting, increase in benefits or compensation, or required
funding, with respect to any Vacation Break Employee, or the forgiveness of
any loan or other commitment of any Vacation Break Employees.
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(vii) There are no actions, suits, arbitrations, inquiries,
investigations or other proceedings (other than routine claims for
benefits) pending or, to Vacation Break's knowledge, threatened, with
respect to any Vacation Break Employee Plan or Vacation Break Benefit
Arrangement.
(viii) No Vacation Break Employees and no beneficiaries or dependents
of Vacation Break Employees are or may become entitled under any Vacation
Break Employee Plan or Vacation Break Benefit Arrangement to post-
employment or retiree welfare benefits of any kind, including without
limitation death or medical benefits, other than coverage mandated by Part
6 of Title I of ERISA or Section 4980B of the Code or other applicable law.
(k) Labor Matters. There are no agreements with, or pending petitions for
recognition of, a labor union or association as the exclusive bargaining agent
for any of the employees of Vacation Break or any of its Subsidiaries or the
Ventures; no such petitions have been pending at any time within two years of
the date of this Agreement and, to the best knowledge of Vacation Break, there
has not been any organizing effort by any union or other group seeking to
represent any employees of Vacation Break or any of its Subsidiaries or the
Ventures as their exclusive bargaining agent at any time within two years of the
date of this Agreement. There are no labor strikes, work stoppages or other
labor troubles, other than routine grievance matters, now pending, or, to
Vacation Break's knowledge, threatened, against Vacation Break or any of its
Subsidiaries or the Ventures, nor have there been any such labor strikes, work
stoppages or other labor troubles, other than routine grievance matters, with
respect to Vacation Break or any of its Subsidiaries or the Ventures at any time
within two years of the date of this Agreement.
(l) Taxes.
(i) Except as set forth in Section 3.1(l)(i) of the Vacation Break
Disclosure Statement, each of Vacation Break and its Subsidiaries has filed
all tax returns and reports required to be filed by it, or requests for
extensions to file such returns or reports have been timely filed and
granted and have not expired, and all tax returns and reports are complete
and accurate in all respects, except to the extent that such failures to
file or be complete and accurate in all respects, as applicable,
individually or in the aggregate, would not have a material adverse effect
on Vacation Break. Vacation Break and each of its Subsidiaries has paid (or
Vacation Break has paid on its behalf) or made provision for all taxes
shown as due on such tax returns and reports. No claim has been made since
August 6, 1992 by an authority in a jurisdiction where Vacation Break or
any of its Subsidiaries does not file tax returns that it is or may be
subject to taxation by that jurisdiction. The most recent financial
statements contained in the Vacation Break Filed SEC Documents reflect
adequate reserves for all taxes payable by Vacation Break and its
Subsidiaries for all taxable periods and portions thereof accrued through
the date of such financial statements, and no deficiencies for any taxes
have been proposed, asserted or assessed against Vacation Break or any of
its Subsidiaries that are not adequately reserved for, except for
inadequately reserved taxes and inadequately reserved deficiencies that
would not, individually or in the aggregate, have a material adverse effect
on Vacation Break.
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There are no liens for taxes (other than for current taxes not yet due and
payable) on the assets of Vacation Break or its Subsidiaries. No requests
for waivers of the time to assess any taxes against Vacation Break or any
of its Subsidiaries have been granted or are pending, except for requests
with respect to such taxes that have been adequately reserved for in the
most recent financial statements contained in the Vacation Break Filed SEC
Documents, or, to the extent not adequately reserved, the assessment of
which would not, individually or in the aggregate, have a material adverse
effect on Vacation Break. Except as set forth in the Vacation Break Filed
SEC Documents or in Section 3.1(l)(i) of the Vacation Break Disclosure
Statement, neither Vacation Break nor any of its Subsidiaries is a party to
or bound by any agreement providing for the allocation or sharing of taxes.
Neither Vacation Break nor any of its Subsidiaries has filed a consent
pursuant to or agreed to the application of Section 341(f) of the Code.
Each of Vacation Break and its Subsidiaries has disclosed on its federal
income tax returns all positions taken therein that could give rise to a
substantial understatement of federal income tax within the meaning of
Section 6662 of the Code. All taxes that are required by the laws of the
United States, any state or political subdivision thereof, or any foreign
country to be withheld or collected by Vacation Break or any of its
Subsidiaries have been duly withheld or collected and, to the extent
required, have been paid to the proper governmental authorities or properly
deposited as required by applicable laws. None of Vacation Break and its
Subsidiaries (i) has been a member of an affiliated group filing a
consolidated federal income tax return (other than a group the common
parent of which was Vacation Break), or (ii) has any liability for the
taxes of any person (other than any of Vacation Break and its Subsidiaries)
under Treas. Reg. (S) 1.1502-6 (or any similar provision of state, local,
or foreign law), as a transferee or successor, by contract or otherwise.
For purposes of this Agreement, the term tax (including, with correlative
meaning, the terms "taxes" and "taxable") shall include all federal, state,
local, and foreign income, profits, franchise, gross receipts, payroll,
sales, employment, use, property, withholding, excise, and other taxes,
duties, or assessments of any nature whatsoever, together with all
interest, penalties, and additions imposed with respect to such amounts.
(ii) Section 3.1(l)(ii) of the Vacation Break Disclosure Statement
sets forth each state in which Vacation Break and its Subsidiaries have
collected or remitted any sales and/or use taxes since August 6, 1992. To
Vacation Break's knowledge, neither Vacation Break nor any of its
Subsidiaries has conducted activities in any other state that would require
such taxes to be collected or remitted. No claim has ever been made since
August 6, 1992 by an authority in a jurisdiction where Vacation Break or
any of its Subsidiaries does not pay sales and/or use taxes that it is or
may be subject to a requirement to remit such taxes in that jurisdiction.
(iii) Neither Vacation Break nor any of its Subsidiaries has taken any
action that is reasonably likely to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
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(iv) None of the compensation paid by Vacation Break since January 1,
1997, and none of the compensation, if any, that may be payable as a result
of the Merger will be subject to the limitations set forth in Section
162(m) of the Code.
(m) Voting Requirements. The affirmative vote of the holders of a majority
of the voting power of all outstanding shares of Vacation Break Common Stock,
voting as a single class, at the Vacation Break Stockholders Meeting (the
"Vacation Break Stockholder Approval") to approve this Agreement is the only
vote of the holders of any class or series of Vacation Break's capital stock
necessary to approve this Agreement and the transactions contemplated by this
Agreement.
(n) No Excess Parachute Payments. Except as described in Section 3.1(n) of
the Vacation Break Disclosure Statement, no amount that could be received
(whether in cash or property or the vesting of property) as a result of any of
the transactions contemplated by this Agreement by any employee, officer or
director of Vacation Break or any of its Affiliates who is a "disqualified
individual" (as such term is defined in Section 280G(c) of the Code or proposed
Treasury Regulation Section 1.280G-1) under any employment, severance or
termination agreement, other compensation arrangement or Vacation Break Employee
Plan or Benefit Arrangement currently in effect would be an "excess parachute
payment" (as such term is defined in Section 280G(b) (l) of the Code).
(o) Ownership of Fairfield Common Stock. Neither Vacation Break nor, to
its knowledge, any of its affiliates, (i) beneficially owns (as such term is
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, or (ii)
is a party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of Fairfield.
(p) State Takeover Statutes. The Board of Directors of Vacation Break
approved the Merger and this Agreement and all agreements related thereto
(including the voting agreement set forth in the Principal Stockholders
Agreement), and such approval is sufficient to render inapplicable to the Merger
and this Agreement, and the transactions contemplated by this Agreement and all
related agreements, the provisions of Sections 607.0901, 607.0902 and 607.1302
of the FBCA to the extent, if any, any such section is applicable to the Merger
and this Agreement and the transactions contemplated by this Agreement and all
related agreements.
(q) Brokers. No broker, investment banker, financial advisor or other
person, other than Montgomery Securities ("Montgomery") and Josephthal is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of Vacation Break.
(r) Properties, Title and Related Matters.
(i) Section 3.1(r)(i) of the Vacation Break Disclosure Statement or
the Vacation Break Filed SEC Documents sets forth as of June 30, 1997: (i)
each VOI resort property owned by, or for which VOIs are sold or marketed
by, Vacation
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Break and each of its Subsidiaries; (ii) the number of VOIs which have been
and which are planned to be developed at each such resort property; and
(iii) the number of VOIs which have been sold at each such resort. With
respect to each resort property or portion thereof which has completed
development of VOIs, the resort or developed portion thereof is in good
repair and condition and each VOI held for sale is in a condition
acceptable for sale. With respect to each resort property or portion
thereof which Vacation Break or any of its Subsidiaries has not completed
development of VOIs, Vacation Break or the applicable Subsidiary
anticipates expending, between June 30, 1997 and the completion of
development, the amounts set forth in Section 3.1(r)(i) of the Vacation
Break Disclosure Statement.
(ii) Except as disclosed or reserved against in the most recent
financial statements contained in the Vacation Break SEC Documents or as
set forth in Section 3.1(r)(ii) of the Vacation Break Disclosure Statement,
Vacation Break and each of its Subsidiaries have good and marketable title
to all of the material properties and assets, tangible or intangible,
reflected in such financial statements as being owned by Vacation Break and
each of its Subsidiaries as of the dates thereof, free and clear of all
Liens, except such imperfections or irregularities of title, liens,
encumbrances, charges or defaults that do not affect the use thereof in any
material respect and statutory liens securing payments not yet due
("Permitted Liens"). All leased buildings and all leased fixtures,
equipment and other property and assets that are material to Vacation
Break's business on a consolidated basis are held under leases or subleases
that are valid and binding instruments enforceable in accordance with their
respective terms, and there is not under any of such leases, any existing
material default or event of default (or event which with notice or lapse
of time, or both, would constitute a material default), except where the
lack of such validity and binding nature or the existence of such default
or event of default does not have and would not reasonably be expected (so
far as can be foreseen at the time) to have a material adverse effect on
Vacation Break.
(s) Customer Warranties. There are not pending nor are there to the best
knowledge of Vacation Break, threatened, any material claims under or pursuant
to any warranty, whether expressed or implied, on products or services sold
prior to the date of this Agreement by Vacation Break or any of its Subsidiaries
that are not disclosed or referred to in the financial statements contained in
the Vacation Break SEC Documents and which are not fully reserved against.
Section 3.1(s) of the Vacation Break Disclosure Statement identifies all such
claims asserted from January 1, 1996 to date of this Agreement and describes the
resolution of each such claim.
(t) Environmental Matters. Except as disclosed in Section 3.1(t) of the
Vacation Break Disclosure Statement or the Vacation Break Filed SEC Documents,
(i) neither the businesses of Vacation Break and its Subsidiaries or the
Ventures nor the operation thereof violates any applicable environmental law and
no condition or event has occurred which, with notice or the passage of time or
both, would constitute a violation of any environmental law; (ii) Vacation Break
and each of its Subsidiaries and each of the Ventures is in possession of all
permits required under any applicable environmental law ("Environmental
Permits") for the conduct or operation of the businesses of Vacation Break and
each of its
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Subsidiaries and each of the Ventures (or any part thereof), and Vacation Break
and each of its Subsidiaries and each of the Ventures is in compliance in all
material respects with all of the requirements and limitations included in such
Environmental Permits; (iii) none of Vacation Break or any of its Subsidiaries
or any Venture has stored or used any pollutants, contaminants or hazardous or
toxic wastes, substances or materials on or at any of its property or facilities
except for inventories of chemicals which are used or to be used in the ordinary
course of the businesses of Vacation Break and each of its Subsidiaries and each
of the Ventures (which inventories have been stored or used in accordance with
all applicable Environmental Permits and all environmental laws, including all
so-called "Right To Know" laws); (iv) none of Vacation Break or any of its
Subsidiaries or any Venture has received any notice, suit or claim from any
authority or any private person or entity that the businesses of Vacation Break
and its Subsidiaries and the Ventures or the operation of any of their
respective facilities is in violation of any environmental law or any
Environmental Permit or that it is responsible (or potentially responsible) for
the cleanup of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on or beneath any of the properties of Vacation
Break and each of its Subsidiaries, or at, on or beneath any land adjacent
thereto or in connection with any waste or contamination site; and (v) none of
Vacation Break or any of its Subsidiaries or any Venture has buried, dumped,
disposed, spilled or released any pollutants, contaminants or hazardous or
wastes, substances or materials on, beneath or adjacent to any of its property
or any property adjacent thereto. Each of Vacation Break and its Subsidiaries
and the Ventures has timely filed all reports required to be filed with respect
to all of its property and facilities and has generated and maintained all
required data, documentation and records under all applicable environmental
laws.
(u) Insurance. Each of Vacation Break and its Subsidiaries has insurance
contracts or policies (the "Vacation Break Policies") in full force and effect
which provide for coverages that are usual and customary as to amount and scope
in its businesses. Section 3.1(u) of the Vacation Break Disclosure Statement
sets forth descriptions of all insurance contracts or policies that relate to
liability or excess liability insurance (collectively the "Vacation Break
Liability Policies"), including the name of the insurer, the types, dates and
amounts of coverages, and any material coverage exclusions. None of Vacation
Break or any of its Subsidiaries has breached or otherwise failed to perform in
any material respects its obligations under any of the Vacation Break Policies
or the Vacation Break Liability Policies nor has Vacation Break or any of its
Subsidiaries received any adverse notice or communication from any of the
insurers party to the Vacation Break Policies or the Vacation Break Liability
Policies with respect to any such alleged breach or failure in connection with
any of the Vacation Break Policies or the Vacation Break Liability Policies. All
Vacation Break Policies are sufficient for compliance with all governmental laws
and regulations and all agreements to which Vacation Break and its Subsidiaries
are subject; are valid, outstanding, collectible and enforceable policies; and
will not in any way be affected by, or terminate or lapse by reason of the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(v) Accounts Receivable. The "mortgages receivable" of Vacation Break and
its Subsidiaries reflected in the financial statements contained in the Vacation
Break SEC Documents and such additional accounts receivable as are reflected on
the books of Vacation
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Break and its Subsidiaries are, to Vacation Break's knowledge, good and
collectible except to the extent reserved against thereon (which reserves have
been determined based upon actual prior experience and are consistent with prior
practices). All such accounts receivable (except to the extent so reserved
against) are valid, genuine and subsisting, arise out of bona fide sales and
deliveries of goods, performance of services or other business transactions and
are not subject to defenses, setoffs or counterclaims.
3.2 Representations and Warranties of Fairfield and Merger Sub. Except as
set forth in the specified section of the disclosure statement dated the date of
this Agreement and delivered by Fairfield to Vacation Break concurrently with
this Agreement (the "Fairfield Disclosure Statement"), Fairfield and Merger Sub
represent and warrant to Vacation Break as follows:
(a) Organization, Standing and Corporate Power. Each of Fairfield and
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has the
requisite corporate power and authority to carry on its business as now being
conducted. Each of Fairfield and Merger Sub is duly qualified or licensed to do
business and is in good standing in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
or licensing necessary, other than in such jurisdictions where the failure to be
so qualified or licensed or to be in good standing (individually or in the
aggregate) could not have a material adverse effect on Fairfield. Fairfield has
delivered to Vacation Break true, correct and complete copies of its certificate
of incorporation and bylaws and the articles of incorporation and bylaws of
Merger Sub, in each case as amended to the date hereof.
(b) Subsidiaries. Section 3.2(b) of the Fairfield Disclosure Statement
lists each Subsidiary of Fairfield together in each case with its jurisdiction
of incorporation or organization. All the outstanding shares of capital stock
or other ownership interest of each such Subsidiary have been validly issued and
are fully paid and nonassessable and owned directly or indirectly by Fairfield,
free and clear of all Liens. Except for the capital stock or other ownership
interest of such Subsidiaries, Fairfield does not own, directly or indirectly,
any capital stock or other ownership interest in any corporation, partnership,
joint venture or other entity. Fairfield has delivered to Vacation Break true,
correct and complete copies of the articles of incorporation and bylaws or other
similar organizational documents for each Subsidiary.
(c) Capital Structure. The authorized capital stock of Fairfield consists
of 25,000,000 shares of Fairfield Common Stock and 5,000,000 shares of preferred
stock, par value $.01 per share, of Fairfield (the "Fairfield Preferred Stock").
At the close of business on August 8, 1997, (i) 16,684,511 shares of Fairfield
Common Stock were issued and outstanding, (ii) 2,310,321 shares of Fairfield
Common Stock were held by Fairfield in its treasury, (iii) no shares of
Fairfield Preferred Stock were issued and outstanding, (iv) no shares of
Fairfield Preferred Stock were held by Fairfield in its treasury, and (v) not
more than 5,093,155 shares of Fairfield Common Stock were reserved for issuance
(A) upon exercise of outstanding employee and director stock options and
warrants to purchase shares of Fairfield Common Stock, (B) under Fairfield's
plan of reorganization and related agreements and settlements, and (C) under its
employee stock purchase plan. Except as set
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forth above, as of the date of this Agreement, no shares of capital stock or
other voting securities of Fairfield were issued, reserved for issuance or
outstanding. As of the date of this Agreement, all outstanding shares of capital
stock of Fairfield are, and all shares which may be issued pursuant to this
Agreement will be, when issued in accordance with the terms hereof, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. As of the date of this Agreement, there are no bonds,
debentures, notes or other indebtedness of Fairfield having the right to vote
(or convertible into securities having the right to vote) on any matters on
which shareholders of Fairfield may vote. Except as set forth above, as of the
date of this Agreement, there are no securities, options, warrants, calls,
rights, commitments, agreements, arrangements or undertakings of any kind to
which Fairfield or any of the Subsidiaries of Fairfield is a party or by which
any of them is bound obligating Fairfield or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock or other voting securities of Fairfield or of any of its
Subsidiaries or obligating Fairfield or any of its Subsidiaries to issue, grant,
extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking. As of the date of this
Agreement, there are no outstanding contractual obligations of Fairfield or any
Subsidiaries of Fairfield to repurchase, redeem or otherwise acquire any shares
of capital stock of Fairfield or its Subsidiaries other than pursuant to an
existing restricted stock plan. As of the date of this Agreement, the authorized
capital stock of Merger Sub consists of 10,000 shares of common stock, par value
$.01 per share, 100 shares of which have been validly issued, are fully paid and
nonassessable and are owned by Fairfield free and clear of any Liens.
(d) Authority; Noncontravention. Fairfield and Merger Sub have all
requisite corporate power and authority to enter into this Agreement and,
subject to the Fairfield Stockholder Approval (as hereinafter defined), to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement by Fairfield and Merger Sub and the consummation by
Fairfield and Merger Sub of the transactions contemplated by this Agreement have
been duly authorized by all necessary corporate action on the part of Fairfield
and Merger Sub, subject to the Fairfield Stockholder Approval. This Agreement
has been duly executed and delivered by each of Fairfield and Merger Sub and
constitutes a legal, valid and binding obligation of Fairfield and Merger Sub,
enforceable against Fairfield and Merger Sub in accordance with its terms. The
execution and delivery of this Agreement do not, and, except as described in
Section 3.2(d) (the "Fairfield Consents") of the disclosure statement dated the
date of this Agreement and delivered by Fairfield to Vacation Break concurrently
with this Agreement (the "Fairfield Disclosure Statement"), the consummation of
the transactions contemplated by this Agreement and compliance with the
provisions of this Agreement will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or loss of a material benefit under, or result in the creation of any Lien upon
any of the properties or assets of Fairfield or any of its Subsidiaries under
(i) the Certificate of Incorporation or bylaws of Fairfield or the comparable
organizational documents of any of its Subsidiaries, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Fairfield or
any of its Subsidiaries or their respective properties or assets, or (iii)
subject to the governmental filings and other matters referred to in the
following sentence, any judgment, order, decree, statute, law, ordinance,
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rule or regulation applicable to Fairfield or any of its Subsidiaries or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii), any such conflicts, violations, defaults, rights, losses or Liens that
individually or in the aggregate would not (x) have a material adverse effect on
Fairfield, (y) impair the ability of Fairfield or Merger Sub to perform its
obligations under this Agreement, or (z) prevent or materially delay the
consummation of the transactions contemplated by this Agreement. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Entity is required by or with respect to Fairfield or any
of its Subsidiaries in connection with the execution and delivery of this
Agreement by Fairfield and Merger Sub or the consummation by Fairfield and
Merger Sub of the transactions contemplated by this Agreement, except for (1)
the filing of a premerger notification and report form by Fairfield under the
HSR Act; (2) the filing with the SEC of (A) the Proxy Statement/Prospectus, and
(B) such reports under Section 13(a), 13(d), 15(d) or 16(a) of the Exchange Act,
as may be required in connection with this Agreement and the transactions
contemplated by this Agreement; (3) the filing of the Articles of Merger with
the Florida Department of State and appropriate documents with the relevant
authorities of other states in which Fairfield is qualified to do business and
such filings with Governmental Entities to satisfy the applicable requirements
of state securities or "blue sky" laws; (4) such other filings and consents as
may be required under any environmental law or any health or safety law or
regulation pertaining to any notification, disclosure or required approval
necessitated by the Merger or the transactions contemplated by this Agreement;
and (5) such consents, approvals, orders or authorizations the failure of which
to be made or obtained would not reasonably be expected to have a material
adverse effect on Fairfield.
(e) SEC Documents; Undisclosed Liabilities. Fairfield has filed all
required reports, schedules, forms, statements and other documents with the SEC
since January 1, 1995 (the "Fairfield SEC Documents"). As of their respective
dates, the Fairfield SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC promulgated thereunder applicable to such
Fairfield SEC Documents, and none of the Fairfield SEC Documents when filed
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Except to the extent that information contained in any Fairfield SEC
Document has been revised or superseded by a later Fairfield Filed SEC Document
(as hereinafter defined), none of the Fairfield SEC Documents contains any
untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of Fairfield included in the Fairfield SEC Documents comply
as to form, as of their respective dates of filing with the SEC, in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles (except, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto)
and fairly present in all material respects the consolidated financial position
of Fairfield and its consolidated Subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of
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unaudited statements, to normal recurring year-end audit adjustments). Except
(i) as reflected in such financial statements or in the notes thereto, (ii) as
contemplated hereunder, (iii) for liabilities incurred in connection with this
Agreement or the transactions contemplated hereby, (iv) for liabilities and
obligations incurred since December 31, 1996 in the ordinary course of business
consistent with past practice, and (v) as set forth in Section 3.2(e) of the
Fairfield Disclosure Statement, neither Fairfield nor any of its Subsidiaries
has any material liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise), including liabilities arising under any
environmental laws or laws relating to the protection of health or safety
required by generally accepted accounting principles to be reflected in a
consolidated balance sheet of Fairfield and its consolidated Subsidiaries and
which, individually or in the aggregate, could reasonably be expected to have a
material adverse effect on Fairfield.
(f) Information Supplied. None of the information supplied or to be
supplied by Fairfield specifically for inclusion or incorporation by reference
in (i) the Form S-4 Registration Statement will, at the time the Form S-4
Registration Statement is filed with the SEC or at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or (ii) the Proxy Statement/
Prospectus will, at the date it is first mailed to Fairfield's stockholders or
at the time of the Fairfield Stockholders Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy
Statement/Prospectus will comply as to the Exchange Act and the rules and
regulations thereunder, except that no representation or warranty is made by
Fairfield with respect to statements made or incorporated by reference therein
based on information supplied by Vacation Break specifically for inclusion or
incorporation by reference in the Proxy Statement/Prospectus.
(g) Absence of Certain Changes or Events. Except (i) as disclosed in the
Fairfield SEC Documents filed and publicly available prior to the date of this
Agreement (as amended to the date of this Agreement, the "Fairfield Filed SEC
Documents"), (ii) for the transactions provided for herein, (iii) as set forth
in Section 3.2(g) of the Fairfield Disclosure Statement, and (iv) for
liabilities incurred in connection with or as a result of this Agreement, since
the date of the most recent financial statements included in the Fairfield Filed
SEC Documents, Fairfield has conducted its business only in the ordinary course,
and there has not been (1) any material adverse change in Fairfield, (2) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of Fairfield's capital
stock other than the stock dividend effected on July 15, 1997, (3) any split,
combination or reclassification of any of Fairfield's capital stock or any
issuance or the authorization of any issuance of any other securities in respect
of, in lieu of or in substitution for shares of Fairfield's capital stock other
than the adjustment of share purchase rights in connection with the stock
dividend effected on July 15, 1997, (4) (A) any granting by Fairfield or any of
its Subsidiaries to any existing director, executive officer or other key
employee of Fairfield or any of its Subsidiaries of any increase in
compensation, except for normal increases in the ordinary course of business
consistent with past practice or as was required under employment agreements in
effect as of the date of the most recent financial
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statements included in the Fairfield Filed SEC Documents, (B) any granting by
Fairfield or any of its Subsidiaries to any such existing director, executive
officer or key employee of any increase in severance or termination pay, except
as was required under any employment, severance or termination agreements in
effect as of the date of the most recent financial statements included in the
Fairfield Filed SEC Documents, or (C) any entry by Fairfield or any of its
Subsidiaries into any employment, severance or termination agreement with any
such existing executive officer or key employee, or (5) except insofar as may
have been disclosed in the Fairfield Filed SEC Documents or required by a change
in generally accepted accounting principles, any change in accounting methods,
principles or practices by Fairfield materially affecting its assets,
liabilities or business.
(h) Litigation. Except as set forth in Section 3.2(h) of the Fairfield
Disclosure Statement or disclosed in the Fairfield Filed SEC Documents, there
are no actions, suits, investigations or proceedings pending or, to the
knowledge of Fairfield, threatened against Fairfield or any of its Subsidiaries,
or any property of Fairfield or any such Subsidiary in any court or before any
arbitrator of any kind or before or by any Governmental Entity, except actions,
suits, investigations or proceedings which, in the aggregate, do not have and
would not be reasonably expected (so far as can be foreseen at the time) to (i)
have a material adverse effect on Fairfield or (ii) have the effect of
preventing or materially delaying the performance by Fairfield or Merger Sub of
its obligations under this Agreement.
(i) Compliance With Laws. Fairfield and its Subsidiaries hold all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
Entities which are material to the operation of the businesses of Fairfield and
its Subsidiaries, taken as a whole (the "Fairfield Permits"). Fairfield and its
Subsidiaries are in compliance with the terms of the Fairfield Permits and all
applicable statutes, laws, ordinances, rules and regulations (including, without
limitation, the Federal Trade Commission Act, the Truth-in-Lending Act, and
Regulation Z promulgated thereunder, the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, the Interstate Land Sales Full Disclosure
Act, the Civil Rights Acts of 1964 and 1968, and Environmental Laws, federal and
state telemarketing laws, state timeshare laws and Seller of Travel or travel
agency laws) except for possible violations which could not reasonably be
expected to have a material adverse effect on Fairfield. Except as described in
Section 3.2(i) of the Fairfield Disclosure Statement or the Fairfield Filed SEC
Documents, as of the date of this Agreement, no action, demand, requirement or
investigation by any Governmental Entity with respect to Fairfield or any of its
Subsidiaries is pending or, to the knowledge of Fairfield, threatened, other
than, in each case, those the outcome of which, individually or in the
aggregate, could not reasonably be expected to have a material adverse effect on
Fairfield.
(j) Absence of Changes in Benefit Plans; Labor Relations.
(i) The Fairfield Filed SEC Document or Section 3.2(j)(i) of the
Fairfield Disclosure Statement sets forth a true and complete list of all
the following: (x) each "employee benefit plan," as such term is defined in
Section 3(3) of ERISA, pursuant to which Fairfield or any of its
Subsidiaries has (A) any liability in respect of current or former
employees, agents, directors, or independent contractors of Fairfield or
its
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Subsidiaries ("Fairfield Employees") or any beneficiaries or dependents of
any Fairfield Employees or (B) any obligation to issue capital stock of
Fairfield or any of its Subsidiaries (each, a "Fairfield Employee Plan"),
and (y) each other plan, program, policy, contract or arrangement providing
for bonuses, pensions, deferred pay, stock or stock related awards,
severance pay, salary continuation or similar benefits, hospitalization,
medical, dental or disability benefits, life insurance or other employee
benefits, or compensation to or for any Fairfield Employees or any
beneficiaries or dependents of any Fairfield Employees (other than
directors' and officers' liability policies), whether or not insured or
funded, (A) pursuant to which Fairfield or any of its Subsidiaries has any
material liability or (B) constituting an employment or severance agreement
or arrangement with any officer or director of Fairfield or any such
Subsidiary or with any holder of shares of Fairfield Common Stock (each, a
"Fairfield Benefit Arrangement"). Fairfield has provided to Vacation Break
with respect to each Fairfield Employee Plan and Fairfield Benefit
Arrangement: (i) a true and complete copy of all written documents
comprising such Fairfield Employee Plan or Fairfield Benefit Arrangement
and any related trust agreement, insurance contract or other funding
vehicle (including amendments and individual agreements relating thereto,
or, if there is no such written document, an accurate and complete
description of such Fairfield Employee Plan or Fairfield Benefit
Arrangement); (ii) the most recent Form 5500 or Form 5500-C/R (including
all schedules thereto), if applicable; (iii) the most recent financial
statements and actuarial reports or valuations, if any; (iv) the summary
plan description currently in effect and all material modifications
thereof, if any; and (v) the most recent Internal Revenue Service
determination letter, if any.
(ii) Each Fairfield Employee Plan and Fairfield Benefit Arrangement
has been established, operated and maintained in all material respects in
accordance with its terms and in material compliance with all applicable
laws and the rules and regulations thereunder, including, but not limited
to, ERISA and the Code. Neither Fairfield nor any of its Subsidiaries or
former Subsidiaries nor any of their respective current or former
directors, officers, or employees, nor, to the best knowledge of Fairfield,
any other disqualified person or party-in-interest with respect to any
Fairfield Employee Plan, have engaged directly or indirectly in any
"prohibited transaction," as such term is defined in Section 4975 of the
Code or Section 406 of ERISA, with respect to which Fairfield or its
Subsidiaries could reasonably be expected to have or has any material
liability. All contributions and other payments required to be made for any
period through the date to which this representation speaks to the
Fairfield Employee Plans and Fairfield Benefit Arrangements (or to any
person pursuant to the terms thereof) have been made or paid in a timely
fashion, or, to the extent not required to be made or paid on or before the
date to which this representation speaks, have been reflected in
Fairfield's financial statements. Each Fairfield Employee Plan that is
intended to be qualified under Section 401(a) of the Code has been
determined by the Internal Revenue Service to be so qualified or an
application for such a determination, which was filed before the expiration
of the applicable remedial amendment period, is pending, and, to the best
knowledge of Fairfield, no circumstances exist that could reasonably be
expected to result in the revocation of any such determination.
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(iii) With respect to each Fairfield Employee Plan that is subject to
Title IV of ERISA: (i) as of the last applicable annual valuation date, the
present value of all benefits under such Fairfield Employee Plan did not
exceed the value of the assets of such Fairfield Employee Plan allocable to
such benefits, on a projected benefits basis, using the actuarial methods,
factors and assumptions used for the most recent actuarial report with
respect to such Fairfield Employee Plan; and (ii) there has been no
termination, partial termination or "reportable event" (as defined in
Section 4043 of ERISA) with respect to any such Fairfield Employee Plan. No
Fairfield Employee Plan that is subject to Section 412 of the Code has
incurred any "accumulated funding deficiency" (as defined in Section 412 of
the Code), whether or not waived. No event has occurred, and, to the best
knowledge of Fairfield, there do not exist any circumstances, that could
reasonably be expected to subject Fairfield or any Subsidiary of Fairfield
to any material liability arising under ERISA. With respect to the
Fairfield Employee Plans and Fairfield Benefit Arrangements, individually
and in the aggregate, no event has occurred, and, to the best knowledge of
Fairfield, there do not exist any circumstances, that could reasonably be
expected to subject Fairfield or any Subsidiary of Fairfield to any
material liability under the Code or other applicable law, or under any
indemnity agreement to which Fairfield or any Subsidiary of Fairfield is a
party, excluding liability for benefit claims, administrative expenses and
funding obligations payable in the ordinary course.
(iv) No Fairfield Employee Plan is a "multiemployer plan" as that term
is defined in Section 3(37) of ERISA or a "multiple employer plan"
described in Section 4063(a) of ERISA, nor has Fairfield or any ERISA
Affiliate of Fairfield at any time since January 1, 1992, contributed to or
been obligated to contribute to such a multiemployer plan or multiple
employer plan.
(v) Except with respect to a Fairfield Employee Plan, neither
Fairfield nor any ERISA Affiliate of Fairfield has any Controlled Group
Liability, nor do any circumstances exist that could result in any of them
having any Controlled Group Liability.
(vi) Neither the execution or delivery of this Agreement, nor the
consummation of the transactions contemplated hereby (either alone or
together with any additional or subsequent events), constitutes an event
under any Fairfield Employee Plan, Fairfield Benefit Arrangement, loan to,
or individual agreement or contract with, a Fairfield Employee that may
result in any payment (whether of severance pay or otherwise), restriction
or limitation upon the assets of any Fairfield Employee Plan or Fairfield
Benefit Arrangement, acceleration of payment or vesting, increase in
benefits or compensation, or required funding, with respect to any
Fairfield Employee, or the forgiveness of any loan or other commitment of
any Fairfield Employee.
(vii) There are no actions, suits, arbitrations, inquiries,
investigations or other proceedings (other than routine claims for
benefits) pending or, to Fairfield's knowledge, threatened, with respect to
any Fairfield Employee Plan or Fairfield Benefit Arrangement.
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(viii) No Fairfield Employees and no beneficiaries or dependents of
Fairfield Employees are or may become entitled under any Fairfield Employee
Plan or Fairfield Benefit Arrangement to post-employment or retiree welfare
benefits of any kind, including without limitation death or medical
benefits, other than coverage mandated by Part 6 of Title I of ERISA or
Section 4980B of the Code or other applicable law.
(k) Labor Matters. There are no agreements with, or pending petitions for
recognition of, a labor union or association as the exclusive bargaining agent
for any of the employees of Fairfield or any of its Subsidiaries; no such
petitions have been pending at any time within two years of the date of this
Agreement and, to the best knowledge of Fairfield, there has not been any
organizing effort by any union or other group seeking to represent any employees
of Fairfield or any of its Subsidiaries as their exclusive bargaining agent at
any time within two years of the date of this Agreement. There are no labor
strikes, work stoppages or other labor troubles, other than routine grievance
matters, now pending, or, to Fairfield's knowledge, threatened, against
Fairfield or any of its Subsidiaries, nor have there been any such labor
strikes, work stoppages or other labor troubles, other than routine grievance
matters, with respect to Fairfield or any of its Subsidiaries at any time within
two years of the date of this Agreement.
(l) Taxes.
(i) Except as set forth in Section 3.2(l)(i) of the Fairfield
Disclosure Statement, each of Fairfield and its Subsidiaries has filed all
tax returns and reports required to be filed by it, or requests for
extensions to file such returns or reports have been timely filed and
granted and have not expired, and all tax returns and reports are complete
and accurate in all respects, except to the extent that such failures to
file or be complete and accurate in all respects, as applicable,
individually or in the aggregate, would not have a material adverse effect
on Fairfield. Fairfield and each of its Subsidiaries has paid (or Fairfield
has paid on its behalf) or made provision for all taxes shown as due on
such tax returns and reports. No claim has been made since August 6, 1992
by an authority in a jurisdiction where Fairfield or any of its
Subsidiaries does not file tax returns that it is or may be subject to
taxation by that jurisdiction. The most recent financial statements
contained in the Fairfield Filed SEC Documents reflect adequate reserves
for all taxes payable by Fairfield and its Subsidiaries for all taxable
periods and portions thereof accrued through the date of such financial
statements, and no deficiencies for any taxes have been proposed, asserted
or assessed against Fairfield or any of its Subsidiaries that are not
adequately reserved for, except for inadequately reserved taxes and
inadequately reserved deficiencies that would not, individually or in the
aggregate, have a material adverse effect on Fairfield. There are no liens
for taxes (other than for current taxes not yet due and payable) on the
assets of Fairfield or its Subsidiaries. No requests for waivers of the
time to assess any taxes against Fairfield or any of its Subsidiaries have
been granted or are pending, except for requests with respect to such taxes
that have been adequately reserved for in the most recent financial
statements contained in the Fairfield Filed SEC Documents, or, to the
extent not adequately reserved, the assessment of which would not,
individually or in the aggregate, have a material
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adverse effect on Fairfield. Except as set forth in the Florida Filed SEC
Documents or in Section 3.2(l)(i) of the Fairfield Disclosure Statement,
neither Fairfield nor any of its Subsidiaries is a party to or bound by any
agreement providing for the allocation or sharing of taxes. Neither
Fairfield nor any of its Subsidiaries has filed a consent pursuant to or
agreed to the application of Section 341(f) of the Code. Each of Fairfield
and its Subsidiaries has disclosed on its federal income tax returns all
positions taken therein that could give rise to a substantial
understatement of federal income tax within the meaning of Section 6662 of
the Code. All taxes that are required by the laws of the United States, any
state or political subdivision thereof, or any foreign country to be
withheld or collected by Fairfield or any of its Subsidiaries have been
duly withheld or collected and, to the extent required, have been paid to
the proper governmental authorities or properly deposited as required by
applicable laws. None of Fairfield and its Subsidiaries (i) has been a
member of an affiliated group filing a consolidated federal income tax
return (other than a group the common parent of which was Fairfield), or
(ii) has any liability for the taxes of any person (other than any of
Fairfield and its Subsidiaries) under Treas. Reg. (S) 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract or otherwise. For purposes of this Agreement, the
term tax (including, with correlative meaning, the terms "taxes" and
"taxable") shall include all federal, state, local, and foreign income,
profits, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise, and other taxes, duties, or assessments of
any nature whatsoever, together with all interest, penalties, and additions
imposed with respect to such amounts.
(ii) Section 3.2(l)(ii) of the Fairfield Disclosure Statement sets
forth each state in which Fairfield and its Subsidiaries have collected or
remitted any sales and/or use taxes since August 6, 1992. To Fairfield's
knowledge, neither Fairfield nor any of its Subsidiaries has conducted
activities in any other state that would require such taxes to be collected
or remitted. No claim has been made since August 6, 1992 by an authority in
a jurisdiction where Fairfield or any of its Subsidiaries does not pay
sales and/or use taxes that it is or may be subject to a requirement to
remit such taxes in that jurisdiction.
(iii) Neither Fairfield nor any of its Subsidiaries has taken any
action that is reasonably likely to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
(iv) Except as disclosed in the Fairfield Filed SEC Documents, none of
the compensation paid by Fairfield since January 1, 1997, and none of the
compensation, if any, that may be payable as a result of the Merger will be
subject to the limitations set forth in Section 162(m) of the Code.
(m) Voting Requirements. The affirmative vote of the holders of a majority
of the voting power of all outstanding shares of Fairfield Common Stock, voting
as a single class, at the Fairfield Stockholders Meeting (the "Fairfield
Stockholder Approval") to approve an amendment to its Certificate of
Incorporation to increase the number of authorized shares of Fairfield Common
Stock and the issuance of the shares of Fairfield Common Stock under
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this Agreement, the Supplemental Warrant Agreements, and the Assumed Options is
the only vote of the holders of any class or series of Fairfield's capital stock
necessary to approve the transactions contemplated by this Agreement.
(n) No Excess Parachute Payments. Except as described in Section 3.2(n) of
the Fairfield Disclosure Statement, no amount that could be received (whether in
cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any employee, officer or director
of Fairfield or any of its Affiliates who is a "disqualified individual" (as
such term is defined in Section 280G(c) of the Code or proposed Treasury
Regulation Section 1.280G-1) under any employment, severance or termination
agreement, other compensation arrangement or Employee Plan or Benefit
Arrangement currently in effect would be an "excess parachute payment" (as such
term is defined in Section 280G(b) (l) of the Code).
(o) Brokers. No broker, investment banker, financial advisor or other
person, other than Stephens Inc. ("Stephens"), is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Fairfield.
(p) Properties, Title and Related Matters.
(i) Section 3.2(p)(i) of the Fairfield Disclosure Statement or the
Fairfield Filed SEC Documents sets forth as of June 30, 1997: (i) each VOI
resort property owned by, or for which VOIs are sold or marketed by,
Fairfield or any of its Subsidiaries; (ii) the approximate number of VOIs
which have been and which are planned to be developed at each such resort
property; and (iii) the approximate number of VOIs which have been sold at
each such resort. With respect to each resort property or portion thereof
which has completed development of VOIs, the resort or developed portion
thereof is in good repair and condition and each VOI held for sale is in a
condition acceptable for sale. With respect to each resort property or
portion thereof which Fairfield or any of its Subsidiaries has not
completed development of VOIs, Fairfield or the applicable Subsidiary
anticipates expending, between June 30, 1997 and the completion of
development, the approximate amounts set forth in Section 3.2(p)(i) of the
Fairfield Disclosure Statement.
(ii) Except as disclosed or reserved against in the most recent
financial statements contained in the Fairfield SEC Documents or as it set
forth in Section 3.2(p)(ii) of the Fairfield Disclosure Statement,
Fairfield and each of its Subsidiaries have good and marketable title to
all of the material properties and assets, tangible or intangible,
reflected in such financial statements as being owned by Fairfield and each
of its Subsidiaries as of the dates thereof, free and clear of all Liens,
except Permitted Liens. All leased buildings and all leased fixtures,
equipment and other property and assets that are material to Fairfield's
business on a consolidated basis are held under leases or subleases that
are valid and binding instruments enforceable in accordance with their
respective terms, and there is not under any of such leases, any existing
material default or event of default (or event which with notice or lapse
of time, or both, would constitute a material default), except where the
lack of such validity and
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binding nature or the existence of such default or event of default does
not have and would not reasonably be expected (so far as can be foreseen at
the time) to have a material adverse effect on Fairfield.
(q) Customer Warranties. There are not pending nor are there to the best
knowledge of Fairfield, threatened, any material claims under or pursuant to any
warranty, whether expressed or implied, on products or services sold prior to
the date of this Agreement by Fairfield or any of its Subsidiaries that are not
disclosed or referred to in the financial statements contained in the Fairfield
SEC Documents and which are not fully reserved against. Section 3.2(q) of the
Fairfield Disclosure Statement identifies all such claims asserted from January
1, 1996 to date of this Agreement and describes the resolution of each such
claim.
(r) Environmental Matters. Except as disclosed in Section 3.2(r) of the
Fairfield Disclosure Statement or the Fairfield Filed SEC Documents, (i) neither
the businesses of Fairfield and its Subsidiaries nor the operation thereof
violates any applicable Environmental Law (as defined in Article VIII) and no
condition or event has occurred which, with notice or the lapse of time or both,
would constitute a violation of any Environmental Law; (ii) Fairfield and each
of its Subsidiaries is in possession of all Environmental Permits required for
the conduct or operation of the businesses of Fairfield and each of its
Subsidiaries (or any part thereof), and Fairfield and each of its Subsidiaries
is in compliance in all material respects with all of the requirements and
limitations included in such Environmental Permits; (iii) none of Fairfield or
any of its Subsidiaries has stored or used any pollutants, contaminants or
hazardous or toxic wastes, substances or materials on or at any of its
properties or facilities except for inventories of chemicals which are used or
to be used in the ordinary course of the businesses of Fairfield and each of its
Subsidiaries (which inventories have been stored or used in accordance with all
applicable Environmental Permits and all Environmental Laws, including all so-
called "Right To Know" laws); (iv) none of Fairfield or any of its Subsidiaries
has received any notice, suit or claim from any authority or any private person
or entity that the businesses of Fairfield and its Subsidiaries or the operation
of any of their respective facilities is in violation of any Environmental Law
or any Environmental Permit or that it is responsible (or potentially
responsible) for the cleanup of any pollutants, contaminants, or hazardous or
toxic wastes, substances or materials at, on or beneath any of the properties of
Fairfield and each of its Subsidiaries, or at, on or beneath any land adjacent
thereto or in connection with any waste or contamination site; and (v) none of
Fairfield or any of its Subsidiaries has buried, dumped, disposed, spilled or
released any pollutants, contaminants or hazardous or toxic wastes, substances
or materials on, beneath or adjacent to any of its properties or any property
adjacent thereto. Fairfield and each of its Subsidiaries has timely filed all
reports required to be filed by it with respect to all of its property and
facilities and has generated and maintained all required data, documentation and
records under all applicable Environmental Laws.
(s) Insurance. Each of Fairfield and its Subsidiaries has insurance
contracts or policies (the "Fairfield Policies") in full force and effect which
provide for coverages that are usual and customary as to amount and scope in its
businesses. Section 3.2(s) of the Fairfield Disclosure Statement sets forth
descriptions of all insurance contracts or policies that relate to liability or
excess liability insurance (collectively the "Fairfield Liability Policies"),
including
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the name of the insurer, the types, dates and amounts of coverages, and any
material coverage exclusions. None of Fairfield or its Subsidiaries has breached
or otherwise failed to perform in any material respects its obligations under
any of the Fairfield Policies or the Fairfield Liability Policies nor has
Fairfield or its Subsidiaries received any adverse notice or communication from
any of the insurers party to the Fairfield Policies or the Fairfield Liability
Policies with respect to any such alleged breach or failure in connection with
any of the Fairfield Policies or the Fairfield Liability Policies. All Fairfield
Policies are sufficient for compliance with all governmental laws and
regulations and all agreements to which Fairfield and its Subsidiaries are
subject; are valid, outstanding, collectible and enforceable policies; and will
not in any way be affected by, or terminate or lapse by reason of the execution
and delivery of, this Agreement or the consummation of the transactions
contemplated hereby.
(t) Accounts Receivable. The "mortgages receivable" of Fairfield and its
Subsidiaries reflected in the financial statements contained in the Fairfield
SEC Documents and such additional accounts receivable as are reflected on the
books of Fairfield and its Subsidiaries are, to Fairfield's knowledge, good and
collectible except to the extent reserved against thereon (which reserves have
been determined based upon actual prior experience and are consistent with prior
practice). All such accounts receivable (except to the extent so reserved
against) are valid, genuine and subsisting, arise out of bona fide sales and
deliveries of goods, performance of services or other business transactions and
are not subject to defenses, setoffs or counterclaims.
(u) State Takeover Statutes; Rights Agreement. The Board of Directors of
Fairfield has approved the terms of this Agreement and the consummation of the
Merger and the other transactions contemplated by this Agreement and, assuming
the accuracy of Vacation Break's representation and warranty contained in
Section 3.1(o), such approval constitutes approval of the Merger and the other
transactions contemplated by this Agreement by the Fairfield Board of Directors
under the provisions of Section 203 of the DGCL. Neither Vacation Break nor any
of its wholly owned subsidiaries is an Acquiring Person (as defined in the
Fairfield Rights Agreement) pursuant to the Fairfield Rights Agreement and a
Stock Acquisition Date, Distribution Date or Triggering Event (in each case as
defined in the Fairfield Rights Agreement) does not occur solely by reason of
the execution of this Agreement, the consummation of the Merger, or the
consummation of the other transactions contemplated by this Agreement unless the
Share Consideration to be received by a stockholder of Vacation Break, when
combined with any other shares of Fairfield Common Stock beneficially owned by
that stockholder would result in that stockholder beneficially owning 20 percent
or more of the outstanding shares of Fairfield Common Stock.
(v) Merger Sub. Merger Sub is a newly formed direct wholly owned subsidiary
of Fairfield formed solely for the purpose of engaging in this transaction. As
of the Effective Date, Merger Sub will not have conducted any business nor will
it own any significant assets or owe any significant liabilities.
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ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Conduct of Business by Vacation Break.
(a) Conduct of Business. During the period from the date of this Agreement
to the Effective Time, except as expressly contemplated or permitted by this
Agreement or to the extent that Fairfield otherwise consents in writing,
Vacation Break will and will cause its Subsidiaries to, carry on their
respective businesses in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and in compliance with all material
respects with all applicable laws and regulations and, to the extent consistent
therewith, use reasonable efforts to preserve intact their current business
organizations, keep available the services of their current officers and
employees and preserve their relationships with those persons having business
dealings with them to the end that their goodwill and ongoing businesses shall
not be impaired in any material respect at the Effective Time. Without limiting
the generality of the foregoing, during the period from the date of this
Agreement to the Effective Time Vacation Break will not, and will not permit any
of its Subsidiaries to:
(i) (A) set aside for payment or pay any dividends on, or make any
other actual, constructive or deemed distributions (whether in cash, stock
or property) in respect of, any of its capital stock or otherwise make any
payments to stockholders in their capacity as such, except for dividends by
a direct or indirect wholly owned Subsidiary of Vacation Break to its
parent, (B) split, combine, subdivide or reclassify any of its capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock, or (C)
purchase, redeem or otherwise acquire or propose to redeem, purchase or
acquire any shares of its capital stock (including the Vacation Break
Common Stock) or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities;
(ii) except for Vacation Break Shares issued upon exercise of Options
outstanding as of this date or the Warrants under the Warrant Agreement,
issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, sale, disposition or pledge or other
encumbrance of (A) any shares of its capital stock of any class (including
the Vacation Break Common Stock), or any securities or rights convertible
into, exchangeable for, or evidencing the right to subscribe for any shares
of its capital stock, or any rights, warrants, options, calls, commitments
or any other agreements of any character to purchase or acquire any shares
of its capital stock or any securities or rights convertible into,
exchangeable for, or evidencing the right to subscribe for, any shares of
its capital stock, or (B) any other securities in respect of, in lieu of,
or in substitution for, Vacation Break Common Stock outstanding on the date
hereof;
(iii) amend its articles of incorporation, bylaws or other comparable
charter or organizational documents or alter through merger, liquidation,
reorganization, restructuring or in any other fashion the corporate
structure or ownership of any Subsidiary;
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(iv) except as set forth in Section 4.1(a)(iv) of the Vacation Break
Disclosure Statement, acquire or agree to acquire (A) by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
joint venture, association or other business organization or division
thereof or (B) any assets that are material, individually or in the
aggregate, to Vacation Break;
(v) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets, except
sales of inventory in the ordinary course of business consistent with past
practice, disposition of obsolete assets or assets no longer used in its
business, and encumbrance of mortgages receivable pursuant to existing
credit facilities in accordance with Section 4.1(a)(vi);
(vi) (A) except as set forth in Section 4.1(a)(vi) of the Vacation
Break Disclosure Statement, incur any indebtedness for borrowed money or
guarantee any such indebtedness of another person, issue or sell any debt
securities or warrants or other rights to acquire any debt securities,
guarantee any debt securities of another person, enter into any "keep well"
or other agreement to maintain any financial statement condition of another
Person or enter into any arrangement having the economic effect of any of
the foregoing, except borrowings under existing credit facilities and other
borrowings in the ordinary course up to $3.0 million after the date hereof,
or (B) except as set forth in Section 4.1(a)(vi) of the Vacation Break
Disclosure Statement, make any loans, advances or capital contributions to,
or investments in, any other Person, other than (A) to Vacation Break or
any of its direct or indirect wholly owned Subsidiaries or (B) advances to
officers and employees of Vacation Break for travel, business and
entertainment or relocation expenses in accordance with past practice;
(vii) except as set forth in Section 4.1 (a)(vii) of the Vacation
Break Disclosure Statement or in the ordinary course of business, make or
agree to make any new capital expenditure or expenditures which,
individually, is in excess of $100,000 or, in the aggregate, are in excess
of $250,000;
(viii) make any material tax elections or settle or compromise any
material tax liability;
(ix) except as set forth in Section 4.1(a)(ix) of the Vacation Break
Disclosure Statement, pay, discharge, settle or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge, settlement or
satisfaction, in the ordinary course of business consistent with past
practice or in accordance with their terms, of liabilities less than
$100,000 or reflected or reserved against in, or contemplated by, the
financial statements of Vacation Break included in the Vacation Break Filed
SEC Documents (or the notes thereto) or incurred in the ordinary course of
business consistent with past practice, or waive any material benefits of,
or agree to modify in any material respect, any confidentiality, standstill
or similar agreements to which it is a party;
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(x) except in the ordinary course of business, modify, amend or
terminate any material contract or agreement to which it is a party or
waive, release or assign any material rights or claims;
(xi) except as set forth in Section 4.1(a)(xi) of the Vacation Break
Disclosure Statement or as required to comply with applicable law, (A)
adopt, enter into, terminate or amend any Benefit Plan or other arrangement
for the benefit or welfare of any director, officer or current or former
employee, (B) increase in any manner the compensation or fringe benefits
of, or pay any bonus to, any director, officer or employee (except for
normal increases or bonuses in the ordinary course of business consistent
with past practice), (C) pay any benefit not provided for under any Benefit
Plan, (D) except as permitted in clause (B), grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
Benefit Plan (including the grant of stock options, stock appreciation
rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any Benefit
Plans or agreement or awards made thereunder) or (E) take any action to
fund or in any other way secure the payment of compensation or benefits
under any employee plan, agreement, contract or arrangement or Benefit
Plan;
(xii) make any change in any method of accounting or accounting
practice or policy other than those required by generally accepted
accounting principles;
(xiii) take any action that would prevent the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of the Code and
Vacation Break will use all reasonable efforts to achieve that result;
(xiv) (A) other than in the ordinary course of business consistent
with past practices, and as approved by the Board of Directors of Vacation
Break, (1) grant any increases in the base compensation of any of its
directors, officers or key employees, (2) pay or agree to pay any material
pension, retirement allowance or other employee benefit not required by any
of the Employee Plans or Benefit Arrangements as in effect on the date
hereof to any such director, officer or key employees, whether past or
present, or (3) grant any increase in the commissions payable to its sales
agents, or (B) (1) enter into any new or amend any existing employment or
severance agreement with any director, officer or key employee of Vacation
Break or any of its Subsidiaries, except as permitted in the Vacation Break
Disclosure Statement, or (2) except as may be required to comply with
applicable law, become obligated under any new Employee Plan or Benefit
Arrangement which was not in existence on the date hereof, or amend any
such Employee Plan or Benefit Arrangement in existence on the date hereof
if such amendment would have the effect of accelerating or materially
enhancing any benefits thereunder;
(xv) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of the Company or any of its Subsidiaries (other than the
Merger);
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(xvi) enter into any agreement providing for acceleration of payment
of any material obligation or performance of any material benefit or
payment or other consequence as a result of a change of control of Vacation
Break or its Subsidiaries;
(xvii) except as disclosed in Vacation Break's current capital budget,
a true and complete copy of which has been delivered to Fairfield, enter
into any contract, arrangement or understanding requiring the lease or
purchase of equipment, materials, supplies or services over a period
greater than 12 months, which is not cancelable without penalty on 30 days'
or less notice;
(xviii) authorize any of, or commit or agree to take any of, the
foregoing actions; or
(xix) take any action that (without regard to any action taken or
agreed to be taken by Fairfield or any of its affiliates) would prevent
Fairfield from accounting for the business combination to be effected by
the Merger as a pooling of interests.
(b) Other Transactions.
(i) Vacation Break shall not, nor shall it permit any of its
Subsidiaries to, nor shall it authorize or permit any of its officers,
directors or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it or any of its
Subsidiaries to, directly or indirectly through another person, (1)
solicit, initiate or encourage (including by way of furnishing
information), or take any other action designed to facilitate, any
inquiries or the making of any proposal which constitutes any Vacation
Break Takeover Proposal (as hereinafter defined) or (2) participate in any
discussions or negotiations regarding any Vacation Break Takeover Proposal;
provided, however, that if, at any time prior to the adoption of this
Agreement by the holders of Vacation Break Common Stock, the Board of
Directors of Vacation Break determines in good faith, after consultation
with outside counsel, that it is necessary to do so in order to comply with
its fiduciary duties to Vacation Break's stockholders under applicable law,
Vacation Break may, in response to a Vacation Break Takeover Proposal which
was not solicited by it or which did not otherwise result from a breach of
this Section 4.1(b)(i), and subject to compliance with Section 4.1(b)(iii),
(x) furnish information with respect to Vacation Break and its Subsidiaries
to any person pursuant to a customary confidentiality agreement (as
determined by Vacation Break after consultation with its outside counsel)
and (y) participate in negotiations regarding such Vacation Break Takeover
Proposal. For purposes of this Agreement, "Vacation Break Takeover
Proposal" means any inquiry, proposal or offer from any person relating to
any direct or indirect acquisition or purchase of 20% or more of the assets
of Vacation Break and its Subsidiaries or 20% or more of any class of
equity securities of Vacation Break or any of its Subsidiaries, any tender
offer or exchange offer that if consummated would result in any person
beneficially owning 20% or more of any class of equity securities of
Vacation Break or any of its Subsidiaries, or any merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving
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Vacation Break or any of its Subsidiaries, other than the transactions
contemplated by this Agreement.
(ii) Except as expressly permitted by this Section 4.1(b), neither the
Board of Directors of Vacation Break nor any committee thereof shall (1)
withdraw or modify, or propose publicly to withdraw or modify, in a manner
adverse to Fairfield, the approval or recommendation by such Board of
Directors or such committee of the Merger or this Agreement, (2) approve or
recommend, or propose publicly to approve or recommend, any Vacation Break
Takeover Proposal, or (3) cause Vacation Break to enter into any letter of
intent, agreement in principle, acquisition agreement or other similar
agreement (each, a "Vacation Break Acquisition Agreement") related to any
Vacation Break Takeover Proposal. Notwithstanding the foregoing, in the
event that prior to the approval of this Agreement by the holders of
Vacation Break Common Stock (x) the Board of Directors of Vacation Break
determines in good faith, after it has received a Vacation Break Superior
Proposal (as hereinafter defined) and after consultation with outside
counsel, that it is necessary to do so in order to comply with its
fiduciary duties to Vacation Break's stockholders under applicable law, the
Board of Directors of Vacation Break may (subject to this and the following
sentences) withdraw or modify its approval or recommendation of the Merger
or this Agreement, or (y) the Board of Directors of Vacation Break
determines in good faith that there is not a substantial probability that
the adoption of this Agreement by holders of Vacation Break Common Stock
will be obtained due to the existence of a Vacation Break Superior
Proposal, the Board of Directors of Vacation Break may (subject to this and
the following sentences) approve or recommend such Vacation Break Superior
Proposal or terminate this Agreement (and concurrently with or after such
termination, if it so chooses, cause Vacation Break to enter into any
Vacation Break Acquisition Agreement with respect to any Vacation Break
Superior Proposal), but in each of the cases set forth in this clause (y),
only at a time that is after the fifth business day following Fairfield's
receipt of written notice advising Fairfield that the Board of Directors of
Vacation Break has received a Vacation Break Superior Proposal, specifying
the material terms and conditions of such Vacation Break Superior Proposal
and identifying the person making such Vacation Break Superior Proposal.
For purposes of this Agreement, a "Vacation Break Superior Proposal" means
any proposal made by a third party to acquire, directly or indirectly, for
consideration consisting of cash and/or securities, more than 50% of the
shares of Vacation Break Common Stock then outstanding or all or
substantially all the assets of Vacation Break and otherwise on terms which
the Board of Directors of Vacation Break determines in its good faith
judgment (based on the advice of a financial advisor of nationally
recognized reputation) to be more favorable to Vacation Break's
stockholders than the Merger and for which financing, to the extent
required, is then committed or which, in the good faith judgment of the
Board of Directors of Vacation Break, is reasonably capable of being
obtained by such third party.
(iii) In addition to the obligations of Vacation Break set forth in
Sections 4.1(b)(i) and 4.1(b)(ii), Vacation Break shall immediately advise
Fairfield orally and in writing of any request for information or of any
Vacation Break Takeover Proposal, the material terms and conditions of such
request or Vacation Break
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Takeover Proposal and the identity of the person making such request or
Vacation Break Takeover Proposal. Vacation Break will keep Fairfield
reasonably informed of the status and details (including amendments or
proposed amendments) of any such request or Vacation Break Takeover
Proposal.
(iv) Nothing contained in this Section 4.1(b) shall prohibit Vacation
Break from taking and disclosing to its stockholders a position
contemplated by Rule 14e-2(a) promulgated under the Exchange Act or from
making any disclosure to Vacation Break's stockholders if, in the good
faith judgment of the Board of Directors of Vacation Break, after
consultation with outside counsel, failure so to disclose would be
inconsistent with its fiduciary duties to Vacation Break's stockholders
under applicable law; provided, however, that neither Vacation Break nor
its Board of Directors nor any committee thereof shall, except as permitted
by Section 4.1(b)(ii), withdraw or modify, or propose publicly to withdraw
or modify, its position with respect to this Agreement or the Merger or
approve or recommend, or propose publicly to approve or recommend, a
Vacation Break Takeover Proposal.
(c) Other Actions. None of Vacation Break or its Subsidiaries shall take
any action that would, or that could reasonably be expected to, result in (i)
any of the representations and warranties of Vacation Break set forth in this
Agreement that are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions to the Merger set forth in
Article VI not being satisfied (subject to Vacation Break's rights and
obligations to comply with federal and state laws).
(d) Certain Tax Matters. From the date hereof until the Effective Time, (i)
Vacation Break and its Subsidiaries will accurately prepare and timely file with
the relevant taxing authorities all tax returns required to be filed ("Post-
Signing Returns"); (ii) Vacation Break and its Subsidiaries will timely pay all
taxes due and payable in connection with each Post-Signing Return; (iii)
Vacation Break and its Subsidiaries will make adequate provision on their books
and records, to the extent required in accordance with generally accepted
accounting principles, for all taxes due and payable from the date hereof until
the Effective Time; and (iv) Vacation Break and its subsidiaries will promptly
notify Fairfield of any pending or announced action, suit, proceeding, claim or
audit against or with respect to Vacation Break in respect of any tax where
there is a reasonable possibility of a determination or decision which would
reasonably be expected to have a material adverse effect on Vacation Break's tax
liabilities or tax attributes.
4.2 Conduct of Business of Fairfield and Merger Sub.
(a) Conduct of Business. During the period from the date of this Agreement
to the Effective Time, except as expressly contemplated or permitted by this
Agreement or to the extent that Vacation Break otherwise consents in writing,
Fairfield will and will cause its Subsidiaries to, carry on their respective
businesses in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted and in compliance with all material respects with
all applicable laws and regulations and, to the extent consistent therewith, use
reasonable efforts to preserve intact their current business organizations, keep
available the
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services of their current officers and employees and preserve their
relationships with those persons having business dealings all to the extent
consistent with its ongoing business and operations. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time, Fairfield will not, and will not permit any of its
Subsidiaries to:
(i) (A) set aside for payment or pay any dividends on, or make any
other actual, constructive or deemed distributions (whether in cash, stock
or property) in respect of, any of its capital stock or otherwise make any
payments to stockholders in their capacity as such, except for dividends by
a direct or indirect wholly owned Subsidiary of Fairfield to its parent,
(B) split, combine, subdivide or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (C)
purchase, redeem or otherwise acquire or propose to redeem, purchase or
acquire any shares of its capital stock (including shares of Fairfield
Common Stock) or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities;
(ii) except for (A) shares of Fairfield Common Stock issued (1) upon
exercise of options and warrants granted under existing stock option and
warrant plans; (2) under Fairfield's plan of reorganization and related
agreements and settlements; and (3) under the employee stock purchase plan;
(B) granting of options, warrants or rights under the plans described in
(A)(1) and (A)(3) above; or (C) repurchasing Fairfield Common Stock
pursuant to an existing restricted stock plan; issue, deliver, sell,
dispose of, pledge or otherwise encumber, or authorize or propose the
issuance, sale, disposition or pledge or other encumbrance of (a) any
shares of its capital stock of any class (including shares of Fairfield
Common Stock), or any securities or rights convertible into, exchangeable
for, or evidencing the right to subscribe for any shares of its capital
stock, or any rights, warrants, options, calls, commitments or any other
agreements of any character to purchase or acquire any shares of its
capital stock or any securities or rights convertible into, exchangeable
for, or evidencing the right to subscribe for, any shares of its capital
stock, or (b) any other securities in respect of, in lieu of, or in
substitution for, shares of Fairfield Common Stock outstanding on the date
hereof;
(iii) except as contemplated under this Agreement, amend Fairfield's
certificate of incorporation or bylaws;
(iv) except as set forth in Section 4.2 (a) (iv) of the Fairfield
Disclosure Statement, acquire or agree to acquire (A) by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
joint venture, association or other business organization or division
thereof or (B) any assets that are material, individually or in the
aggregate, to Fairfield; provided, however, Fairfield or its Subsidiaries
may acquire any such business, assets or Person or division thereof if (1)
it does not exceed 15 percent of the total assets of Fairfield and its
Subsidiaries consolidated as of the end of the most recently completed
fiscal year (for a proposed business combination to be accounted for as a
pooling of interests, this condition will be met if
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the number of common shares exchanged or to be exchanged by Fairfield does
not exceed 15 percent of its total common shares outstanding at the date
the combination is initiated) or (2) Fairfield and its Subsidiaries'
proportionate share of the total assets (after intercompany eliminations)
of any such business, assets, Person or division does not exceed 15 percent
of the total assets of Fairfield and its Subsidiaries consolidated as of
the end of the most recently completed fiscal year.
(v) make any change in any method of accounting or accounting practice
or policy other than those required by generally accepted accounting
principles;
(vi) take any action that would prevent the Merger from qualifying as
a reorganization within the meaning of Section 368(a) of the Code and
Fairfield will use all reasonable efforts to achieve that result;
(vii) authorize any of, or commit or agree to take any of, the
foregoing actions;
(viii) take any action that (without regard to any action taken or
agreed to be taken by Vacation Break or any of its affiliates) would
prevent Fairfield from accounting for the business combination to be
effected by the Merger as a pooling of interests;
(ix) purchase shares of Vacation Break Common Stock.
(b) Other Actions. Fairfield shall not, and shall not permit any of its
Subsidiaries to, take any action that would, or that could reasonably be
expected to, result in (i) any of the representations and warranties of
Fairfield or Merger Sub set forth in this Agreement that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
that are not so qualified becoming untrue in any material respect, or (iii) any
of the conditions to the Merger set forth in Article VI not being satisfied
(subject to their right and obligation to comply with federal and state laws).
(c) Certain Tax Matters. From the date hereof until the Effective Time,
(i) Fairfield and its Subsidiaries will accurately prepare and timely file with
the relevant taxing authorities all Post-Signing Returns required to be filed;
(ii) Fairfield and its Subsidiaries will timely pay all taxes due and payable in
connection with each Post-Signing Return; (iii) Fairfield and its Subsidiaries
will make adequate provision on their books and records, to the extent required
in accordance with generally accepted accounting principles, for all taxes due
and payable from the date hereof until the Effective Time; and (iv) Fairfield
and its subsidiaries will promptly notify Vacation Break of any pending or
announced action, suit, proceeding, claim or audit against or with respect to
the Fairfield in respect of any tax where there is a reasonable possibility of a
determination or decision which would reasonably be expected to have a material
adverse effect on Fairfield's tax liabilities or tax attributes.
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ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Preparation of Proxy Statement; Shareholders Meeting.
(a) Proxy. Fairfield and Vacation Break shall cooperate and promptly
prepare and Fairfield shall file with the SEC as soon as practicable a
Registration Statement on Form S-4 under the Securities Act with respect to the
shares of Fairfield Common Stock issuable in the Merger (the "S-4 Registration
Statement"), a portion of which Registration Statement shall also serve as the
proxy statement with respect to the meeting of Fairfield's stockholders to
approve the amendment to its Certificate of Incorporation to increase the number
of authorized shares of Fairfield Common Stock and the issuance of the shares of
Fairfield Common Stock under this Agreement, the Supplemental Warrant Agreements
and the Assumed Options (the "Fairfield Stockholder Meeting") and Vacation
Break's meeting of stockholders to approve this Agreement (the "Vacation Break
Stockholders Meeting")(such proxy statement/prospectus, together with any
amendments thereof or supplements thereto, in each case in the form or forms
mailed to stockholders, is herein called the "Proxy Statement/Prospectus").
Fairfield will cause the Proxy Statement/Prospectus and the S-4 Registration
Statement to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and regulations
thereunder. Fairfield shall use all reasonable efforts, and Vacation Break will
cooperate with Fairfield, to have the S-4 Registration Statement declared
effective by the SEC as promptly as practicable and to keep the S-4 Registration
Statement effective as long as is necessary to consummate the Merger. Fairfield
shall, as promptly as practicable, provide Vacation Break copies of any written,
and will inform Vacation Break of any oral, comments on the S-4 Registration
Statement received from the SEC. Fairfield shall use its best efforts to obtain,
prior to the effective date of the S-4 Registration Statement, all necessary
state securities law or "Blue Sky" permits or approvals required to carry out
the transactions contemplated by this Agreement and will pay all expenses
incident thereto. Fairfield agrees that the Proxy Statement/Prospectus and each
amendment or supplement thereto at the time of mailing thereof and at the time
of the Fairfield Stockholders Meeting, or, in the case of the S-4 Registration
Statement, at the time it becomes effective, as it may be amended or
supplemented, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state a
material fact was made by Fairfield in reliance upon and in conformity with
written information concerning Vacation Break furnished to Fairfield by Vacation
Break for inclusion in the Proxy Statement/Prospectus and the S-4 Registration
Statement, as it may be amended or supplemented. Vacation Break agrees that the
written information concerning Vacation Break, its Subsidiaries, and its
officers and directors provided by it for inclusion in the Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof and at the time of the Fairfield Stockholders Meeting, or, in
the case of written information concerning Vacation Break provided by Vacation
Break for inclusion in the S-4 Registration Statement or any amendment or
supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material fact
required to be
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stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. No amendment or
supplement to the Proxy Statement/Prospectus that amends or supplements
information relating to Vacation Break will be made by Fairfield without the
approval of Vacation Break, such approval not to be unreasonably withheld.
Fairfield will advise Vacation Break, promptly after it receives notice thereof,
of the time when the S-4 Registration Statement has become effective or any
supplement or amendment has been filed, the issuance of any stop order, the
suspension of a qualification of the Fairfield Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, or any
written request by the SEC for amendment of the Proxy Statement/Prospectus or
the S-4 Registration Statement or for additional information. As soon as
practicable after the S-4 Registration Statement has become effective, Fairfield
will provide Vacation Break with sufficient copies of the Proxy
Statement/Prospectus in the form mailed to Fairfield stockholders, as well as
sufficient copies of the Fairfield SEC Reports incorporated by reference into
the Proxy Statement/Prospectus, to enable Vacation Break to deliver a copy to
each stockholder of record of Vacation Break.
(b) Warrants. Vacation Break will use all reasonable efforts to cause the
Proxy Statement/Prospectus to be mailed to Vacation Break's stockholders, and
Fairfield will use all reasonable efforts to cause the Proxy
Statement/Prospectus to be mailed to Fairfield's stockholders, in each case as
promptly as practicable after the S-4 Registration Statement is declared
effective under the Securities Act. Vacation Break will, as soon as practicable
following the date of this Agreement, duly call, give notice of, convene and
hold the Vacation Break Stockholders Meeting for the purpose of obtaining the
Vacation Break Stockholder Approval. Without limiting the generality of the
foregoing but subject to Section 4.02(b), Vacation Break agrees that its
obligations pursuant to the first sentence of this Section 5.01(b) shall not be
affected by the commencement, public proposal, public disclosure or
communication to Vacation Break of any Vacation Break Takeover Proposal.
Vacation Break will, through its Board of Directors, recommend to its
stockholders the approval and adoption of this Agreement, the Merger and the
other transactions contemplated hereby, except to the extent that the Board of
Directors of Vacation Break shall have withdrawn or modified its approval or
recommendation of this Agreement or the Merger and terminated this Agreement in
accordance with Section 4.02(b). Fairfield will, as soon as practicable
following the date of this Agreement, duly call, give notice of, convene and
hold the Fairfield Stockholders Meeting for the purpose of obtaining the
Fairfield Stockholder Approval. Fairfield will, through its Board of Directors,
recommend to its stockholders the approval and adoption of the amendment of its
certificate of incorporation and the issuance of the shares of Fairfield Common
Stock under this Agreement, the Supplemental Warrant Agreements and the Assumed
Options. Fairfield and Vacation Break will use reasonable efforts to hold the
Vacation Break Stockholders Meeting and the Fairfield Stockholders Meeting on
the same date and as soon as practicable after the date hereof.
5.2 Letters of Vacation Break's Accountants.
(a) With respect to the filing of the S-4 Registration Statement and the
Proxy Statement/Prospectus and each Current Report on Form 8-K (a "Form 8-K")
filed by Fairfield pertaining to the Merger (which Form 8-K contains financial
statements of or pertaining to Vacation Break), Vacation Break shall use its
reasonable efforts to cause to be
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delivered to Fairfield a "comfort" letter of Coopers & Lybrand L.L.P., Vacation
Break's independent auditors. Such comfort letter shall be dated on the date of
the schedule or report filed with the SEC and shall be customary in scope and
substance for letters delivered by independent public accountants in connection
with such schedules or reports.
(b) Vacation Break shall use its reasonable efforts to cause to be
delivered to Fairfield letters from Coopers & Lybrand L.L.P., addressed to
Fairfield, one dated the date of the Proxy Statement/Prospectus, stating that
the Merger will qualify as a pooling of interests transaction under Opinion 16
of the Accounting Principles Board and applicable SEC rules and regulations, and
one dated as of the Closing Date, confirming as of the Closing Date the
previously delivered letter referred to above.
5.3 Letters of Fairfield's Accountants.
(a) With respect to the filing of the S-4 Registration Statement and Proxy
Statement/Prospectus and each Form 8-K filed by Fairfield pertaining to the
Merger (which Form 8-K contains financial statements of or pertaining to
Fairfield and Vacation Break), Fairfield shall use its reasonable efforts to
cause to be delivered to Fairfield a "comfort" letter of Ernst & Young LLP,
Fairfield's independent auditors. Such comfort letter shall be dated on the date
of the schedule or report filed with the SEC and shall be customary in scope and
substance for letters delivered by independent public accountants in connection
with such schedules or reports.
(b) Fairfield shall use its reasonable efforts to cause to be received by
it letters from Ernst & Young LLP, addressed to Fairfield, one dated the date of
the Proxy Statement/Prospectus, stating that the Merger will qualify as a
pooling of interests transaction under Opinion 16 of the Accounting Principles
Board and applicable SEC rules and regulations, and one dated as of the Closing
Date, confirming as of the Closing Date the previously delivered letter referred
to above.
5.4 Certain Actions. Fairfield and Vacation Break shall and shall use
reasonable efforts to cause their respective Subsidiaries to: (i) promptly make
all filings and seek to obtain all Authorizations required under all applicable
laws with respect to the Merger and the other transactions contemplated hereby
and will cooperate with each other with respect thereto; and (ii) promptly take,
or cause to be taken, all other actions and do, or cause to be done, all other
things necessary, proper or appropriate to satisfy the conditions set forth in
Article VIII and to consummate and make effective the transactions contemplated
by this Agreement on the terms and conditions set forth herein as soon as
practicable (including, without limitation, using their respective reasonable
best efforts to avoid the entry of (or, if entered, to have lifted, vacated or
reversed) any order, decree, judgment or ruling of any court or Governmental
Entity restraining or preventing the consummation of the transactions
contemplated by this Agreement on the basis of any federal or state antitrust
laws or regulations; provided, however, that in connection with any filing or
submission required or action to be taken by either Fairfield or Vacation Break
or any of their Subsidiaries to effect the Merger and to consummate the other
transactions contemplated hereby, (A) neither Vacation Break nor any of its
Subsidiaries shall, without Fairfield's prior written consent, commit to any
divestiture or hold separate or similar transaction and (B) neither Fairfield
nor
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any of its Subsidiaries shall be required to divest or hold separate or
otherwise take or commit to take any action, in each case, that materially
limits its freedom of action with respect to, or its ability to retain, Vacation
Break or any of its Subsidiaries or any material portion of the assets of
Vacation Break and its Subsidiaries or any existing (as of the date hereof) and
material business, product line or asset of Fairfield or any of its
Subsidiaries.
5.5 Access to Information.
(a) Vacation Break. Vacation Break shall, and shall cause each of its
Subsidiaries to, upon reasonable notice from Fairfield, afford to Fairfield, and
to Fairfield's officers, employees, accountants, counsel, financial advisors and
other representatives, reasonable access during normal business hours during the
period prior to the Effective Time to all their respective properties, books,
contracts, commitments, personnel and records and, during such period, Vacation
Break and its Subsidiaries shall furnish promptly to Fairfield upon request (i)
a copy of each report, schedule, and other document filed or received by it
during such period pursuant to the requirements of federal, state, local or
foreign tax laws and (ii) all other information concerning its business,
properties and personnel as Fairfield may reasonably request.
(b) Fairfield. Fairfield shall, and shall cause each of its Subsidiaries
to, upon reasonable notice from Vacation Break, afford to Vacation Break, and to
Vacation Break's officers, employees, accountants, counsel, financial advisors
and other representatives of Vacation Break, reasonable access during normal
business hours during the period prior to the Effective Time to all their
respective properties, books, contracts, commitments, personnel and records and,
during such period, Fairfield shall and shall cause each of its Subsidiaries to,
furnish promptly to Vacation Break upon request (i) a copy of each report,
schedule, and other document filed or received by it during such period pursuant
to the requirements of federal or state tax laws and (ii) all other information
concerning its business, properties and personnel as Vacation Break may
reasonably request.
(c) Confidential Treatment. Each of Fairfield and Vacation Break may make
copies of documents provided to them pursuant to this Section 5.5 at their own
expense. The parties shall, and shall cause their respective officers,
employees, accountants, counsel, financial advisors and other representatives
to, hold any such information which is nonpublic in confidence on the same terms
and conditions as set forth in the letter dated July 14, 1997, as amended from
time to time, between Vacation Break and Fairfield (the "Confidentiality
Agreement").
5.6 Reasonable Efforts. Upon the terms and subject to the conditions set
forth in this Agreement, each of the parties will use all reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other parties in doing, all other things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including (i) the obtaining of all other
necessary actions or nonactions, waivers, consents and approvals from
Governmental Entities and the making of all necessary registrations and filings
(including filings with Governmental Entities, if any) and the taking of all
other reasonable steps as may be necessary to obtain an approval in
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waiver form, or to avoid an action or proceeding by any Governmental Entity,
(ii) the obtaining of all necessary consents, approvals or waivers from third
parties, (iii) the defending of any lawsuits or other legal proceedings, whether
judicial or administrative, challenging this Agreement or the consummation of
the transactions contemplated by this Agreement, including seeking to have any
stay or temporary restraining order entered by any court or other Governmental
Entity vacated or reversed and (iv) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement. In connection with and without
limiting the foregoing, the Companies and their respective Board of Directors
shall, if any state takeover statute or similar statute or regulation is or
becomes applicable to the Merger, this Agreement or the other transactions
contemplated by this Agreement, use all reasonable efforts to ensure that the
Merger and the other transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger and the other transactions contemplated by this Agreement.
5.7 Fees and Expenses.
(a) Merger. Except as set forth in Section 5.7(b), all fees and expenses
incurred in connection with the Merger, this Agreement and the transactions
contemplated by this Agreement shall be paid by the party incurring such fees
and expenses, whether or not the Merger are consummated, except that each of
Fairfield and Vacation Break shall bear and pay one-half of the costs and
expenses incurred in connection with the filing, printing and mailing of the
Form S-4 and the Joint Proxy Statement (including SEC filing fees) and (ii) the
filings of the premerger notification and report forms under the HSR Act
(including filing fees).
(b) Termination Fee. If (i) a Vacation Break Takeover Proposal shall have
been made known to Vacation Break or any of its Subsidiaries or has been made
directly to its stockholders generally or any person shall have publicly
announced an intention (whether or not conditional) to make a Vacation Break
Takeover Proposal and thereafter this Agreement is terminated by either Vacation
Break or Fairfield pursuant to Section 7.1(b)(ii), or (ii) this Agreement is
terminated (1) by Vacation Break pursuant to Section 7.1(e) or (2) by Fairfield
pursuant to Section 7.1(f) or (g), then Vacation Break shall promptly, but in no
event later than 10 days after the date of such termination, pay Fairfield a fee
equal to $7.5 million (the "Termination Fee"), payable by wire transfer of same
day funds. Vacation Break acknowledges that the agreements contained in this
Section 5.7(b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Fairfield would not enter into
this Agreement; accordingly, if Vacation Break fails promptly to pay the amount
due pursuant to this Section 5.7(b), and, in order to obtain such payment,
Fairfield commences a suit which results in a judgment against Vacation Break
for the Termination Fee, Vacation Break shall pay to Fairfield its costs and
expenses (including attorneys' fees and expenses) in connection with such suit,
together with interest on the amount of the Termination Fee at the prime rate of
BankBoston N.A. in effect on the date such payment was required to be made.
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5.8 Public Announcements. Fairfield and Merger Sub, on the one hand, and
Vacation Break, on the other hand, will consult with each other before issuing,
and give each other the opportunity to review and comment upon, any press
release or other public statements with respect to the transactions contemplated
by this Agreement, including the Merger, and will not issue any such press
release or make any such public statements without the other party's
consultation except as either party may determine is required by applicable law,
court process or by obligations pursuant to any listing agreement with any
national securities exchange or the Nasdaq National Market. The parties agree
that the initial press release to be issued with respect to the transactions
contemplated by this Agreement shall be in the form heretofore agreed to by the
parties.
5.9 Key Officer Employment Arrangements. Vacation Break will not permit any
employment agreement to be renewed or extended without Fairfield's prior written
consent.
5.10 Stock Exchange Listing. To the extent Fairfield does not issue
treasury shares in the Merger or under Assumed Plans which are already listed,
Fairfield shall use its reasonable efforts to cause the shares of Fairfield
Common Stock to be issued in the Merger and under the Assumed Plans to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Closing Date.
5.11 Certain Litigation. Vacation Break agrees that it will not settle any
litigation commenced after the date hereof against Vacation Break or any of its
directors without the prior written consent of Fairfield, other than (i) the
settlement in the ordinary course of business consistent with past practice of
litigation that does not involve amounts in excess of $100,000 with respect to
any particular proceeding or related proceedings or (ii) the settlement of the
litigation described in Section 7.1(d) of the Vacation Break Disclosure
Statement as provided in Section 7.1(d).
5.12 Consents. Vacation Break shall use its reasonable efforts to obtain
the Vacation Break Consents before Closing. Fairfield shall use reasonable
efforts to obtain the Fairfield Consents before Closing.
5.13 Pooling of Interests. Each of the parties to this Agreement agrees to
use its reasonable efforts to qualify the Merger for pooling of interests
treatment under Opinion 16 of the Accounting Principles Board and applicable SEC
rules and regulations, and such accounting treatment to be accepted by each of
Fairfield's and Vacation Break's independent auditors, and by the SEC,
respectively, and each of Fairfield and Vacation Break agrees that it will
voluntarily take no action that would cause such accounting treatment not to be
obtained.
5.14 Rule 145 Affiliates. Before the Closing Date, Vacation Break shall
identify in writing to Fairfield all persons who are, at the time this Agreement
is submitted for adoption by the stockholders of Vacation Break, "affiliates" of
Vacation Break for purposes of Rule 145 under the Securities Act or for purposes
of qualifying the Merger for pooling of interests accounting treatment under
Opinion 16 of the Accounting Principles Board and applicable SEC rules and
regulations. Vacation Break shall use all reasonable efforts to cause all
persons who are "affiliates" of Fairfield for purposes of qualifying the Merger
for pooling of
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interests accounting treatment under Opinion 16 of the Accounting Principles
Board and applicable SEC rules and regulations to deliver a letter to Fairfield
in the form of Exhibit C (each, an "Affiliate Letter").
5.15 Tax Treatment. Each of Fairfield and Vacation Break shall use
reasonable efforts to cause the Merger to qualify as a reorganization under the
provisions of Section 368(a) of the Code and Vacation Break shall use reasonable
efforts to obtain the opinion of counsel referred to in Section 6.2(d).
5.16 New Director. Promptly following the Effective Time, Fairfield will
cause Ralph P. Muller to be elected to its Board of Directors until his
successor is duly selected and qualified or his earlier death, resignation or
removal.
5.17 Escrow. As security for the agreement by the Principal Stockholders to
indemnify and hold Fairfield harmless as described in Section 5 of the Principal
Stockholders Agreement, the Exchange Agent shall deposit on behalf of the
Principal Stockholders from the shares they are entitled to receive under
Section 2.2 the number of shares of Fairfield Common Stock required to be
deposited under the Principal Stockholders Agreement with the related escrow
agent.
5.18 Stock Options. As soon as practicable following the date of this
Agreement, the Board of Directors of Vacation Break (or, if appropriate, any
committee administering the Option Plan and the Directors' Plan) shall adopt
such resolutions or take such other actions as may be required to (a) adjust the
terms of all outstanding Options granted under those plans, whether vested or
unvested, as necessary to provide that, at the Effective Time, each Option
outstanding immediately prior to the Effective Time shall be deemed to
constitute an option to acquire Fairfield Common Stock on the terms and
conditions described in Section 2.1(e); and make such other changes to the
Option Plan and Directors' Plan as Vacation Break and Fairfield may agree are
appropriate to give effect to the Merger.
5.1 D&O Coverage.
(a) The provisions of the bylaws and articles of incorporation of the
Surviving Corporation with respect to indemnification shall not be amended,
repealed or otherwise modified for a period of six years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who at the Effective Time were directors, officers, employees
or agents of Vacation Break or any of its Subsidiaries, unless such
modification is required by law.
(b) From and after the Effective Time, the Surviving Corporation and
Fairfield, jointly and severally, shall, to the fullest extent required or
permitted under the Surviving Corporation's articles of incorporation or
bylaws, indemnify and hold harmless, each present and former director or
officer of Vacation Break or any of its Subsidiaries entitled to
indemnification under Vacation Break's articles of incorporation and bylaws
(collectively, the "Indemnified Parties") against any costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim,
action, suit,
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proceeding or investigation, whether civil, criminal, administrative or
investigative, (x) arising out of or pertaining to the transactions
contemplated by this Agreement or (y) otherwise with respect to any acts or
omissions occurring at or prior to the Effective Time, at least to the same
extent as provided in Vacation Break's articles of incorporation or bylaws,
in each case, as in effect immediately prior to the Effective Time, or any
applicable contract or agreement as in effect on the date hereof, in each
case for a period of six year after the date hereof. In the event of any
such claim, action, suit, proceeding or investigation (whether arising from
an event or action that occurred or was taken before or after the Effective
Time), (A) Fairfield and/or the Surviving Corporation shall have the right
to assume the defense thereof and shall not be liable to such Indemnified
Parties for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Parties in connection with the
defense thereof, except that if Fairfield and/or the Surviving Corporation
elect not to assume such defense or counsel for the Indemnified Parties
advises that there are issues which raise conflicts of interest between
Fairfield and/or the Surviving Corporation and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and Fairfield
and/or the Surviving Corporation shall pay all reasonable fees and expenses
of such counsel for the Indemnified Parties promptly as statements therefor
are received; provided, however, that Fairfield and/or the Surviving
Corporation shall be obligated pursuant to this paragraph 5.19(b) to pay
for only one firm of counsel for all Indemnified Parties in any
jurisdiction unless the use of one counsel for such Indemnified Parties
would represent such counsel with a conflict of interest, (B) the
Indemnified Parties will cooperate in the defense of any such matter and
(C) Fairfield and/or the Surviving Corporation shall not be liable for any
settlement effected without its prior written consent; and provided,
further, that Fairfield and/or the Surviving Corporation shall not have any
obligation hereunder to any Indemnified Party when and if a court of
competent jurisdiction shall ultimately determine, and such determination
shall have become final, that the indemnification of such Indemnified Party
in the manner contemplated hereby is prohibited by applicable law. An
Indemnified Party shall not be entitled to indemnification pursuant to this
Agreement or any other agreement with Vacation Break or its Subsidiaries or
under the articles of incorporation or bylaws of Vacation Break or the
Surviving Corporation for the cost or amount of any liability for which he
has received reimbursement or an indemnification payment from some other
source or for which, for any reason, he suffers no liability. The foregoing
indemnity shall not apply with respect to any conduct of an Indemnified
Party which is determined by a final and nonappealable court order to have
constituted intentional misconduct and from which the Indemnified Party
derived an improper personal benefit. If such indemnity is not available
with respect to any Indemnified Party, then Fairfield and/or the Surviving
Corporation and the Indemnified Party shall contribute to the amount
payable in such proportion as is appropriate to reflect relative faults and
benefits. In the event that any claim or claims for indemnification are
asserted or made within such six-year period, all rights to indemnification
in respect of any such claim or claims shall continue until the disposition
of any and all such claims.
(c) For a period of six years after the Effective Time, Fairfield will
maintain or will cause the Surviving Corporation to maintain in effect, if
available,
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directors' and officers' liability insurance covering those persons who are
currently covered by Vacation Break's directors' and officers' liability
insurance policy (a copy of which has been made available to Fairfield) on
terms no less advantageous than those now applicable to directors and
officers of Vacation Break or any of its Subsidiaries; provided, however,
that in no event shall Fairfield or the Surviving Corporation be required
to expend in excess of 200% of the annual premium currently paid by
Vacation Break for such coverage, and provided further, that if the premium
for such coverage exceeds such amount, Fairfield or the Surviving
Corporation shall purchase a policy with the greatest coverage available
for such 200% of the annual premium.
(d) This Section 5.19 is subject to the terms of Section 5(c) of the
Principal Stockholders Agreement.
ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Shareholder Approval. Each of the Fairfield Stockholder Approval and
the Vacation Break Stockholder Approval shall have been obtained.
(b) NYSE Listing. The Fairfield Common Stock issuable to Vacation Break's
shareholders pursuant to this Agreement, the Supplemental Warrant Agreements and
Assumed Options shall have been approved for listing on the NYSE, subject to
official notice of issuance.
(c) HSR Act. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have expired.
(d) Form S-4. The Form S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order.
(e) Pooling Letters. Fairfield and Vacation Break shall have received
letters from each of Coopers & Lybrand L.L.P. and Ernst & Young LLP dated as of
the Closing Date, addressed to Fairfield and Vacation Break, stating in
substance that the Merger will qualify as a pooling of interests transaction
under Opinion 16 of the Accounting Principles Board and applicable SEC rules and
regulations.
(f) Tax Opinion. On or prior to the Closing Date, Vacation Break and
Fairfield shall have received the opinion of Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A., counsel to Vacation Break, to the effect that,
based on representation letters and certificates in substantially the form of
Exhibit D provided to counsel by Vacation Break, Fairfield and certain
shareholders of Vacation Break, and based on the assumptions and
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qualifications set forth in that opinion, for federal income tax purposes, (i)
the Merger will be treated as a reorganization within the meaning of Sections
368(a) and 368(a)(2)(E) of the Code, (ii) each of Vacation Break, Merger Sub,
and Fairfield will be a party to the reorganization within the meaning of
Section 368(b) of the Code, (iii) no gain or loss will be recognized by a
Shareholder of Vacation Break upon the exchange pursuant to the Merger of shares
of Vacation Break solely for shares of Fairfield except for cash received in
lieu of a fractional share, (iv) the basis of the Fairfield shares received by a
Shareholder of Vacation Break pursuant to the Merger will be the same as the
basis of the Vacation Break shares exchanged therefor, and (v) the holding
period of the shares of Fairfield Common Stock received by a Shareholder of
Vacation Break pursuant to the Merger will include the holding period of the
Vacation Break Common Stock exchanged therefor, provided those shares of
Vacation Break Common Stock were held as capital assets as of the Effective Time
of the Merger.
(g) Consents. The Vacation Break Consents and Fairfield Consents shall have
been obtained.
(h) No Injunctions or Restraints. No judgment, order, decree, statute, law,
ordinance, rule, regulation, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced or
issued by any court of competent jurisdiction or other Governmental Entity or
other legal restraint or prohibition (collectively, "Restraints") preventing the
consummation of the Merger shall be in effect; provided, however, that each of
the parties shall have used reasonable efforts to prevent the entry of any such
Restraints and to appeal as promptly as possible any such Restraints that may be
entered.
(i) No Litigation. There shall not be pending any suit, action or
proceeding, in each case brought by any Governmental Entity and (i) seeking to
restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement or seeking to obtain from either of
Vacation Break or Fairfield any damages that are material in relation to
Vacation Break and its Subsidiaries taken as a whole or Fairfield and its
Subsidiaries taken as a whole, as applicable, (ii) seeking to prohibit or limit
the ownership or operation by Vacation Break, Fairfield, or any of their
respective Subsidiaries of any material portion of the business or assets of
Vacation Break, Fairfield or any of their respective Subsidiaries, or to compel
Vacation Break, Fairfield, or any of their respective Subsidiaries to dispose of
or hold separate any material portion of the business or assets of Vacation
Break, Fairfield, or any of their respective Subsidiaries, as a result of the
Merger or any of the other transactions contemplated by this Agreement or (iii)
which otherwise could reasonably be expected to have a material adverse effect
on Vacation Break or Fairfield, as applicable. In addition, there shall not be
any Restraint enacted, entered, enforced or promulgated that is reasonably
likely to result, directly or indirectly, in any of the consequences referred to
in clauses (ii) or (iii) above.
6.2 Conditions to Obligations of Vacation Break. The obligations of
Vacation Break to effect the Merger are further subject to the following
conditions:
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(a) Representations and Warranties. The representations and warranties of
Fairfield and Merger Sub set forth in this Agreement that are qualified as to
materiality shall be true and correct, and the representations and warranties of
Fairfield and Merger Sub set forth in this Agreement that are not so qualified
shall be true and correct in all material respects, in each case as of the date
of this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date, except as otherwise contemplated by this Agreement, and
Vacation Break shall have received a certificate signed on behalf of Fairfield
and Merger Sub by the chief executive officer and the chief financial officer of
each of them to such effect.
(b) Performance of Obligations of Fairfield. Fairfield and Merger Sub shall
have performed in all material respects all obligations required to be performed
by them under this Agreement at or prior to the Closing Date, and Vacation Break
shall have received a certificate signed on behalf of Fairfield and Merger Sub
by the chief executive officer and the chief financial officer of each of them
to such effect.
(c) No Material Adverse Change. At any time on or after the date of this
Agreement there shall not have occurred any material adverse change in Fairfield
and its Subsidiaries taken as a whole.
(d) Fairness Opinion. Vacation Break's Board of Directors shall have
received prior to the date the Proxy Statement/Prospectus is submitted to the
SEC, and Vacation Break shall have included in the Proxy Statement/Prospectus,
the written Fairness Opinion of Montgomery, independent financial advisor to
Vacation Break, to the effect that the financial terms of the Merger are fair to
the shareholders of Vacation Break from a financial point of view, in form and
substance reasonably satisfactory to Vacation Break.
6.3 Conditions to Obligations of Fairfield. The obligation of Fairfield
to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
Vacation Break set forth in this Agreement that are qualified as to materiality
shall be true and correct, and the representations and warranties of Vacation
Break set forth in this Agreement that are not so qualified shall be true and
correct in all material respects, in each case as of the date of this Agreement
and (except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the Closing
Date, except as otherwise contemplated by this Agreement, and Fairfield shall
have received a certificate signed on behalf of Vacation Break by the chief
executive officer and the chief financial officer of Vacation Break to such
effect.
(b) Performance of Obligations of Vacation Break. Vacation Break shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Fairfield shall
have received a certificate signed on behalf of Vacation Break by the chief
executive officer and the chief financial officer of Vacation Break to such
effect.
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(c) No Material Adverse Change. At any time on or after the date of this
Agreement there shall not have occurred any material adverse change in Vacation
Break and its Subsidiaries, taken as a whole.
(d) Fairness Opinion. Fairfield's Board of Directors shall have received
prior to the date the Proxy Statement/Prospectus is submitted to the SEC, and
Fairfield shall have included in the Proxy Statement/Prospectus, the written
Fairness Opinion of Stephens, independent financial advisor to Fairfield, to the
effect that the financial terms of the Merger are fair to the shareholders of
Fairfield from a financial point of view, in form and substance reasonably
satisfactory to Fairfield.
6.4 Frustration of Closing Conditions. Neither Fairfield nor Vacation Break
may rely on the failure of any condition set forth in Section 6.1, 6.2 or 6.3,
as the case may be, to be satisfied if such failure was caused by such party's
failure to use reasonable efforts to consummate the Merger and the other
transactions contemplated by this Agreement, as required by and subject to
Section 5.6.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated, and the Merger
contemplated hereby may be abandoned, at any time prior to the Effective Time:
(a) by mutual written consent of Fairfield, Merger Sub and Vacation Break;
(b) by either Fairfield or Vacation Break;
(i) if the Fairfield Stockholder Approval shall not have been obtained
at a Fairfield Stockholders Meeting duly convened therefor or at any
adjournment or postponement thereof;
(ii) if the Vacation Break Stockholder Approval shall not have been
obtained at a Vacation Break Stockholders Meeting duly convened therefor or
at any adjournment or postponement thereof;
(iii) if the Merger shall not have been consummated on or before
December 31, 1997, unless the failure to consummate the Merger is the
result of a breach of this Agreement by the party seeking to terminate this
Agreement; provided, however, that the passage of such period shall be
tolled for any part thereof during which any party shall be subject to a
nonfinal order, decree, ruling or action restraining, enjoining or
otherwise prohibiting the consummation of the Merger or the calling or
holding of the related stockholders meeting; or
(iv) if any Governmental Entity of competent jurisdiction shall have
issued a Restraint or taken any other action permanently enjoining,
restraining or otherwise
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prohibiting the Merger or any of the other actions contemplated under the
Agreement and such Restraint shall have become final and nonappealable;
(c) by Vacation Break, if on the date that is 2 business days before the
Closing Date the closing price for a share of Fairfield Common Stock as reported
on the NYSE Composite Transaction Tape is less than $19/3//4; provided, however,
if on that date the Standard and Poor's Composite Index of 500 Stocks has
decreased since the date of this Agreement, then such closing price must be less
than the product of (i) $24/11//16 multiplied by (ii) the difference of 80
percent less the percentage decrease of such index.
(d) by Fairfield, if before the Closing Date the litigation and other
proceedings and investigations or any other actions, proceedings or
investigations relating thereto described in Section 7.1(d) of the Vacation
Break Disclosure Statement have not been dismissed or settled on substantially
the terms set forth in Section 7.1(d) of the Vacation Break Disclosure
Statement.
(e) by Vacation Break, in accordance with Section 4.1(b)(ii); provided that
it has complied with all provisions thereof, including the notice provisions
therein, and that it complies with applicable requirements of Section 5.7;
(f) by Fairfield, if (i) the Board of Directors of Vacation Break or any
committee thereof shall have withdrawn or modified in a manner adverse to
Fairfield its approval or recommendation of the Merger or this Agreement, or
failed to reconfirm its recommendation within 15 business days after a written
request to do so, or approved or recommended any Vacation Break Takeover
Proposal, or (ii) the Board of Directors of Vacation Break or any committee
thereof shall have resolved to take any of the foregoing actions; or
(g) by Fairfield, if Vacation Break or any of its officers, directors,
employees, representatives or agents shall take any of the actions that would be
proscribed by Section 4.1(b) but for the exceptions therein allowing certain
actions to be taken pursuant to the proviso in the first sentence of Section
4.1(b)(i) or the second sentence of Section 4.1(b)(ii).
7.2 Effect of Termination. If this Agreement is terminated as provided in
Section 7.1, this Agreement shall forthwith become void and have no effect,
without any liability or obligation on the part of any party, other than the
second sentence of Section 5.5(c), Section 5.7, this Section 7.2 and Article
VIII and except to the extent that such termination results from the willful and
material breach by a party of any of its representations, warranties, covenants
or agreements set forth in this Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto at any
time before or after any required approval of matters presented in connection
with the Merger by the shareholders of Vacation Break; provided, however, that
after any such approval, there shall be made no amendment that by law requires
further approval by such shareholders without the further approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
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7.4 Extension; Waiver. At any time prior to the Effective Time, the parties
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or (c)
subject to the proviso of Section 7.3, waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. The failure of any party
to this Agreement to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights.
ARTICLE VII
GENERAL PROVISIONS
8.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement shall survive the Effective
Time.
8.2 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed given if
delivered personally or sent by overnight courier (providing proof of delivery)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to Vacation Break:
Vacation Break U.S.A., Inc.
6400 N. Andrews Avenue
Park Plaza, Suite 200
Ft. Lauderdale, Florida 33309
Attention: Mr. Ralph P. Muller
with a copy to:
Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Attention: Gary M. Epstein, Esq.
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(b) if to Fairfield or Merger Sub:
Fairfield Communities, Inc.
11001 Executive Center Drive
Little Rock, Arkansas 72211
Attention: Mr. John W. McConnell
with a copy to:
Jones, Day, Reavis & Pogue
2001 Ross Avenue, Suite 2300
Dallas, Texas 75201
Attention: Mark V. Minton, Esq.
8.3 Definitions. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person;
(b) "Code" means the Internal Revenue Code of 1986, as amended, and all
regulations promulgated thereunder, as in effect from time to time;
(c) an "environmental law" means any law, statute, regulation, rule, order,
decree, judgment, consent decree, settlement agreement or governmental
requirement, which relates to or otherwise imposes liability or standards of
conduct concerning mining or reclamation of mined land, discharges, emissions,
releases or threatened releases of noises, odors or any pollutants, contaminants
or hazardous or toxic wastes, substances or materials, whether as matter or
energy, into ambient air, water, or land, or otherwise relating to the
manufacture, processing, generation, distribution, use, treatment, storage,
disposal, cleanup, transport or handling of pollutants, contaminants, or
hazardous wastes, substances or materials, including (but not limited to) the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, as amended, the
Resource Conservation and Recovery Act of 1976, as amended, the Toxic Substances
Control Act of 1976, as amended, the Federal Water Pollution Control Act
Amendments of 1972, the Clean Water Act of 1977, as amended, any so-called
"Superlien" law, and any other similar Federal, state or local statutes.
(d) "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder, as in effect from time to
time;
(e) "ERISA Affiliate" means any trade or business, whether or not
incorporated, that is now or has at any time in the past been treated as a
single employer with Vacation Break or Fairfield (as applicable) or any of their
respective Subsidiaries under Section 414(b), (c), (m) or (o) of the Code and
the Treasury Regulations thereunder.
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(f) "key employee" means any employee whose current salary and targeted
bonus exceeds $75,000 per annum.
(f) "knowledge" of any person means actual knowledge of the directors and
executive officers of such person;
(g) "material adverse change" or "material adverse effect" means, when used
in connection with the Company or Fairfield, any change or effect that is
materially adverse to the business, properties, assets, financial condition,
prospects, or results of operations of such party and its Subsidiaries taken as
a whole; and
(h) "person" means an individual, corporation, partnership, joint venture,
association, trust, unincorporated organization or other entity.
8.4 Interpretation. When a reference is made in this Agreement to a
Section, Exhibit or Schedule, such reference shall be to a Section of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
8.5 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signet by each of
the parties and delivered to the other parties.
8.6 Entire Agreement; No Third-party Beneficiaries. This Agreement and the
Confidentiality Agreement, (a) constitute the entire agreement, and supersede
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter of this Agreement and the
Confidentiality Agreement and (b) except for the provisions of Article II, are
not intended to confer upon any person other than the parties any rights or
remedies.
8.7 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Florida, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
8.8 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned, in whole or in part, by operation of
law or otherwise by any of the parties without the prior written consent of the
other parties, except that Merger Sub may assign, in its sole discretion, any of
or all its rights, interests and obligations under this Agreement to Fairfield
or to any direct wholly owned corporate subsidiary of Fairfield. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
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8.9 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Florida or in Florida state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any federal court located in the State of Florida or
any Florida state court in the event any dispute arises out of this Agreement or
the transactions contemplated by this Agreement, (b) agrees that it will not
attempt to deny or defeat such personal jurisdiction by motion or other request
for leave from any such court and (c) agrees that it will not bring any action
relating to this Agreement or the transactions contemplated by this Agreement in
any court other than a federal court sitting in the State of Florida or a
Florida state court.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Fairfield, Merger Sub and Vacation Break have caused
this Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
FAIRFIELD COMMUNITIES, INC.
By: /s/ J.W. McConnell
-------------------------------------------------
J. W. McConnell
President and Chief Executive Officer
FCVB CORP.
By: /s/ J.W. McConnell
-------------------------------------------------
J. W. McConnell
President
VACATION BREAK USA, INC.
By: /s/ Ralph P. Muller
-------------------------------------------------
Ralph P. Muller
Chairman of the Board and
Chief Executive Officer
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APPENDIX B
[Letterhead of Stephens Inc.]
November 10, 1997
The Board of Directors of
Fairfield Communities, Inc.
11001 Executive Center Drive
Little Rock, Arkansas 72211
Gentlemen:
We have acted as your financial advisor in connection with the merger of
FCVB Corp. ("FCVB"), a Florida corporation and wholly owned subsidiary of
Fairfield Communities, Inc. (the "Company"), with and into Vacation Break
U.S.A., Inc. ("Vacation Break"). FCVB will be merged with and into Vacation
Break, with Vacation Break as the surviving corporation and a wholly owned
subsidiary of the Company; and the stockholders of Vacation Break will receive
0.6075 shares of the Company's one class of publicly traded common stock (the
"Exchange Ratio") in consideration of the surrender and cancellation of each
of their shares of Vacation Break common stock (the "Merger"). The terms and
conditions of the Merger are more fully set forth in the merger agreement.
You have requested our opinion as to the fairness to the Company from a
financial point of view of the Exchange Ratio in the Merger.
In connection with rendering our opinion we have:
(i) analyzed certain publicly available financial statements and
reports regarding the Company and Vacation Break;
(ii) analyzed certain internal financial statements and other financial
and operating data (including financial projections) concerning the
Company and Vacation Break prepared by management of the Company
and Vacation Break, respectively;
(iii) analyzed, on a pro forma basis, the effect of the Merger on the
Company's balance sheet capitalization ratios, earnings and book
value both in the aggregate and, where applicable, on a per share
basis;
(iv) reviewed the reported prices and trading activity for the common
stock of the Company and Vacation Break;
(v) compared the financial performance of the Company and Vacation
Break and the prices and trading activity of the common stock of
the Company and Vacation Break with that of certain other
comparable publicly-traded companies and their securities;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
(vii) reviewed the merger agreement and related documents;
(viii) discussed with management of the Company and Vacation Break the
operations of and future business prospects for the Company and
Vacation Break and the anticipated financial consequences of the
Merger to the Company;
(ix) assisted in your deliberations regarding the material financial
terms of the Merger and your negotiations with Vacation Break and
their financial advisors;
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(x) performed such other analyses and provided such other services as
we have deemed appropriate.
We have relied on the accuracy and completeness of the information and
financial data provided to us by the Company and Vacation Break, and our opinion
is based upon such information. We have inquired into the reliability of such
information and financial data only to the limited extent necessary to provide a
reasonable basis for our opinion, recognizing that we are rendering only an
informed opinion and not an appraisal or certification of value. With respect to
the financial projections prepared by management of the Company and Vacation
Break, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of the Company and Vacation Break.
As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. We are familiar with the Company and regularly
provide investment banking services to it and issue periodic research reports
regarding its business activities and prospects. In the ordinary course of
business, Stephens Inc. and its affiliates at any time may hold long or short
positions, and may trade or otherwise effect transactions as principal or for
the accounts of customers, in debt or equity securities or options on securities
of the Company and Vacation Break. Stephens is receiving a fee, and
reimbursement of its expenses, in connection with the issuance of this fairness
opinion and its role as financial advisor.
Based on the foregoing and our general experience as investment bankers,
and subject to the qualifications stated herein, we are of the opinion on the
date hereof that the Exchange Ratio is fair to the Company from a financial
point of view.
This opinion and a summary discussion of our underlying analyses and role
as your financial advisor may be included in communications to the Company's
stockholders provided that we approve of such disclosures prior to publication.
Very truly yours,
/s/ Stephens Inc.
STEPHENS INC.
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APPENDIX C
[Letterhead of Montgomery Securities]
November 10, 1997
Board of Directors
Vacation Break U.S.A., Inc.
6400 North Andrews Avenue
Ft. Lauderdale, Florida 33309
Ladies and Gentlemen:
We understand that Vacation Break U.S.A., Inc., a Florida corporation
("Seller"), Fairfield Communities, Inc., a Delaware corporation ("Buyer"), and
FCVB Corp., a Florida corporation and a wholly-owned subsidiary of Buyer
("Merger Subsidiary"), propose to enter into an Agreement and Plan of Merger, a
draft of which has been furnished to us by management of Seller (the "Merger
Agreement"), pursuant to which Merger Subsidiary will be merged with and into
Seller, which will be the surviving entity (the "Merger"). Pursuant to the
Merger, as more fully described in the Merger Agreement and as further described
to us by management of Seller, we understand that each outstanding share of the
common stock, $.01 par value per share ("Seller Common Stock"), of Seller (other
than shares of Seller Common Stock held by Buyer or Merger Subsidiary or any
other subsidiary of Buyer or by Seller or any of its subsidiaries) will be
converted into and exchangeable for .6075 shares of the common stock, $.01 par
value per share ("Buyer Common Stock"), of Buyer, subject to certain adjustments
(the "Consideration"). The terms and conditions of the Merger are set forth in
more detail in the Merger Agreement.
You have asked for our opinion as investment bankers as to whether the
Consideration to be received by the shareholders of Seller pursuant to the
Merger is fair to such shareholders from a financial point of view, as of the
date hereof.
In connection with our opinion, we have performed a variety of financial
and comparative analyses, of which the material analyses are described below.
The summary of such analyses contained in this paragraph and in this letter,
which does not purport to be a complete description of the analyses underlying
Montgomery's opinion, sets forth the material aspects of the analyses performed
and factors considered by Montgomery in connection with its opinion. In
preparing its opinion, Montgomery, among other things: (i) reviewed certain
publicly available financial and other data with respect to Seller and Buyer,
including the consolidated financial statements for recent years and interim
periods to March 31, 1997 for each of Seller and Buyer and consolidated
condensed financial statements contained in the press release prepared by Seller
and announced on July 28, 1997, and certain other relevant financial and
operating data relating to Seller and Buyer made available to us from published
sources and from the internal records of Seller and Buyer; (ii) reviewed the
financial terms and conditions of the August 8, 1997 draft of the Merger
Agreement; (iii) reviewed certain publicly available information concerning the
trading of, and the trading market for, Seller Common Stock and Buyer Common
Stock; (iv) compared Seller and Buyer from a financial point of view with
certain other companies in the timeshare resort industry which we deemed to be
relevant; (v) considered the financial terms, to the extent publicly available,
of selected recent business combinations of companies in the timeshare resort
industry which we deemed to be comparable, in whole or in part, to the Merger;
(vi) reviewed and discussed with representatives of the management of Seller and
Buyer certain information of a business and financial nature regarding Seller
and Buyer, furnished to us by them, including financial forecasts and related
assumptions of Seller prepared by management of Seller ("Seller Forecasts") and
earnings estimates of Buyer obtained by us from a third party research report,
as adjusted, with your consent, after discussions with management of each of
Seller and Buyer ("Buyer Estimates"); and (vii) made inquiries regarding and
discussed the Merger and the Merger Agreement and other matters related thereto
with Seller's counsel.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. Upon the advice of Seller's
management and with your consent, we have assumed for purposes of our opinion
that the Seller Forecasts have been
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reasonably prepared on bases reflecting the best available estimates and
judgments of the management of Seller at the time of preparation as to the
future financial performance of Seller and that the Seller Forecasts and the
Buyer Estimates provide a reasonable basis upon which we can form our opinion.
We have also assumed that there have been no material changes in Seller's or
Buyer's respective assets, financial condition, results of operations, business
or prospects since the respective dates of their last financial statements made
available to us. We have relied on advice of counsel and independent accountants
to Seller as to all legal and financial reporting matters with respect to
Seller, the Merger and the Merger Agreement. We have assumed that the Merger
will be consummated in a manner that complies in all respects with the
applicable provisions of the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934, as amended, and all other applicable
federal and state statutes, rules and regulations. In addition, we have not
assumed responsibility for making an independent evaluation, appraisal or
physical inspection of any of the assets or liabilities (contingent or
otherwise) of Seller or Buyer, nor have we been furnished with any such
appraisals. You have informed us, and we have assumed, that the Merger will be
recorded as a "pooling-of-interests" under generally accepted accounting
principles. Finally, our opinion is based on economic, monetary and market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. Such conditions include, without limitation, the condition
of the U.S. stock markets, particularly in the time-share resort industry,
interest rates and the current level of economic activity.
We have further assumed with your consent that the Merger will be
consummated in accordance with the terms described in the draft Merger
Agreement, without any further amendments thereto, and without waiver by Seller
of any of the conditions to its obligations thereunder.
We have acted as co-financial advisor to Seller in connection with the
Merger and will receive a fee for our services, including rendering this
opinion, all of which is contingent upon the consummation of the Merger (with
the exception of reimbursement for out-of-pocket expenses). In the ordinary
course of our business, we actively trade the equity securities of Seller and
Buyer for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Consideration to be received by the shareholders of
Seller pursuant to the Merger is fair to such shareholders from a financial
point of view, as of the date hereof.
We are not expressing an opinion regarding the price at which the Buyer
Common Stock may trade at any future time. The Consideration to be received by
the shareholders of Seller pursuant to the Merger is based upon a fixed exchange
ratio and, accordingly, the market value of the Consideration may vary
significantly.
This opinion is directed to the Board of Directors of Seller in its
consideration of the Merger and is not a recommendation to any shareholder as to
how such shareholder should vote with respect to the Merger. Further, this
opinion addresses only the financial fairness of the Consideration to be
received by the shareholders of Seller and does not address the relative merits
of the Merger and any alternatives to the Merger, Seller's underlying decision
to proceed with or affect the Merger or any other aspect of the Merger. In
furnishing this opinion, we do not admit that we are experts within the meaning
of the term "experts" as used in the Securities Act and the rules and
regulations promulgated thereunder, nor do we admit that this opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act.
Very truly yours,
/s/ MONTGOMERY SECURITIES
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FAIRFIELD COMMUNITIES, INC.
This Proxy is Solicited on Behalf of the Board of Directors
of Fairfield Communities, Inc. for Use at the Special Meeting
of Stockholders to be held on December 19, 1997.
The undersigned hereby appoints John W. McConnell and Marcel J. Dumeny, and each
of them, jointly and severally and with full power of substitution, as Proxies
to vote, as designated below, all common stock of Fairfield Communities, Inc.
(the "Company") owned by the undersigned at the Special Meeting of Stockholders
to be held on December 19, 1997 at 9:00 a.m. Central Time at The Capital Hotel,
111 West Markham Street, Little Rock, Arkansas, and at any and all postponements
and adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION FOR VOTING IS GIVEN, THIS PROXY
WILL BE VOTED "FOR" PROPOSAL NO. 1, THE APPROVAL OF THE ISSUANCE OF UP TO
5,826,281 SHARES (THE "ISSUANCE OF FAIRFIELD COMMON STOCK") OF COMMON STOCK, PAR
VALUE $.01 PER SHARE, OF THE COMPANY ("FAIRFIELD COMMON STOCK"), "FOR" PROPOSAL
NO. 2, THE APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF THE
COMPANY (THE "CERTIFICATE AMENDMENT") TO INCREASE THE AUTHORIZED NUMBER OF
SHARES OF FAIRFIELD COMMON STOCK TO 100,000,000, AND IN ACCORDANCE WITH THE
JUDGMENT OF THE PERSON OR PERSONS VOTING THE PROXY WITH RESPECT TO ANY OTHER
BUSINESS THAT MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
THE EFFECTIVENESS OF PROPOSAL NO. 1 IS CONDITIONED UPON THE APPROVAL OF PROPOSAL
NO. 2.
<PAGE>
REVERSE SIDE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 1, THE ISSUANCE OF
FAIRFIELD COMMON STOCK, AND "FOR" PROPOSAL NO. 2, THE CERTIFICATE AMENDMENT.
1. Approval of the issuance of up to 5,826,281 FOR AGAINST ABSTAIN
shares of Fairfield Common Stock. [_] [_] [_]
2. Approval of the amendment to the Certificate of FOR AGAINST ABSTAIN
Incorporation of the Company to increase the [_] [_] [_]
authorized number of shares of Fairfield Common
Stock to 100,000,000.
Please complete, date, sign and return this
proxy promptly in the enclosed envelope. If
signing as attorney, executor, administrator,
trustee or guardian, please give full title as
such. If signing on behalf of a corporation,
please sign in full corporate name by an
authorized officer. If shares are registered in
more than one name, all holders must sign. The
undersigned hereby acknowledges receipt of the
Notice of Special Meeting of Stockholders and
the Joint Proxy Statement/Prospectus dated
November 10, 1997.
Signature:______________________________ Date: __________________
Signature:______________________________ Date: __________________
<PAGE>
VACATION BREAK U.S.A., INC.
6400 N. Andrews Avenue
Park Plaza, Suite 200
Ft. Lauderdale, Florida 33309
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF VACATION BREAK U.S.A., INC.
The undersigned holder of common stock, par value $.01 per share, of Vacation
Break U.S.A., Inc., a Florida corporation (the "Company"), hereby appoints Ralph
P. Muller and Henry M. Cairo, and each of them, as proxies for the undersigned,
each with full power of substitution, for and in the name of the undersigned to
act for the undersigned and to vote, as designated below, all of the shares of
common stock of the Company that the undersigned is entitled to vote at the
Special Meeting of Stockholders of the Company, to be held on December 19, 1997
at 10:00 a.m. Eastern Time, at the Sea Gardens Beach and Tennis Resort, 615 N.
Ocean Blvd., Pompano Beach, Florida, and at any adjournments or postponements
thereof.
The Board of Directors recommends a vote "FOR" proposal No. 1 as set forth
below:
Proposal No. 1. Approval of the Agreement and Plan of Merger, dated August 8,
1997 (the "Merger Agreement"), between Fairfield Communities, Inc., a Delaware
corporation ("Fairfield"), FCVB Corp., a Florida corporation and wholly owned
subsidiary of Fairfield ("Merger Sub"), and the Company, pursuant to which,
among other things, (i) Merger Sub will be merged with and into the Company and
(ii) each issued and outstanding share of common stock of the Company will be
converted into the right to receive .6075 of a share of common stock, par value
$.01, of Fairfield.
[_] FOR [_] AGAINST [_] ABSTAIN
In their discretion, the proxies are authorized to vote upon such other business
as may properly come before the Special Meeting, and any adjournments or
postponements thereof.
<PAGE>
[continued from other side]
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSAL NO. 1, APPROVAL OF THE MERGER AGREEMENT, AND IN ACCORDANCE
WITH THE JUDGMENT OF THE PERSON OR PERSONS VOTING THE PROXY WITH RESPECT TO ANY
OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting and the Joint Proxy Statement/Prospectus dated November 10, 1997.
Dated: _______________________________________, 1997
____________________________________________________
(Signature)
____________________________________________________
(Signature if held jointly)
IMPORTANT: Please sign exactly as your name appears
hereon and mail it promptly even though you may plan
to attend the meeting. When shares are held by joint
tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please
give full title as such. If a corporation, please
sign in full corporate name by president or other
authorized officer. If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD AND
PROMPTLY RETURN IT IN THE ENVELOPE PROVIDED. NO
POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
