UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number: 1-8096
FAIRFIELD COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 71-0390438
(State of Incorporation) (I.R.S. Employer Identification No.)
11001 Executive Center Drive, Little Rock, Arkansas 72211
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (501) 228-2700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of July 31, 1998 totaled 45,924,704.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
No.
----
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Earnings for the Three and Six
Months Ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
- ------ ---------------------
ITEM I - FINANCIAL STATEMENTS
- ------ --------------------
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,438 $ 3,074
Loans receivable, net 207,774 291,209
Real estate inventories 102,637 93,139
Property and equipment, net 25,925 24,370
Restricted cash and escrow accounts 20,488 25,607
Investment in and net amount due
from unconsolidated subsidiary 28,562 -
Other assets 30,820 26,533
-------- --------
$423,644 $463,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 84,130 $170,081
Deferred revenue 26,841 29,769
Accounts payable 19,708 20,398
Accrued income taxes 18,505 12,566
Other liabilities 56,174 43,936
-------- --------
205,358 276,750
-------- --------
Stockholders' Equity:
Common stock, $.01 par value, 100,000,000
shares authorized, 50,364,680 and 49,491,666
shares issued as of June 30, 1998 and
December 31, 1997, respectively 504 495
Paid-in capital 118,024 107,920
Retained earnings 100,626 79,083
Unamortized value of restricted stock (144) (316)
Treasury stock, at cost, 4,546,214 shares
in 1998 and 4,573,266 in 1997 (724) -
-------- --------
218,286 187,182
-------- --------
$423,644 $463,932
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Vacation ownership, net $ 80,155 $73,196 $140,360 $121,148
Resort management 9,947 6,927 19,547 13,967
Interest 8,567 8,541 18,866 16,842
Other 7,631 6,499 13,321 11,990
-------- ------- -------- --------
106,300 95,163 192,094 163,947
-------- ------- -------- --------
EXPENSES
Vacation ownership 22,945 19,068 39,620 32,120
Selling 37,083 32,550 65,675 56,325
Provision for loan losses 3,993 3,183 6,910 4,958
Resort management 8,387 6,347 16,089 11,984
General and administrative 6,141 8,069 13,283 15,254
Interest, net 1,828 2,720 5,452 4,913
Depreciation 1,677 1,243 3,329 2,407
Other 4,593 4,929 8,829 9,147
-------- ------- -------- --------
86,647 78,109 159,187 137,108
-------- ------- -------- --------
Earnings before net earnings of
unconsolidated subsidiary and
provision for income taxes 19,653 17,054 32,907 26,839
Net earnings of unconsolidated
subsidiary 1,064 - 1,315 -
-------- ------- -------- --------
Earnings before provision for
income taxes 20,717 17,054 34,222 26,839
Provision for income taxes 7,579 6,710 12,679 10,444
-------- ------- -------- --------
Net earnings $ 13,138 $10,344 $ 21,543 $ 16,395
======== ======= ======== ========
BASIC EARNINGS PER SHARE $.29 $.24 $.48 $.38
==== ==== ==== ====
DILUTED EARNINGS PER SHARE $.28 $.23 $.46 $.36
==== ==== ==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 44,940 43,710 44,608 43,187
====== ====== ====== ======
Diluted 47,416 45,973 47,264 46,022
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
Six Months Ended
June 30,
------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 21,543 $ 16,395
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 3,329 2,407
Provision for loan losses 6,910 4,958
Net earnings of unconsolidated subsidiary (1,315) -
Tax benefit from employee stock benefit plans 4,111 466
Changes in operating assets and liabilities:
Real estate inventories (9,498) (1,868)
Deferred revenue (2,928) (4,435)
Accounts payable and other liabilities 4,145 11,136
Income taxes payable 5,939 9,540
Other (3,770) 3,975
--------- ---------
Net cash provided by operating activities 28,466 42,574
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (4,438) (2,718)
Principal collections on loans receivable 86,308 59,246
Originations of loans receivable (130,975) (99,316)
Sales of loans receivable to
unconsolidated subsidiary 101,362 -
Net investment activities of net liabilities of
assets held for sale - (8,293)
--------- ---------
Net cash provided by (used in) investing activities 52,257 (51,081)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from financing arrangements 294,492 191,076
Repayments of financing arrangements (380,443) (181,471)
Activity related to employee stock benefit plans 5,197 1,001
Net decrease (increase) in restricted
cash and escrow accounts 5,119 (8,676)
Repurchase of treasury stock (724) -
--------- ---------
Net cash (used in) provided by financing activities (76,359) 1,930
--------- ---------
Net increase (decrease) in cash and cash equivalents 4,364 (6,577)
Cash and cash equivalents, beginning of period 3,074 13,316
--------- ---------
Cash and cash equivalents, end of period $ 7,438 $ 6,739
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $5,979 $5,029
====== ======
Income taxes paid $3,645 $ 435
====== ======
Capitalized interest $ 473 $ 595
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1 - ORGANIZATION AND BASIS OF PREPARATION
- ------ -------------------------------------
Organization
------------
Fairfield Communities, Inc. ("Fairfield" and together with its
consolidated subsidiaries, the "Company") is one of the largest vacation
ownership companies in the United States in terms of property owners and
vacation units constructed. The Company's operations consist of 26 resorts
located in 11 states and the Bahamas. Of the Company's 26 resorts, 16 are
located in destination areas with popular vacation attractions and 10 are
located in scenic regional locations.
The Company's primary business is selling vacation ownership interests
("VOIs"), primarily through its innovative points-based vacation system,
Fairshare Plus. The VOIs offered by the Company consist of either individual fee
simple interest or specified fixed week interval ownership in fully furnished
units. Additionally, the Company offers financing for VOI purchases, which
results in the creation of high-quality, medium-term contracts receivable.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial statements and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The interim financial information is unaudited, but
reflects all adjustments consisting only of normal recurring accruals which are,
in the opinion of management, necessary for a fair presentation of the results
of operations for such interim periods. Operating results for the three and six
months ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 1997. Certain previously
reported amounts in the consolidated financial statements have been reclassified
to conform to the presentation used for the current period. All significant
intercompany balances and transactions have been eliminated in consolidation.
Basis of Preparation
--------------------
Fairfield Receivables Corporation ("FRC") was incorporated in January 1998
as a wholly owned, qualifying special purpose subsidiary of Fairfield Acceptance
Corporation ("FAC"), which is itself a wholly owned, consolidated subsidiary of
Fairfield. Statement of Financial Accounting Standards ("SFAS") No. 125 requires
that qualifying special purpose entities, which engage in qualified sales of
financial assets with affiliated companies, be accounted for on an
unconsolidated basis using the equity method of accounting. See Note 10 for
condensed financial information of FRC.
NOTE 2 - NEW ACCOUNTING STANDARDS
- ------ ------------------------
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131, which the Company will be required to adopt in the fourth quarter of 1998,
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas of operations and
major customers. Management is currently studying and analyzing SFAS No. 131 as
well as the Company's operations to determine the applicability of SFAS No. 131.
<PAGE>
NOTE 3 - STOCKHOLDERS' EQUITY
- ------ --------------------
In December 1997, Fairfield's Board of Directors declared a two-for-one
common stock split in the form of a stock dividend effective January 30, 1998 to
shareholders of record on January 15, 1998. All references to numbers of shares,
per share amounts and average shares outstanding in the consolidated financial
statements have been restated.
In April 1998, the Company acquired 32,805 shares of its Common Stock
("Surrendered Shares") in settlement of federal and state withholding taxes
pursuant to a Restricted Stock Agreement. The cost to the Company related to the
Surrendered Shares is reflected in "Treasury stock" in the Consolidated Balance
Sheet.
On August 10, 1998, the Company announced that its Board of Directors
had authorized the Company to repurchase up to $20 million of the Company's
Common Stock. Repurchased shares of common stock will become treasury shares of
the Company, and may be used to meet the Company's obligations under its
employee stock option plans and for other corporate purposes.
NOTE 4 - VACATION OWNERSHIP REVENUES
- ------ ---------------------------
Vacation ownership revenues are summarized as follows (In thousands):
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Vacation ownership revenues $82,572 $72,691 $142,931 $119,602
Less: Deferred revenue on
current year sales, net (3,590) (1,087) (5,380) (8,642)
Add: Revenue recognized on
prior year sales 1,173 1,592 2,809 10,188
------- ------- -------- --------
Vacation ownership revenues, net $80,155 $73,196 $140,360 $121,148
======= ======= ======== ========
</TABLE>
NOTE 5 - LOANS RECEIVABLE
- ------ ----------------
Loans receivable consisted of the following (In thousands):
<TABLE>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Contracts $213,868 $302,519
Mortgages 9,323 9,538
-------- --------
223,191 312,057
Less allowance for loan losses (15,417) (20,848)
-------- --------
Loans receivable, net $207,774 $291,209
======== ========
</TABLE>
At June 30, 1998, FRC held $117.6 million of contracts receivable
purchased from the Company (see Note 10). Except for the repurchase of defective
contracts receivable, as defined by a Receivables Purchase Agreement dated
January 15, 1998, the Company is not obligated to repurchase defaulted contracts
receivable sold to FRC. It is anticipated, however, that the Company will
repurchase defaulted contracts receivable to facilitate the remarketing of the
underlying collateral. The Company maintains an allowance for loan losses in
connection with its option to repurchase the defaulted contracts receivable from
FRC. This allowance, totaling $7.3 million at June 30, 1998, is included in
"Other liabilities" in the Consolidated Balance Sheet.
<PAGE>
NOTE 6 - REAL ESTATE INVENTORIES
- ------ -----------------------
Real estate inventories are summarized as follows (In thousands):
<TABLE>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Land:
Under development $ 14,692 $20,186
Undeveloped 10,460 6,480
-------- -------
25,152 26,666
-------- -------
Residential housing:
Vacation ownership interests 73,442 62,410
Homes 4,043 4,063
-------- -------
77,485 66,473
-------- -------
$102,637 $93,139
======== =======
</TABLE>
NOTE 7 - FINANCING ARRANGEMENTS
- ------ ----------------------
Financing arrangements are summarized as follows (In thousands):
<TABLE>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Revolving credit agreements $22,303 $ 94,101
Notes payable collateralized by
contracts receivable:
Fairfield Capital Corporation 50,246 60,147
Fairfield Funding Corporation 8,860 12,330
Notes payable - other 2,721 3,503
------- --------
$84,130 $170,081
======= ========
</TABLE>
In January 1998, the Company amended the previously existing revolving
credit agreements between Fairfield, FAC and their primary lender. The Amended
and Restated Revolving Credit Agreements (the "Credit Agreements") provide
borrowing availability of up to $60.0 million (including up to $11.0 million for
letters of credit)and mature in January 2001. Borrowings under the Credit
Agreements bear interest at rates ranging from the base rate of the primary
lender minus .25% to the base rate minus .75% (weighted average interest rate on
outstanding borrowings of 7.8% at June 30, 1998).
In January 1998, FRC entered into a Credit Agreement (the "FRC Agreement")
which provides for borrowings of up to $150.0 million for the purchase of
contracts receivable pursuant to a Receivables Purchase Agreement, among
Fairfield, FAC and FRC. During the six months ended June 30, 1998, approximately
$129.3 million of contracts receivable were sold from FAC to FRC, with FRC
primarily funding the purchases of contracts receivable through advances under
the FRC Agreement totaling $103.0 million. Borrowings under the FRC Agreement
bear interest at commercial paper rates (approximately 6.7%, including fees, for
the six months ended June 30, 1998). See Note 10 for condensed financial
information of FRC.
In February 1998, FAC entered into an interest rate swap agreement with
its primary lender, which provides for a fixed interest rate of 5.63% on $50.0
million of outstanding debt. This agreement is subject to the scheduled
amortization of a pool of contracts receivable and will expire in February 2002.
In March 1998, FRC entered into certain interest rate swap and cap
transactions with its primary lender to provide for a fixed interest rate of
5.78% on $59.8 million of outstanding indebtedness through June 2004, unless
terminated earlier by the primary lender (early termination may occur at the
option of the primary lender in March 2001). Interest rate differentials to be
paid under the terms of the interest rate swap and cap agreements are recognized
as an adjustment of interest expense related to the designated financing
arrangement.
<PAGE>
NOTE 8 - EARNINGS PER SHARE
- ------ ------------------
The following table sets forth the computation of basic and diluted
earnings per share ("EPS") (In thousands, except per share data):
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income - Numerator for basic
and diluted EPS $13,138 $10,344 $21,543 $16,395
======= ======= ======= =======
Denominator:
Denominator for basic EPS-weighted
average shares 44,940 43,710 44,608 43,187
Effect of dilutive securities:
Restricted common stock 90 180 90 180
Options and warrants 1,837 1,156 1,988 1,487
Common stock held in escrow 549 366 578 607
Other - 561 - 561
------- ------- ------- -------
Dilutive potential common shares 2,476 2,263 2,656 2,835
------- ------- ------- -------
Denominator for diluted EPS-adjusted
weighted average shares and
assumed conversions 47,416 45,973 47,264 46,022
======= ======= ======= =======
Basic earnings per share $.29 $.24 $.48 $.38
==== ==== ==== ====
Diluted earnings per share $.28 $.23 $.46 $.36
==== ==== ==== ====
</TABLE>
NOTE 9 - FAIRFIELD ACCEPTANCE CORPORATION
- ------ --------------------------------
Condensed consolidated financial information for FAC is summarized as
follows (In thousands):
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash $ 1,816 $ 494
Loans receivable, net 126,472 111,071
Restricted cash 3,652 3,749
Due from parent - 6,710
Investment in and net amount due
from unconsolidated subsidiary 28,562 -
Other assets 2,559 2,390
-------- --------
$163,061 $124,414
======== ========
LIABILITIES AND EQUITY
Financing arrangements $ 79,106 $ 72,477
Due to parent 26,687 -
Accrued interest and other liabilities 757 703
Equity 56,511 51,234
-------- --------
$163,061 $124,414
======== ========
</TABLE>
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
Six Months Ended
June 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $10,891 $7,980
Expenses 4,630 3,137
------- ------
Earnings before net earnings of unconsolidated
subsidiary and provision for income taxes 6,261 4,843
Net earnings of unconsolidated subsidiary 1,315 -
------- ------
Earnings before provision for income taxes 7,576 4,843
Provision for income taxes 2,299 1,900
------- ------
Net earnings $ 5,277 $2,943
======= ======
</TABLE>
NOTE 10 - FAIRFIELD RECEIVABLES CORPORATION
- ------- ---------------------------------
FRC, a wholly owned, unconsolidated qualifying special purpose subsidiary
of FAC, was incorporated in January 1998 for the specific purpose of purchasing
contracts receivable from FAC, with the purchases funded by advances under the
FRC Agreement, which provides for borrowings of up to $150.0 million. SFAS No.
125 requires that qualifying special purpose entities, which engage in qualified
sales of financial assets with affiliated companies, be accounted for on an
unconsolidated basis using the equity method of accounting. The purchase of
contracts receivable by FRC is subject to a Receivables Purchase Agreement dated
January 15, 1998 between Fairfield, FAC and FRC. The Receivables Purchase
Agreement substantially restricts the transfer of assets from FRC to FAC.
During the six months ended June 30, 1998, approximately $129.3 million of
contracts receivable were sold from FAC to FRC, with FRC primarily funding the
purchases of contracts receivable through advances under the FRC Agreement
totaling $103.0 million. Borrowings under the FRC Agreement bear interest at
commercial paper rates (approximately 6.7%, including fees, for the six months
ended June 30, 1998).
In March 1998, FRC entered into certain interest rate swap and cap
transactions with its primary lender to provide for a fixed interest rate of
5.78% on $59.8 million of outstanding indebtedness through June 2004, unless
terminated earlier by the primary lender (early termination may occur at the
option of the primary lender in March 2001). Interest rate differentials to be
paid under the terms of the interest rate swap and cap agreements are recognized
as an adjustment of interest expense related to the designated financing
arrangement.
Condensed financial information for FRC is summarized as follows (In
thousands):
CONDENSED BALANCE SHEET
June 30,
1998
----
ASSETS
Cash $ 10
Contracts receivable 117,591
Restricted cash 4,672
--------
$122,273
========
LIABILITIES AND EQUITY
Financing arrangements $ 93,355
Subordinated note payable to parent 25,086
Accrued interest and other liabilities 790
Equity 3,042
--------
$122,273
========
<PAGE>
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1998
---- ----
<S> <C> <C>
Interest income $3,775 $4,437
------ ------
Expense:
Interest expense:
Financing arrangements 1,450 1,650
Subordinated note to parent 423 487
General and administrative 218 218
------ ------
2,091 2,355
------ ------
Earnings before provision for income taxes 1,684 2,082
Provision for income taxes 620 767
------ ------
Net earnings $1,064 $1,315
====== ======
</TABLE>
NOTE 11 - SUPPLEMENTAL INFORMATION
- ------- ------------------------
Included in other assets at June 30, 1998 and December 31, 1997 are (i)
other receivables of $7.6 million and $5.5 million, respectively (consisting
primarily of receivables from property owner associations), (ii) unamortized
capitalized financing costs totaling $2.8 million and $2.4 million, respectively
and (iii) $2.2 million and $2.0 million, respectively, related to assets of the
Company's life insurance subsidiary.
Included in other liabilities at June 30, 1998 and December 31, 1997
are (i) accruals totaling $14.4 million and $14.0 million, respectively, related
to the Company's employee compensation and benefit programs, (ii) accruals
totaling $7.7 million and $5.6 million, respectively, for the fulfillment costs
associated with the Company's Discovery Vacation program, (iii) deposits
associated with sales contracts totaling $6.2 million and $6.6 million,
respectively, and (iv) an accrual of $7.3 million at June 30, 1998 related to
the Company's option to repurchase defaulted contracts receivable from FRC.
Other revenues for the six months ended June 30, 1998 and 1997 include
home sales revenue totaling $6.0 million and $5.3 million, respectively, and lot
sales revenue totaling $3.5 million and $4.6 million, respectively.
Additionally, other revenues for the three and six months ended June 30, 1998
include a $.9 million gain on the sale of the Company's remaining golf course.
Other expenses for the six months ended June 30, 1998 and 1997 include cost of
home sales, including selling expenses, totaling $5.2 million and $4.6 million,
respectively, and cost of lot sales of $1.1 million and $1.2 million,
respectively.
NOTE 12 - CONTINGENCIES
- ------- -------------
In July 1993 and September 1993, two lawsuits (the "Recreation Fee
Litigation") were filed by 29 individuals and a company against Fairfield in the
District Court of Archuleta County, Colorado. The Recreation Fee Litigation,
which sought certification as class actions, alleges that Fairfield and its
predecessors in interest wrongfully imposed an annual recreation fee on owners
of lots, condominiums, townhouses, VOIs and single family residences in
Fairfield's Pagosa, Colorado development. The amount of the recreation fee,
which was adopted in August 1983, is $180 per lot, condominium, townhouse and
single family residence subject to the fee and $360 per unit for VOIs. The
plaintiffs have asserted in court appearances that the actions focus on
recreation fees collected in Pagosa for lots from September 1, 1992 (which is
the effective date of Fairfield's Chapter 11 bankruptcy reorganization plan) to
the present. The Recreation Fee Litigation in general seeks (a) a declaratory
judgment that the recreation fee is invalid; (b) the refund, with interest, of
the recreation fees which were allegedly improperly collected by Fairfield; (c)
damages arising from Fairfield's allegedly improper attempts to collect the
recreation fee (i) in an amount of not less than $1,000 per lot in one case (the
Daleske case) and (ii) in an unstated amount in the other case (the Storm case);
(d) punitive damages; and (e) recovery of costs and expenses, including
attorneys' fees. The court has never ruled on whether or not the Recreation Fee
Litigation would be allowed to proceed as class actions. Because of the nature
of the litigation, Fairfield is unable to determine with certainty the dollar
amount
<PAGE>
sought by plaintiffs, but estimates that it has collected approximately $600,000
in recreation fees during the relevant period for lots at Pagosa. Two additional
related lawsuits were also filed in the Archuleta County District Court, raising
similar issues and demands as the Storm and Daleske cases. The Fiedler case,
filed in October 1994, was filed individually concerning two lots, while the
second of these cases, the Lobdell case, was filed in November 1994, as a
purported class action. The Colorado District Court entered summary judgment
against Fairfield for one of two lots in the Fiedler case, holding that the
individual lot in question is not subject to the recreation fee, based upon
facts unique to the Fiedler case. Fairfield appealed the summary judgment
decision in the Fiedler case. Motions and cross motions for summary judgment
were filed in Colorado state court. By orders dated June 19, 1998, the Colorado
District Court denied plaintiffs' motions for summary judgments and granted
Fairfield's motions for summary judgments (except with respect to a husband and
wife in the Storm case who owned a lot, not subject to the recreation fee, who
Fairfield did not assert were liable for the recreation fee), in the Storm,
Daleske, Fiedler (with respect to one lot) and Lobdell cases, based upon court
findings in favor of Fairfield on the merits in each of these cases. Attorneys
for the plaintiffs in these cases have advised that they intend to appeal the
Colorado District Court decisions. Fairfield intends to continue its defense of
these cases, including any attempt to certify a class in any of the cases, and
expects to seek to recover unpaid recreation fee assessments, interest and
litigation expenses. Fairfield has previously implemented recreation fee charges
at certain other of its resort sites which are not subject to the pending
action.
In December 1993, Charlotte T. Curry, who, with her husband, purchased a
lot from Fairfield under an installment sale contract subsequently sold to First
Federal Savings and Loan Association of Charlotte ("First Federal"), filed suit
against First Federal in Superior Court in Mecklenburg County, North Carolina,
alleging breach of contract, breach of fiduciary duty and unfair trade
practices. In April 1994, the complaint was amended, (a) adding Fairfield as a
party, (b) adding an additional count against both Fairfield and First Federal
alleging violation of the North Carolina's Racketeer Influenced and Corrupt
Organizations ("RICO") Statute and (c) adding a count against Fairfield alleging
fraud. The litigation, which sought class action certification, contested the
method used by Fairfield to calculate refunds for lot purchasers whose
installment sale contracts were cancelled due to failure to complete payment of
the deferred sales price for the lot. Most installment lot sale contracts
require Fairfield to refund to a defaulting purchaser the amount paid in
principal, after deducting the greater of (a) 15% of the purchase price of the
lot or (b) Fairfield's actual damages. The plaintiff disputes Fairfield's method
of calculating damages, which has historically included certain sales, marketing
and other expenses. In the case of Ms. Curry's lot, the amount of refund claimed
as having been improperly retained is approximately $3,600. The Curry lawsuit
sought damages, punitive damages, treble damages under North Carolina law for
unfair trade practices and RICO, prejudgment interest and attorneys' fees and
costs. By order dated July 6, 1994, the court dismissed Ms. Curry's claims for
(a) breach of contract, due to the statute of limitations, (b) breach of
fiduciary duty, due to the lack of a fiduciary duty and the statute of
limitations, (c) fraud, due to the statute of limitations, and (d) RICO, due to
failure to state a claim. The court, by order dated August 16, 1994, dismissed
Ms. Curry's only remaining claim against Fairfield, for unfair trade practices,
subject to possible appeal rights. By order filed September 15, 1995, the court
denied the plaintiff's motion for class certification. The plaintiff appealed
the denial of the motion for class certification to the North Carolina Court of
Appeals, which dismissed the appeal by order dated January 8, 1997.
Subsequently, the plaintiff requested that the Supreme Court of North Carolina
grant discretionary review of the decision denying class certification, which
the Supreme Court of North Carolina declined. In April 1998, the plaintiff in
the Curry case dismissed the lawsuit. On January 7, 1998, the attorneys who
previously represented Ms. Curry filed another lawsuit (the Scarvey lawsuit),
currently pending in Superior Court in Mecklenburg County, North Carolina, as a
purported class action, against First Federal, alleging breach of contract,
breach of fiduciary duty and unfair trade practices, and seeking damages as
outlined above in the Curry case. The Scarvey case seeks to relitigate the North
Carolina courts' refusal to certify the Curry case as a class action and asserts
that the Curry case tolled the statute of limitations for Ms. Scarvey's claims,
which are alleged to post-date Ms. Curry's claims. Under the Stock Purchase
Agreement for the sale of First Federal, Fairfield agreed to indemnify the buyer
against any liability in the Curry litigation. Fairfield does not believe that
it is obligated under the Stock Purchase Agreement to indemnify the buyer of
First Federal for the Scarvey litigation, but the buyer has filed a third party
action against Fairfield contesting Fairfield's interpretation of the Stock
Purchase Agreement and asserting other common law and statutory grounds for
indemnification. Fairfield also cancelled defaulted lot installment sales
contracts owned by it and its subsidiaries (other than First Federal), using the
same method of calculating refunds as was at issue in the Curry litigation.
<PAGE>
During the first quarter of 1997, the Company transferred $7.9 million in
cash and the assets collateralizing the 10% Senior Subordinated Secured Notes
(the "FCI Notes"), with an appraised market value of $7.2 million (the "Real
Estate Collateral"), in settlement of the FCI Notes. The indenture trustee, at
the direction of the majority noteholders, filed suit in the United States
District Court for the Southern District of New York, contesting the Company's
method of satisfying this obligation and claiming a default under the indenture
securing the FCI Notes. This action alternatively (a) disputed the Company's
right to transfer the Real Estate Collateral in satisfaction of the FCI Notes,
seeking instead a cash payment of $7.2 million, plus penalty interest and the
fees and expenses of the action, or (b) disputed the $7.9 million cash transfer,
seeking instead the issuance of 1,764,706 shares (after giving effect to the
2-for-1 share stock split, effective January 30, 1998) of Fairfield's Common
Stock (the "Contested Shares"), previously reserved for issuance if a deficiency
resulted on the FCI Notes at maturity. Pursuant to the indenture for the FCI
Notes, the noteholders are entitled to retain, as a premium, up to $2.0 million
from the proceeds of the collateral transferred in satisfaction of the FCI Notes
(including, if applicable, shares of Fairfield's Common Stock) in excess of the
amount of principal and accrued interest due at maturity. The indenture trustee
has asserted that the $2.0 million premium limit is not applicable to the
Contested Shares, accordingly claimed entitlement to all of the Contested Shares
and on September 24, 1997 filed a motion seeking to require the immediate
issuance and sale of the Contested Shares, with the proceeds to be held in
escrow, pending the outcome of the litigation. The Company opposed the indenture
trustee's motion and requested summary judgment, asserting that the noteholders
were not entitled to any of the Contested Shares. The indenture trustee
indicated that the Real Estate Collateral was sold for approximately $4.4
million. The court on April 24, 1998 entered an order denying the relief sought
by the indenture trustee and granting the Company's motion for summary judgment.
The indenture trustee has appealed the court's order to the Court of Appeals for
the Second Circuit. The Contested Shares are not included in the number of
shares outstanding for earnings per share or other purposes.
On March 28, 1997, a lawsuit was filed against Vacation Break in the
Circuit Court for Pinellas County, Florida by Market Response Group & Laser
Company, Inc. ("MRG&L") alleging that Vacation Break and others conspired to
boycott MRG&L and 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 Vacation Break breached its contract with MRG&L, that Vacation Break
misappropriated proprietary information from MRG&L and that Vacation Break
interfered with, and caused other companies to breach their, contracts with
MRG&L. The complaint demands that Vacation Break indemnify MRG&L for costs
incurred by it to defend a 1996 Federal Trade Commission action. While the
Company cannot calculate the total amount of damages sought by MRG&L under its
complaint, it appears to be in excess of $50.0 million.
The Company intends to vigorously defend this action and has filed a
separate action in federal District Court asserting various antitrust tying and
other claims against MRG&L and related parties. Under the terms of the Principal
Stockholders Agreement, entered into in connection with the acquisition of
Vacation Break, Fairfield has been indemnified for (a) 75% of the damages which
may be incurred in connection with the defense of the MRG&L litigation and (b)
25% of the expense incurred in defending the MRG&L litigation, in excess of the
June 30, 1997 reserve on Vacation Break's books, with the maximum amount of
indemnification to be $6.0 million. Such indemnification agreement has been
collateralized by, and recourse under the indemnity agreement is limited to, the
pledge of shares of Fairfield's Common Stock, valued as of December 18, 1997
(adjusted for stock splits and certain other similar items), and the proceeds
thereof.
The Company is involved in various other or threatened lawsuits and
contingencies on an ongoing basis as a result of its day-to-day operations.
However, the Company does not believe that any of these other or threatened
lawsuits or contingencies will have a materially adverse effect on the Company's
financial position or results of operations.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS
- -------------
RESULTS OF OPERATIONS
On December 19, 1997, the Company acquired all of the outstanding common
stock of Vacation Break U.S.A., Inc. ("Vacation Break") in exchange for
approximately 10,632,000 shares of its common stock. The resorts acquired by the
Company in conjunction with the merger are located in Pompano Beach, Florida
(four resorts), Orlando, Florida and a 50%-owned resort located in the Bahamas.
The merger was accounted for as a pooling of interests and, accordingly, all
prior period financial information has been restated as if the merger took place
at the beginning of such periods.
Additionally, on December 19, 1997, Fairfield acquired the remaining 45%
minority interest in Vacation Break's joint ventures in the Palm Aire and Royal
Vista resorts for approximately $13.5 million in cash. These acquisitions have
been accounted for as purchases and the total results of operations of these
resorts have been included in the consolidated financial statements from the
date of acquisition.
The following table sets forth certain consolidated operating information
for the three and six months ended June 30, 1998 and 1997.
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
As a percentage of total revenues:
Vacation ownership, net 75.4% 76.9% 73.1% 73.9%
Resort management 9.4 7.3 10.2 8.5
Interest income 8.1 9.0 9.8 10.3
Other revenue 7.1 6.8 6.9 7.3
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
As a percentage of related revenues:
Cost of sales - vacation ownership 28.6% 26.1% 28.2% 26.5%
Resort management 84.3% 91.6% 82.3% 85.8%
Selling expense 44.9% 42.8% 45.6% 44.7%
Provision for loan losses 4.8% 4.2% 4.8% 3.9%
As a percentage of interest revenues:
Interest expense, net 21.3% 31.9% 28.9% 29.2%
As a percentage of total revenues:
General and administrative 5.8% 8.5% 6.9% 9.3%
Depreciation 1.6% 1.3% 1.7% 1.5%
Other expense 4.3% 5.2% 4.6% 5.6%
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Vacation Ownership
------------------
Gross revenue from vacation ownership interests ("VOIs") increased 19.5% to
$142.9 million for the six months ended June 30, 1998 as compared to $119.6
million for the six months ended June 30, 1997. Gross VOI sales at the Company's
destination resorts continue to be the largest dollar contributor to total VOI
sales. Gross VOI sales for the six months ended June 30, 1998 increased 14.7% at
the Company's 16 destination resorts, 30.3% at the Company's ten regional
resorts and 62.9% at the Company's five off-site sales offices.
Net VOI revenue increased 15.9% to $140.4 million for the six months ended
June 30, 1998 from $121.1 million for the six months ended June 30, 1997. The
increase in VOI was offset by the net revenue deferral of $2.6 million during
the six months ended June 30, 1998, resulting from the percentage of completion
method of accounting, as compared to net revenue recognition of $1.5 million for
the six months ended June 30, 1997. Under the percentage of completion method of
accounting, the portion of revenue attributable to
<PAGE>
costs incurred as compared to total estimated construction costs and selling
expenses, is recognized in the period of sale. The remaining revenue is deferred
and recognized as the remaining costs are incurred.
VOI cost of sales, as a percent of related revenue, was 28.2% and 26.5% for
the six months ended June 30, 1998 and 1997, respectively. This increase is
directly related to higher product costs (including beachfront property
purchased at higher prices and increased construction costs) at certain of the
Company's destination resorts. Effective May 1, 1998, the Company initiated
sales price increases to partially offset the higher product cost.
Selling expenses, including commissions, as a percentage of related net
revenues, were 45.6% and 44.7%, for the six months ended June 30, 1998 and 1997,
respectively. The increase in the selling expense percentage results primarily
from sales inefficiencies experienced in the second quarter of 1998 at certain
of the Company's Florida locations.
The provision for loan losses, as a percentage of related net revenues,
increased to 4.8% for the six months ended June 30, 1998 compared to 3.9% for
the six months ended June 30, 1997. The Company provides for losses on contracts
receivable by a charge against earnings at the time of sale at a rate based upon
the Company's historical cancellation experience and management's estimate of
future losses. The allowance for contracts receivable is maintained at a level
believed adequate by management based upon periodic valuation of the contracts
receivable portfolio. Management anticipates the provision for loan losses will
remain relatively constant during the remainder of 1998.
Resort Management
-----------------
Resort management revenue increased 40% to $19.5 million for the six months
ended June 30, 1998 as compared to $14.0 million for the six months ended June
30, 1997. This increase is primarily due to an expansion of the Company's resort
management services, including the sale of furnishings for VOI units to
independent resort operators and property owner associations, as well as an
increase in resort operating locations.
Interest
--------
During the six months ended June 30, 1998, the Company sold approximately
$129.3 million of contracts receivable to Fairfield Receivables Corporation
("FRC"), a wholly owned, unconsolidated special purpose subsidiary of Fairfield
Acceptance Corporation ("FAC"). FRC financed these purchases through advances of
$103.0 million drawn under the FRC Credit Agreement, which provides for
borrowings of up to $150.0 million for purchases of contracts receivable from
FAC. Management intends to fully utilize the FRC Credit Agreement in the future
due to the favorable interest rates available through this financing
alternative. As a result, the level of interest income and expense recorded by
the Company will begin to decline during the remainder of the year due to the
continued sales of contracts receivable to FRC.
Interest income, exclusive of $4.4 million recorded by FRC, increased 12.0%
to $18.9 million for the six months ended June 30, 1998 as compared to $16.8
million for the six months ended June 30, 1997. This increase is primarily
attributable to an increase in the average balance of outstanding contracts
receivable ($251.3 million for the six months ended June 30, 1998 versus $240.6
million for the six months ended June 30, 1997).
Interest expense, net of amounts capitalized and exclusive of $2.1 million
recorded by FRC, totaled $5.5 million and $4.9 million for the six months ended
June 30, 1998 and 1997, respectively. This increase is primarily attributable to
an increase in the average outstanding balance of interest-bearing debt ($129.8
million for the six months ended June 30, 1998 as compared to $123.6 million for
the six months ended June 30, 1997).
The refinancing of certain of the Company's credit agreements (including
substantially all of the secured obligations of Vacation Break) resulted in a
reduction in the Company's weighted average interest rate on financing
arrangements collateralized by contracts receivable to 8.6% from 9.7%,
respectively, for the six month periods ended June 30, 1998 and 1997. Management
anticipates that the Company's weighted average interest rate will continue to
decline during 1998, as compared to 1997, as the effect of its new credit
facilities are fully realized.
The Company uses interest rate swap and cap agreements to manage the
interest rate characteristics of certain of its outstanding financing
arrangements to a more desirable fixed rate basis and to limit the Company's
exposure to rising interest rates. In February 1998, FAC entered into an
interest rate swap agreement with its primary lender, which provides for a fixed
interest rate of 5.63% on $50.0 million of outstanding debt. This
<PAGE>
agreement is subject to the scheduled amortization of a pool of contracts
receivable and will expire in February 2002. In March 1998, FRC entered into
certain interest rate swap and cap transactions with its primary lender to
provide for a fixed interest rate of 5.78% on $59.8 million of outstanding
indebtedness through June 2004, unless terminated earlier by the primary lender
(early termination may occur at the option of the primary lender in March 2001).
Interest rate differentials to be paid under the terms of the interest rate swap
and cap agreements are recognized as an adjustment of interest expense related
to the designated financing arrangement.
General and Administrative
--------------------------
General and administrative expenses, as a percent of total revenues,
decreased from 9.3% for the six months ended June 30, 1997 to 6.9% for the six
months ended June 30, 1998. This decrease is due primarily to benefits realized
from integrating Vacation Break's operational infrastructure with that of the
Company. Management anticipates additional cost savings to be realized during
the remainder of 1998, as compared to 1997, as the Company continues the
integration of the Vacation Break operations.
Other
-----
Other revenues for the six months ended June 30, 1998 and 1997 include home
sales revenue totaling $6.0 million and $5.3 million, respectively, and lot
sales revenue totaling $3.5 million and $4.6 million, respectively.
Additionally, in June 1998, the Company sold its remaining golf course and
recorded a gain on this sale of $.9 million.
Other expenses for the six months ended June 30, 1998 and 1997 include cost
of home sales, including selling expenses, totaling $5.2 million and $4.6
million, respectively, and cost of lot sales of $1.1 million and $1.2 million,
respectively.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
All revenue and expense trends, other than those mentioned below, for the
three months ended June 30, 1998, compared to the same period in the prior year,
were generally consistent with the trends of the related six month period.
Vacation Ownership
------------------
Gross revenue from VOIs increased 13.6% to $82.6 million for the three
months ended June 30, 1998 as compared to $72.7 million for the three months
ended June 30, 1997. Gross VOI sales at the Company's destination resorts
continue to be the largest dollar contributor to total VOI sales. Gross VOI
sales for the three months ended June 30, 1998 increased 8.1% at the Company's
16 destination resorts, 24.4% at the Company's ten regional resorts and 64.6% at
the Company's five off-site sales offices.
Net VOI revenue increased 9.5% to $80.2 million for the three months ended
June 30, 1998 from $73.2 million for the three months ended June 30, 1997. The
increase in net VOI revenue was offset the net revenue deferral of $2.4 million
during the six months ended June 30, 1998, resulting from the percentage of
completion method of accounting, as compared to net revenue recognition of $.5
million for the three months ended June 30, 1997. Under the percentage of
completion method of accounting, the portion of revenue attributable to costs
incurred as compared to total estimated construction costs and selling expenses,
is recognized in the period of sale. The remaining revenue is deferred and
recognized as the remaining costs are incurred.
VOI cost of sales, as a percent of related revenue, was 28.6% and 26.1% for
the three months ended June 30, 1998 and 1997, respectively. This increase is
directly related to higher product cost (including beachfront property purchased
at higher prices and increased construction costs) at certain of the Company's
destination resorts. Effective May 1, 1998, the Company initiated sales price
increases to partially offset the higher product cost.
<PAGE>
Interest
--------
During the three months ended June 30, 1998, the Company sold approximately
$46.3 million of contracts receivable to FRC. FRC financed these purchases
through advances of $36.5 million drawn under the FRC Credit Agreement.
Interest income, exclusive of $3.8 million recorded by FRC, totaled $8.6
million for the three months ended June 30, 1998 as compared to $8.5 million for
the three months ended June 30, 1997. Interest expense, net of amounts
capitalized and exclusive of $1.9 million recorded by FRC, totaled $1.8 million
and $2.7 million for the three months ended June 30, 1998 and 1997,
respectively. This decrease is due primarily to (i) a reduction in weighted
average interest rates on outstanding debt (8.1% and 9.9% for the three month
periods ended June 30, 1998 and 1997, respectively) and (ii) a reduction in
borrowings under the Company's revolving credit agreements, which resulted from
a shift in funding sources from the revolving credit agreements to the FRC
Agreement.
Other
-----
Other revenues for the three months ended June 30, 1998 include home sales
revenue of $3.0 million and lot sales revenue of $2.3 million. For the three
months ended June 30, 1997, home sales revenue and lot sales revenue totaled
$2.7 million and $2.6 million, respectively.
Other expenses for the three months ended June 30, 1998 and 1997 include
cost of home sales, including selling expenses, totaling $2.7 million and $2.4
million, respectively, and cost of lot sales of $.7 million for each respective
quarter.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's cash and cash equivalents totaled $7.4
million, an increase of $4.4 million from December 31, 1997. Cash provided by
operating activities totaled $28.5 million and $42.6 million for the six months
ended June 30, 1998 and 1997, respectively. The fluctuation in operating cash
results primarily from an increase in real estate inventories in 1998 compared
to 1997. During the six months ended June 30, 1998, the Company increased its
VOI construction activity at several of its resorts, including the Fairfield
Meadows resort located in Branson, Missouri as well as the Royal Vista and the
Palm Aire resorts, located in Pompano Beach, Florida. Additionally, the Company
purchased, for future VOI development, a 20 acre site located in Sedona,
Arizona.
Cash provided by investing activities totaled $52.3 million for the six
months ended June 30, 1998 compared to cash used in investing activities of
$51.1 million for the six months ended June 30, 1997. In 1998, the Company
received $101.4 million in cash from FRC related to the sale of contracts
receivable.
Cash used in financing activities totaled $76.4 million for the six months
ended June 30, 1998 compared to cash provided by financing activities of $1.9
million for the six months ended June 30, 1997. During the six months ended June
30, 1998, repayments of financing arrangements exceeded proceeds by $86.0
million (proceeds received from the sale of contracts receivable to FRC were
used to pay down the credit facilities of the Company). During the six months
ended June 30, 1997, proceeds from financing arrangements exceeded repayments by
$9.6 million.
In January 1998, the Company amended the previously existing revolving
credit agreements between Fairfield, FAC and their primary lender. The Amended
and Restated Revolving Credit Agreements (the "Credit Agreements") provide
borrowing availability of up to $60.0 million (including up to $11.0 million for
letters of credit) and mature in January 2001. At June 30, 1998, borrowing
availability under the Credit Agreements totaled $31.4 million.
At June 30, 1998, Fairfield Capital Corporation ("FCC"), a wholly owned
subsidiary of FAC, had oustanding borrowings of $50.2 million under the FCC
Agreement, which provides for the purchases of contracts receivable from FAC.
There are no additional fundings available under the FCC Agreement. At June 30,
1998, contracts receivable totaling $66.8 million collateralized the FCC
borrowings.
Fairfield Funding Corporation ("FFC") is a wholly owned subsidiary of FAC
with outstanding borrowings of $8.9 million at June 30, 1998, issued under
private placement notes. There are no additional fundings available under the
FFC credit facility. Contracts receivable totaling $16.6 million at June 30,
1998 collateralized these borrowings.
<PAGE>
In January 1998, FRC entered into the FRC Agreement which provides for
borrowings of up to $150.0 million for the purchase of contracts receivable
pursuant to a Receivables Purchase Agreement, among Fairfield, FAC and FRC. At
June 30, 1998, FRC held $117.6 million of contracts receivable with $93.4
million of related borrowings.
On August 10, 1998, the Company announced that its Board of Directors
had authorized the Company to repurchase up to $20 million of the Company's
Common Stock. Repurchased shares of common stock will become treasury shares of
the Company, and may be used to meet the Company's obligations under its
employee stock option plans and for other corporate purposes.
The Company intends to continue its growth-oriented strategy and,
accordingly, may from time to time acquire additional vacation ownership
resorts, additional land upon which vacation ownership resorts may be expanded
or developed and companies operating resorts or having vacation ownership
assets, management, or sales and marketing expertise commensurate with the
Company's operations in the vacation ownership industry. The Company is
currently evaluating the acquisition of certain additional land parcels for the
expansion of existing resorts and the development of additional resorts. In
addition, the Company is also evaluating certain VOI and property management
acquisitions to integrate into or expand the operations of the Company. The
Company expects to finance its short- and long-term cash needs, including
potential acquisitions, from (i) contract payments generated from its contracts
receivable portfolio, (ii) operating cash flows, (iii) borrowings under its
credit facilities, and (iv) future financings, including additional
securitizations of contracts receivable.
FORWARD-LOOKING INFORMATION
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations include certain forward-looking statements,
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. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," and
"should," and variations of these words and similar expressions, are intended to
identify these forward-looking statements. Forward-looking statements made by
the Company and its management are based on estimates, projections, beliefs and
assumptions of management at the time of such statements and are not guarantees
of future performance. The Company 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.
Actual future performance, outcomes and results may differ materially from
those expressed in forward-looking statements made by the Company and its
management as a result of a number of risks, uncertainties and assumptions,
including those relating to the operations of Vacation Break. 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 and related benefits; economic cycles; the
Company's success in its ability to hire, train and retain qualified employees;
the continued availability of financing in the amounts and at the terms
necessary to support the Company's future business; assumed cost savings and
other synergistic benefits of the merger with Vacation Break and the success
achieved or problems encountered in the continued integration of the Vacation
Break operations into those of the Company.
<PAGE>
PART II - OTHER INFORMATION
- ------- -----------------
Item 1 - Legal Proceedings
Incorporated by reference (see Note 12 of "Notes to Consolidated
Financial Statements").
Item 4 - Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Stockholders of the Registrant was held on
May 21, 1998. The following items of business were presented to the
stockholders:
Election of Directors
----------------------
The nine directors were elected as proposed in the Proxy
Statement dated April 21, 1998 under the caption titled "Election
of Directors".
Total Vote For Total Vote Withheld
Each Director From Each Director
------------- ------------------
Les R. Baledge 39,998,283 62,439
Ernest D. Bennett, III 40,026,767 33,955
Philip L. Herrington 40,030,397 30,325
Gerald Johnston 40,016,451 44,271
Bryan D. Langton 40,031,751 28,971
John W. McConnell 40,025,139 35,583
Charles D. Morgan 36,647,778 3,412,944
Ralph P. Muller 40,022,228 38,494
William C. Scott 40,031,771 28,951
Approval of an Amendment to the 1997 Stock Option Plan
------------------------------------------------------
An amendment to the 1997 Stock Option Plan as proposed in the
Proxy Statement dated April 21, 1998 under the caption titled
"Approval of Amendment to the 1997 Stock Option Plan" was
approved (For - 31,447,401; Against - 8,391,138; Abstentions -
31,148; Broker Non-Votes - 191,035).
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K
-------------------
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FAIRFIELD COMMUNITIES, INC.
Date: August 13, 1998 /s/Robert W. Howeth
-------------------- -------------------------------------------
Robert W. Howeth, Senior Vice President and
Chief Financial Officer
Date: August 13, 1998 /s/William G. Sell
-------------------- ----------------------------------------------
William G. Sell, Vice President and Controller
(Chief Accounting Officer)
<PAGE>
FAIRFIELD COMMUNITIES, INC.
EXHIBIT INDEX
-------------
Exhibit
Number
- ------
3(a) Second Amended and Restated Certificate of Incorporation of the
Registrant, effective September 1, 1992 (previously filed with
the Registrant's Current Report on Form 8-K dated September 1,
1992 and incorporated herein by reference)
3(b) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant (previously filed as Exhibit 4.2
to the Registrant's Form S-8, SEC File No. 333-42901, and
incorporated herein by reference)
3(c) Fifth Amended and Restated Bylaws of the Registrant, dated May 9,
1996 (previously filed with the Registrant's Current Report on
Form 8-K dated May 22, 1996 and incorporated herein by reference)
4.1 Supplemented and Restated Indenture between the Registrant,
Fairfield River Ridge, Inc., Fairfield St. Croix, Inc. and IBJ
Schroder Bank & Trust Company, as Trustee, and Houlihan Lokey
Howard & Zukin, as Ombudsman, dated September 1, 1992, related to
the Senior Subordinated Secured Notes (previously filed with the
Registrant's Current Report on Form 8-K dated September 1, 1992
and incorporated herein by reference)
4.2 First Supplemental Indenture to the Supplemented and Restated
Indenture, dated September 1, 1992 (previously filed with the
Registrant's Current Report on Form 8-K dated September 1, 1992
and incorporated herein by reference)
4.3 Second Supplemental Indenture to the Supplemented and Restated
Indenture, dated September 1, 1992 (previously filed with the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated herein by reference)
4.4 Third Supplemental Indenture to the Supplemented and Restated
Indenture, dated March 18, 1993 (previously filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1993 and incorporated herein by reference)
4.5 Certificate of Designation, Preferences, and Rights of Series A
Junior Participating Preferred Stock, dated September 1, 1992
(previously filed with the Registrant's Current Report on Form
8-K dated September 1, 1992 and incorporated herein by reference)
10.1 Fifth Amended and Restated Operating Agreement between Fairfield
Communities, Inc., Fairfield Myrtle Beach, Inc., Sea Gardens
Beach and Tennis Resort, Vacation Break Resorts, Inc., Vacation
Break Resort at Star Island, Inc., Palm Vacation Group, Ocean
Ranch Vacation Group and Fairfield Acceptance Corporation -
Nevada, dated July 14, 1998 (attached)
10.2 First Amendment to Amended and Restated Revolving Credit
Agreement between Fairfield Communities, Inc. and BankBoston,
N.A., dated July 13, 1998 (attached)
10.3 First Amendment to Amended and Restated Revolving Credit
Agreement between Fairfield Acceptance Corporation and
BankBoston, N.A., dated July 13, 1998 (attached)
27 Financial Data Schedule (attached)
FIFTH AMENDED AND RESTATED OPERATING AGREEMENT
----------------------------------------------
THIS FIFTH AMENDED AND RESTATED OPERATING AGREEMENT ("Agreement") is
made and entered into as of July 14, 1998, by and between FAIRFIELD COMMUNITIES,
INC. ("FCI"), a Delaware corporation, FAIRFIELD MYRTLE BEACH, INC., a Delaware
corporation ("FMB"), SEA GARDENS BEACH AND TENNIS RESORT, INC., a Florida
corporation ("Sea Gardens"), VACATION BREAK RESORTS, INC., a Florida corporation
("VBR"), VACATION BREAK RESORTS AT STAR ISLAND, INC., a Florida corporation
("VBRS"), PALM VACATION GROUP, a Florida general partnership ("PVG"), OCEAN
RANCH VACATION GROUP, a Florida general partnership ("ORVG") (each of Sea
Gardens, VBR, VBRS, PVG and ORVG are hereinafter collectively referred to as the
"VB Subsidiaries"), and each of FCI, FMB and the VB Subsidiaries are hereinafter
referred to as "Originators") and FAIRFIELD ACCEPTANCE CORPORATION - NEVADA, a
Nevada domiciled, Delaware corporation ("FAC-Nevada") and wholly-owed subsidiary
of FCI.
W I T N E S S E T H :
WHEREAS, each Originator is now and will become in the future the owner
of numerous receivables arising out of its sales of houses, condominiums,
townhouses, subdivided lots and timeshare intervals in the normal course of its
business;
WHEREAS, each of FMB and the VB Subsidiaries desire to sell, and FCI
desires to purchase from time to time, receivables generated by FMB and the VB
Subsidiaries;
WHEREAS, pursuant to that certain Fourth Amended and Restated Operating
Agreement (the "Original Agreement"), among the Originators and Fairfield
Acceptance Corporation, an Arkansas domiciled Delaware Corporation and
wholly-owned subsidiary of FCI ("FAC-Arkansas"), FAC-Arkansas (i) purchased from
time to time from FCI receivables which were generated by FCI or the other
Originators and (ii) subcontracted with FCI for FCI to act as its agent to bill,
collect, administer and service all receivables owned by FAC-Arkansas or
otherwise required to be administered and serviced by FAC-Arkansas pursuant to
the Securitizations; and
WHEREAS, FAC-Arkansas has engaged in a plan of reorganization of its
operations pursuant to which, among other things, (i) FAC-Arkansas' place of
business was relocated to the State of Nevada by way of a merger of FAC-Arkansas
with and into FAC-Nevada, with FAC-Nevada being the surviving corporation (the
"Merger") and (ii) FAC Nevada, as successor to FAC-Arkansas, has established
substantive servicing and financing operations in the State of Nevada;
WHEREAS, FCI now desires to sell, and FAC-Nevada desires to purchase
from time to time, receivables which are generated by FCI or purchased by FCI
from the other Originators;
<PAGE>
WHEREAS, FAC-Nevada, or its subsidiaries will from time to time sell or
pledge receivables pursuant to certain Securitizations ;
WHEREAS, FAC-Nevada will act as servicer and agent to bill, collect,
administer and service the portfolio of receivables owned by FCI and the
Originators or otherwise sold or pledged pursuant to the Securitizations;
WHEREAS, FAC-Nevada desires to contract with FCI to provide it and its
subsidiaries with certain accounting and computer support services; and
WHEREAS, FCI and FAC-Nevada desire to enter into this Agreement in
amendment and restatement of, and in substitution for, the Original Agreement;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree as follows:
1. Definitions. For the purposes of this Agreement, the following
-----------
definitions are used:
(a) "Assigned Base Contract" means any Base Contract (and
related Transferred Assets) which, as of any date, FCI sells to
FAC-Nevada (or previously sold to FAC-Arkansas prior to the Merger),
including any Base Contract subsequently pledged or sold by FAC-Nevada,
or its subsidiaries, pursuant to a Securitization.
(b) "Base Contract" has the meaning set forth in the FAC
Credit Agreement.
(c) "Base Contract Completion" means full performance by an
Originator of all of its duties and obligations to the Obligor under a
Base Contract, including, but not limited to, completion of
improvements or amenities relating to the subject Properties and
delivery of certain services.
(d) "Business Day" means any day on which banking institutions
in Boston, Massachusetts are open for the transaction of banking
business.
(e) "Collections" has the meaning set forth in the FCI
Security Agreement.
(f) "Contract File" has the meaning set forth in the FCI
Security Agreement.
(g) "Contract Settlement Date" has the meaning as set forth in
the FAC Credit Agreement.
(h) "Determination Date" has the meaning as set forth in the
FCI Credit Agreement.
<PAGE>
(i) "Document of Sale" means one of the following agreements:
(A) with respect to Base Contracts (and related
Transferred Assets) sold to (i) FCI by an Originator (other
than FCI) from time to time or (ii) FAC-Nevada by FCI from
time to time pursuant to Section 2(a) hereof, the Sale and
Assignment of Contracts and Assignment of Mortgages executed
by FCI, the other Originators and FAC-Nevada, which shall be
in substantially the form of "Exhibit A" attached hereto;
---------
(B) with respect to Base Contracts (and related
Transferred Assets) sold to (i) FCI by FAC-Nevada from time to
time pursuant to Section 2(g) hereof or repurchased by FCI
from FAC-Nevada pursuant to Section 4 hereof or (ii) an
Originator (other than FCI) by FCI, the Sale and Assignment of
Contracts and Assignment of Mortgages executed by FAC-Nevada,
FCI, and the other Originators, as applicable, which shall be
in substantially the form of "Exhibit B" attached hereto;
---------
(j) "Effective Date" shall mean the effective date of this
Agreement, as stated above.
(k) "Fairshare Plus Program" has the meaning set forth in the
FCI Security Agreement.
(l) "FCI Credit Agreement" means that certain Amended and
Restated Revolving Credit Agreement, dated as of January 15, 1998,
executed by and among FCI and BankBoston, N.A., individually and as
agent for the benefit of itself and the other financial institutions
who now or may become lenders thereunder, as amended by Amendment No. 1
thereto, dated as of July 13, 1998, as the same may be further amended
or otherwise modified from time to time.
(m) "FCI Security Agreement" means the Amended and Restated
Security Agreement, dated as of January 15, 1998, between FCI and
BankBoston, N.A., as collateral agent.
(n) "FAC Credit Agreement" means that certain Amended and
Restated Revolving Credit Agreement, dated as of January 15, 1998,
executed by and among FAC-Arkansas and BankBoston, N.A, individually
and as agent for the benefit of itself and the other financial
institutions who now are or may become lenders thereunder, as amended
by Amendment No. 1 thereto which, among other things, replaces
FAC-Arkansas with FAC-Nevada as the "Borrower" thereunder, as the same
may be further amended or otherwise modified from time to time.
(o) "Insurance Policy" has the meaning set forth in the FCI
Security Agreement.
<PAGE>
(p) "Lots" has the meaning set forth in the FCI Security
Agreement.
(q) "Mortgage" has the meaning set forth in the FCI Security
Agreement.
(r) "Obligor" means the person or persons obligated to make
payments under a Base Contract.
(s) "Originator" shall have the meaning set forth in the
recitals to this Agreement and shall include any Subsidiary which
hereafter sells Base Contracts to FCI pursuant to this Agreement;
whereupon, and by reason of such sale, such Subsidiary shall therefore
be deemed to have become a party hereto and shall become subject to all
of the obligations and have all of the rights of an Originator
hereunder with respect to such Base Contracts.
(t) "Payment" has the meaning set forth in the FCI Security
Agreement.
(u) "POA" has the meaning set forth in the FCI Security
Agreement.
(v) "Properties" means houses, condominiums, townhouses,
subdivided lots and fixed or undivided interest timeshare intervals
sold under Base Contracts.
(w) "Records" has the meaning set forth in the FCI Security
Agreement.
(x) "Reservation System" has the meaning set forth in the FCI
Security Agreement.
(y) "Repurchase Default" has the meaning set forth in the FAC
Credit Agreement.
(z) "Security Interests" means any security interests, liens
or other encumbrances on the Assigned Base Contracts in favor of any
third party.
(aa) "Securitization(s)" has the meaning set forth in the FAC
Credit Agreement.
(bb) "Subsidiary" means a corporation or partnership more than
fifty percent (50%) of the voting capital stock or voting interests of
which are owned directly or indirectly by FCI, but does not include
FAC-Nevada.
(cc) "Transferred Assets" has the meaning set forth in Section
2(h) hereof.
(dd) "Title Clearing Agreement" has the meaning set forth in the
FCI Security Agreement.
<PAGE>
(ee) "Title Documents" means any deeds, mortgages, deeds of
trust, vendors' liens or other document evidencing liens or
encumbrances on the Properties securing the respective interests of
each Originator, FAC-Nevada, the Obligors or any third parties.
(ff) "VOIs" has the meaning set forth in the FCI Security
Agreement.
2. Sale and Ownership of Base Contracts.
------------------------------------
(a) Subject to the terms hereof, Section 8.16 of the FAC
Credit Agreement and Section 9.5.2(ii) of the FCI Credit Agreement, FCI
and FAC-Nevada hereby agree that FCI may sell to FAC-Nevada and
FAC-Nevada may purchase, as hereinafter provided and as provided in the
FAC Credit Agreement, all of FCI's right, title and interest in and to
such Base Contracts (and related Transferred Assets) as shall be
described in the particular Document of Sale executed by FCI in
connection with each such sale.
(b) Sales of Base Contracts (and related Transferred Assets)
from FCI to FAC under this Agreement shall be accomplished by (i)
FAC-Nevada's compliance with the requirements of Section 8.16 of the
FAC Credit Agreement and FCI's compliance with Section 9.5.2(ii) of the
FCI Credit Agreement, (ii) in connection with each sale, the delivery
to and acceptance by FAC-Nevada of a Document of Sale executed by FCI,
and (iii) in connection with each sale, the satisfaction of all other
requirements of this Agreement.
(c) Concurrently with the sale to FAC-Nevada pursuant to
Section 2(a) hereof of any Base Contract that was originated by an
Originator (other than FCI), each such Originator shall execute and
deliver to FCI a Document of Sale which evidences the transfer, sale
and assignment of all of such Originator's right, title and interest in
and to such Base Contract.
(d) Each group of Base Contracts which are sold by FCI to
FAC-Nevada from time to time shall be of a quality with respect to
credit worthiness of the Obligors and collection experience at least
equivalent to the quality of the aggregate portfolio of the Base
Contracts held by FCI and the other Originators at the time of such
sale. All such purchases by FAC-Nevada shall be subject to all
conditions and stipulations, and shall otherwise be in compliance with
all terms and provisions, of the FAC Credit Agreement.
(e) FCI shall be obligated to repurchase Assigned Base
Contracts from FAC-Nevada pursuant to Section 4 of this Agreement.
(f) No Originator shall be obligated to sell, nor shall
FAC-Nevada be obligated to purchase, any Base Contracts (and related
Transferred Assets) under this Agreement.
<PAGE>
(g) Subject to the terms of Sections 8.16(d) and 9.5.2(i) of
the FAC Credit Agreement, FCI and FAC-Nevada hereby agree that
FAC-Nevada may sell to FCI, and FCI may purchase all of FAC-Nevada's
right, title and interest in and to such Base Contracts (and related
Transferred Assets) as shall be described in the particular Document of
Sale executed by FAC-Nevada in connection with each such sale.
(h) Any sale and purchase of a Base Contract between (i) any
Originator (other than FCI) and FCI and (ii) FCI and FAC-Nevada, shall
be evidenced by a Document of Sale and shall be deemed to include the
transfer from such parties of all of the applicable assignors' right,
title and interest in (A) such Base Contract, (B) all Payments, other
Collections and other funds received with respect to the such Base
Contracts on or after the effective date of such Document of Sale, (C)
the VOIs and Lots relating to such Base Contracts, and the Title
Clearing Agreements and the FairShare Plus Program insofar as they
relate to such VOIs or Lots, (D) any Mortgages relating to such Base
Contracts, (E) any Insurance Policies relating to such Base Contracts,
and (F) the Contract Files and other Records relating to such Base
Contracts and any interest in or other proceeds from any of the
foregoing, and any security therefor ((a)-(f) being collectively
referred to as the "Transferred Assets").
(i) In the event any Mortgage being transferred in conjunction
with an Assigned Base Contract pursuant to the terms of this Agreement
has not been filed of record in the appropriate county in which the
underlying Property relating to the Base Contract is located, then as a
condition subsequent to the effectiveness of such transfer, either FCI
or the Originator of such Assigned Base Contract, as appropriate, shall
cause such Mortgage to be so filed promptly following the date upon
which the underlying Property is deeded to the Obligor under such Base
Contract.
3. Purchase Price for Base Contracts.
---------------------------------
(a) The purchase price for any Base Contract (and related
Transferred Assets) purchased by FCI from FMB or any VB Subsidiary will
be equal to one hundred percent (100%) of the outstanding principal
balance remaining of such Base Contract at the time of purchase by FCI,
plus all accrued and unpaid interest thereon.
(b) The purchase price for any Base Contract (and related
Transferred Assets) purchased by FAC-Nevada from FCI will be equal to
one hundred percent (100%) of the outstanding principal balance
remaining of such Base Contract at the time of purchase by FAC-Nevada,
plus all accrued and unpaid interest thereon.
4. Obligation to Repurchase
------------------------
In the event an Assigned Base Contract owned by FAC-Nevada is in
Repurchase Default, FCI shall be obligated to repurchase such Assigned Base
Contract as follows:
<PAGE>
(a) Upon the request of FAC-Nevada (and in any event no later
than the date upon which such Assigned Base Contract is to be
cancelled) FCI shall repurchase such Assigned Base Contract from
FAC-Nevada by payment of a purchase price in the amount of one hundred
percent 100% of the principal balance remaining unpaid under such
Assigned Base Contract (the repurchase price determined in such manner
being hereinafter referred to as the "Default Repurchase Price"); and
(b) FCI shall be obligated to repurchase Assigned Base
Contracts in Repurchase Default pursuant to this Section 4 of this
Agreement regardless of whether a Default or Event of Default may have
occurred and be continuing under the FAC Credit Agreement.
5. Documents.
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(a) Whenever Base Contracts (and related Transferred Assets)
are sold under this Agreement, the party selling such Base Contracts
(and related Transferred Assets) shall make available to the other
party, at its request and for its inspection and copying, the
following:
(i) Documents, if any, evidencing such Base Contracts
and any Title Documents or releases of Security Interests
relating thereto and any evidence of filing or recording
thereof.
(ii) A listing showing the original amount of the
Base Contracts and the amount remaining unpaid thereon if less
than the face amount.
(iii) Such other financial information then possessed
by the seller of the Base Contracts regarding the Obligors'
financial condition as the purchaser of such Base Contracts
may from time to time request.
(b) Nothing contained in this Agreement shall require any
party hereunder to give, unless otherwise required by applicable law,
notice to any Obligor that a Base Contract has been sold pursuant to
the terms hereof.
6. Settlement. At the close of each Contract Settlement Date, the
----------
balance due between the parties shall thereupon be settled by payment in cash or
in such other manner as may be agreed upon between the parties. Each transfer at
the time of the settlement on a Contract Settlement Date shall for the purposes
hereof be deemed to have been made as of the end of such Contract Settlement
Date.
7. Representations, Warranties and Covenants. In connection with (i)
------------------------------------------
the sale of Base Contracts (and related Transferred Assets) pursuant to Section
2(a) hereof, FCI hereby represents and warrants to FAC-Nevada, and (ii) the sale
of Base Contracts (and related Transferred Assets) pursuant to Section 2(a)
hereof that were originated by an Originator (other
<PAGE>
than FCI), each Originator (other than FCI) hereby represents and warrants to
each of FCI and FAC-Nevada, as follows:
(a) The figures set forth in each Document of Sale and
settlement statement delivered to FCI or FAC-Nevada, as applicable,
will be true and correct as of the time made;
(b) At the time of sale of any Base Contracts, such Base
Contracts and Title Documents relating thereto will be valid and
legally enforceable in accordance with their respective terms;
(c) At the time of sale of any Base Contracts, beneficial
ownership in the Base Contracts will not have been conveyed or assigned
by FCI or any other Originator to a third party;
(d) Each Document of Sale executed and delivered to FCI or
FAC-Nevada, as applicable, hereunder will vest in FCI or FAC-Nevada, as
applicable, all right, title and interest in and to the Base Contracts
and all related property described by such Document of Sale;
(e) At the time of sale of Base Contracts to FAC-Nevada, such
Base Contracts will be free and clear of all liens, encumbrances,
setoffs, counterclaims or other rights or defenses except as
specifically provided for under the terms of the Base Contracts, or as
permitted by the FAC Credit Agreement and Title Documents relating to
the Properties, the sale of which gave rise to the Base Contracts;
(f) At the time of sale of Base Contracts to FCI, such Base
Contracts will be free and clear of all liens, encumbrances, setoffs,
counterclaims or other rights and defenses except as specifically
provided for under the terms of the Base Contracts, or as permitted by
the FCI Credit Agreement and Title Documents relating to the
Properties, the sale of which gave rise to the Base Contracts;
(g) At the time of sale of any Base Contracts, such Base
Contracts will comply with any and all applicable laws and regulations;
(h) Each Originator, as applicable, shall at all times remain
solely responsible for Base Contract Completion and shall fully perform
its duties and obligations to the Obligors under the Base Contracts
originated by it in accordance with the terms thereof.
8. Services Provided by FAC-Nevada to FCI. Until a termination pursuant
--------------------------------------
to this Section 8(e), the Originators hereby appoint FAC-Nevada to perform the
following services for such Originators, and FCI agrees to pay FAC-Nevada the
reasonable fees and expenses FAC-Nevada incurs in performing such services as
follows:
<PAGE>
(a) FAC-Nevada shall bill and collect all Base Contracts when
due and with the same diligence and procedures employed by FAC-Nevada
with respect to its Base Contracts utilizing separate lock boxes for
FCI and FAC-Nevada (or any FAC-Nevada Subsidiaries under a
Securitization) as soon as practicable. To the extent payments on the
Base Contracts are mistakenly applied to reduce FAC-Nevada's
indebtedness under the FAC Credit Agreement, FAC-Nevada shall (after
making appropriate adjustments for payments on FAC-Nevada's Base
Contracts mistakenly applied to FCI's indebtedness under the Credit
Agreement) make a settlement and remit all such payments to FCI
together with interest calculated on a daily basis at a rate equivalent
to the interest cost to FCI under the FCI Credit Agreement.
(b) Nothing contained in this Agreement shall in any way
restrict FAC-Nevada at any time from exchanging, renewing, extending or
in any way altering the Base Contracts being serviced by FAC-Nevada,
provided that any such exchange, renewal, extension or alteration shall
be consistent with FCI's and FAC's then existing standard credit
policies. Appropriate adjustment shall be made for any such change,
renewal, extension or alteration on the Contract Settlement Date
immediately following the date such action took place.
(c) FCI shall pay FAC-Nevada for FAC-Nevada's reasonable fees
and expenses for all services provided by FAC-Nevada to the
Originators, provided the amount of such payment and/or reimbursement
shall not in the aggregate exceed three quarters of one percent (.75%)
per annum of the aggregate outstanding principal balance of all Base
Contracts owned by the Originators, and shall be payable monthly in
arrears.
(d) In addition to servicing functions described in paragraph
(a) immediately above, FAC-Nevada shall provide bank reconciliation,
treasury transaction, cash management and other administrative services
to FCI, including reasonable access to the FAC-Nevada personnel
responsible for administering such services. The services to be
provided by FAC-Nevada pursuant to this Section 8(d) are more
specifically described on Exhibit "C-1" hereto. FCI shall pay
FAC-Nevada for its fees and expenses incurred in providing the services
described on Exhibit "C-1" the amounts set forth on Exhibit "C-2"
hereto.
(e) Any Originator may terminate the services of FAC-Nevada
under this Section 8 by providing ninety (90) days prior written notice
of such termination to FAC-Nevada; provided however, that an Originator
may terminate such services at an earlier date if required to do so
under the terms of the FCI Credit Agreement. Such termination shall not
act to terminate any other rights or obligations of the parties under
this Agreement.
9. Services Provided by FCI to FAC-Nevada. Until a termination pursuant
--------------------------------------
to Section 9(c), FAC-Nevada appoints FCI to perform the following services for
FAC-Nevada, and
<PAGE>
FAC-Nevada agrees to pay FCI for the reasonable fees and expenses FCI incurs in
performing such services as follows:
(a) FCI shall provide payroll, accounts payable, computer and
management information services for FAC-Nevada including reasonable
access to the FCI personnel responsible for administering said
services. The services to be provided by FCI pursuant to the Section
9(a) are more specifically described on Exhibit "D-1" hereto.
FAC-Nevada shall pay FCI for its fees and expenses incurred in
providing the services described on Exhibit "D-1" the amounts set forth
on Exhibit "D-2" hereto.
(c) FAC-Nevada may terminate any one of the services provided
by FCI under this Section 9 by providing ninety (90) days prior written
notice of such termination to FCI; provided however, that FAC-Nevada
may terminate such services at an earlier date if required to do so
under the terms of the FAC Credit Agreement . Such termination as to
any singular service shall not be deemed to terminate any other
services being provided by FCI and shall not act to terminate any other
rights or obligations of the parties under this Agreement.
10. Indemnification.
---------------
(a) FCI agrees to indemnify FAC-Nevada against, and hold
FAC-Nevada harmless from, any and all liabilities, losses, damages,
costs and expenses arising out of claims asserted against FAC-Nevada by
any third party relating to (i) any wrongful or negligent act of, or
omission to act, by FCI, in performing any of the services which FCI is
required to perform for or furnish to FAC-Nevada pursuant to the
provisions of this Agreement, (ii) any breaches by FCI or any other
Originator of the representations and warranties in Section 7, and
(iii) any failures by FCI or any other Originator to timely and fully
perform all of its covenants to the Obligors under the Base Contracts,
including, but not limited to, those duties and obligations of an
Originator relating to Base Contract Completion; provided however,
FAC-Nevada shall promptly notify FCI in writing of each such claim made
or suit therein instituted against FAC-Nevada and the details thereof,
and shall not pay or compromise any such claim or suit without the
written approval of FCI, and FCI shall be permitted to assume and
direct the defense of any such suit by counsel of its own choosing and
at its own expense.
(b) FAC-Nevada agrees to indemnify the Originators against,
and hold harmless said Originators from, any and all liabilities,
losses, damages, costs and expenses arising out of claims asserted
against the Originators which relate to or were caused by FAC-Nevada's
intentional willful misconduct or gross negligence, in performing, or
failing to perform, any of the services which FAC-Nevada is required to
perform on behalf of or furnish to the Originators pursuant to this
Agreement.
11. Records. FAC-Nevada, FCI and the other Originators mutually agree
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to:
<PAGE>
(a) Safely maintain such documents as may be required for the
collection of Base Contracts.
(b) Keep such accounts and other records as will enable
FAC-Nevada and FCI to determine at any time the status of all Base
Contracts, including whether such Base Contracts are in Repurchase
Default.
(c) Permit FAC-Nevada or FCI, as applicable, on reasonable
notice at any time during normal business hours to inspect, audit,
check and make abstracts from accounts, records, correspondence and
other papers pertaining to Base Contracts.
(d) Deliver to FCI or FAC-Nevada, as applicable, upon its
request and at its expense, any of said accounts, records,
correspondence and other papers as the other party may deem reasonably
essential to enable it to enforce its rights, if then being challenged,
with respect to Base Contracts. The books and records of each
Originator and FAC-Nevada will be made to reflect the sale of Base
Contracts pursuant to this Agreement.
12. Waivers. Each Originator and FAC hereby waive any failure or delay
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on the part of the other party in asserting or enforcing any of its rights or in
making any claims or demands hereunder.
13. Termination; Amendment. This Agreement may not be terminated,
-----------------------
amended or modified except upon the written consent thereto of each Originator
and FAC-Nevada, which will not be unreasonably withheld; provided that FCI and
FAC-Nevada agree not to terminate, amend or modify this Agreement to the extent
that such action would be inconsistent with the terms of the FCI Credit
Agreement or FAC Credit Agreement or any agreement entered into by FAC in
connection with Securitizations.
14. Software.
--------
(a) Subject to paragraph (b) below, FCI and each Originator
hereby grants a royalty free, perpetual, irrevocable, non-exclusive
license to FAC-Nevada and its successors and assigns (which for all
purposes of this license shall include, without limitation, any secured
party which enforces its rights against FAC-Nevada or any transferee of
any such secured party which acquires rights in connection with or
subsequent to such enforcement) in, to and under all rights of FCI and
each Originator in or to all intellectual property (including, without
limitation, computer software, tapes, disks and other electronic media,
books, records and documents) relating to the Assigned Base Contracts
(or Base Contracts owned by FCI and each Originator which are being
serviced by FAC-Nevada pursuant to Section 8 hereof); including,
without limitation, all rights of FCI and each Originator in, to or
under any such software, electronic media, books, records and documents
used
<PAGE>
(i) to account for and service Base Contracts
(including the Assigned Base Contracts) and
related assets (including the Transferred
Assets);
(ii) in the management of any VOI resorts, and
the VOIs and Lots located within such VOI
resorts;
(iii) in the monitoring of accounts receivables
and third party contracts relating to the
management of properties located within any
VOI resort;
(iv) in managing and operating the FairShare
Plus Program;
(v) in managing and operating the Reservation
System; and
(vi) in managing and operating the Fairfield
Destinations Vacation Club.
and all rights, title and interest of FCI and each Originator in, to or
under relevant licenses, sublicenses, leases, contracts (including,
without limitation, service and maintenance contracts), warranties and
guaranties relating to any such software, electronic media, books,
records and documents, as the case may be, including without
limitation, all such rights arising under such software, electronic
media, books, records and documents (all of the rights described in
this clause (a) being referred to collectively as the "Licensed
Rights"). FAC-Nevada shall have the right to use all of the Licensed
Rights in connection with the conduct of its business as it deems
necessary or appropriate, including without limitation the right to use
such Licensed Rights for the purposes specified in clauses (a)(i)-(vi)
immediately above and the right to assign, sublicense or otherwise
transfer all or any part of such rights to one or more third parties in
connection with the transfer of all or any part of the Assigned Base
Contracts owned or serviced by FAC-Nevada (including, without
limitation, any such transfer pursuant to or in connection with the
grant by FAC-Nevada of a security interest in any or all of its assets
and/or the enforcement by any such secured party of its interests in
such assets).
(b) The license granted to FAC-Nevada pursuant to clauses
(a)(ii)-(vi) immediately above, shall only be deemed to confer upon
FAC-Nevada, and its respective successors and assigns, the sole right
to sub-license the use of such software, electronic media, books,
records and documents (at no charge, except for reimbursement of
administrative, legal and other expenses associated with such
sublicense) to (i) FCI (as long as FCI or any of its subsidiaries is
manager of the subject POA) or the subject POA (in the event FCI or any
of its subsidiaries is not the manager of such POA) in the case of
clauses (a)(ii)-(iii) above or (ii) FCI (or if applicable any successor
to FCI) under the FairShare Plus Program or Fairfield Destinations Club
in the case of clause (a)(iv)-(vi) above.
<PAGE>
(c) All rights and licenses granted under or pursuant to this
clause (b) (the "License") are, and shall otherwise be deemed to be,
for purposes of Section 365(n) of the United States Bankruptcy Code
(the "Code"), licenses to rights in and to "intellectual property" as
defined under the Code. The parties hereto agree that FAC-Nevada, as
licensee of such rights under the License, shall have and retain and
may fully exercise and exploit all of its respective rights under the
Code. The parties hereto further agree that, in the event of the
commencement of bankruptcy proceedings by or against FCI under the
Code, FAC-Nevada, as licensee, shall be entitled to have and retain all
of its rights under the License.
(d) If an Event of Default has occurred and is continuing
under the FAC Credit Agreement, FCI hereby agrees to provide to any of
the persons or entities described in clauses b(i) and (ii) immediately
above, and each of their successors and assigns, immediately upon the
written request of FAC-Nevada, copies of all software (including
without limitation both object code and source code), tapes disks,
other electronic media, books, records, documents and other tangible
embodiments of the Licensed Rights.
15. Notices. Any notice, instruction, request, consent, demand or other
-------
communication required or contemplated by this Agreement to be in writing, shall
be given or made or communicated by United States first class mail, addressed as
follows:
If to an Originator: c/o Fairfield Communities, Inc.
11001 Executive Center Drive
Little Rock, AR 72211
Attention: President
If to FAC-Nevada: Fairfield Acceptance Corporation-Nevada
7730 West Sahara Avenue
Suite 105
Las Vegas, Nevada 89117
Attention: President
16. Successors and Assigns. The covenants, representations, warranties
----------------------
and agreements herein set forth shall be mutually binding upon, and inure to the
mutual benefit of, each Originator and its successors and assigns and FAC-Nevada
and its successors and assigns.
17. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Nevada.
18. ENTIRE AGREEMENT. THIS AGREEMENT REPRESENTS THE FINAL, ENTIRE
-----------------
AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS,
AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OF ORAL,
RELATING TO THE SUBJECT
<PAGE>
MATTER HEREOF INCLUDING, WITHOUT LIMITATION, THAT CERTAIN FOURTH AMENDED AND
RESTATED OPERATING AGREEMENT DATED AS OF JANUARY 19, 1998, AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES
HERETO.
19. Conflict With FAC Credit Agreement. If the terms of this Operating
----------------------------------
Agreement conflict in any manner with the terms and provisions of the FAC Credit
Agreement, the terms and provisions of the FAC Credit Agreement shall control.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and have
affixed their corporate seals as of the day and year first above written.
FAIRFIELD COMMUNITIES, INC.
By: /s/Robert W. Howeth
------------------------------------
Name: Robert W. Howeth
Title: Senior Vice President
FAIRFIELD ACCEPTANCE CORPORATION-NEVADA
By:/s/ Ralph E. Turner
-------------------------------------
Name: Ralph E. Turner
Title: President
FAIRFIELD MYRTLE BEACH, INC.
By:/s/ Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
SEA GARDENS BEACH AND TENNIS RESORT, INC.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
VACATION BREAK RESORTS, INC.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
<PAGE>
VACATION BREAK RESORTS AT STAR ISLAND, INC.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
PALM VACATION GROUP, by its General Partners:
VACATION BREAK RESORTS at Palm Aire, Inc.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
PALM RESORT GROUP, INC.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
OCEAN RANCH VACATION GROUP, by its General Partners:
VACATION BREAK at OCEAN RANCH, INC.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
OCEAN RANCH DEVELOPMENT, INC.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Vice President
FIRST AMENDMENT TO AMENDED AND
RESTATED REVOLVING CREDIT AGREEMENT
between
FAIRFIELD COMMUNITIES, INC.
and
BANKBOSTON, N.A.,
INDIVIDUALLY AND AS AGENT
THIS FIRST AMENDMENT (this "Amendment") dated as of July 13, 1998, is
made by and among FAIRFIELD COMMUNITIES, INC., a Delaware corporation ("FCI"),
BANKBOSTON, N.A., a national banking association ("BKB"), and BANKBOSTON, N.A.,
as agent for itself and the Banks ("Agent"), all parties to a certain Amended
and Restated Revolving Credit Agreement dated as of January 15, 1998 ( the
"Credit Agreement"), and BKB, as Collateral Agent ("Collateral Agent") under
that certain Collateral Agency Agreement, dated as of January 15, 1998, by and
among the parties hereto (including the Subsidiary Guarantors, as defined
below), BKB, as agent under the FAC Credit Agreement, BancBoston Securities,
Inc. and EagleFunding Capital Corporation. This Amendment is joined in by (i)
Fairfield Acceptance Corporation, an Arkansas domiciled Delaware corporation
("FAC-Arkansas"), Fairfield Myrtle Beach, Inc. ("FMB"), Vacation Break USA, Inc.
("Vacation Break"), Sea Gardens Beach and Tennis Resorts, Inc. ("SGR"), Vacation
Break Resorts, Inc. ("VBR"), Vacation Break Resorts at Star Island, Inc.
("VBRS"), Palm Vacation Group ("PVG") and Ocean Ranch Vacation Group ("ORV")
(FAC-Arkansas, FMB, Vacation Break, SGR, VBR, VBRS, PVG and ORV are hereinafter
collectively referred to as the "Subsidiary Guarantors") by reason of the
Amended and Restated Unconditional Payment and Performance Guaranty, dated as of
January 15, 1998, from the Subsidiary Guarantors in favor of the Agent (the "FCI
Guaranty") and (ii) Fairfield Acceptance Corporation - Nevada, a Nevada
domiciled Delaware corporation ("FAC-Nevada") as the proposed successor in
interest to FAC-Arkansas. All capitalized terms used herein and not otherwise
defined shall have the same respective meanings herein as in the Credit
Agreement. Arkansas").
WHEREAS, FAC-Arkansas is a Subsidiary Guarantor under the Credit
Agreement and FCI Guaranty and in connection therewith has executed and
delivered to the Collateral Agent that certain Amended and Restated Security
Agreement, dated as of January 15, 1998 (the "FAC Security Agreement");
WHEREAS, FAC-Arkansas is reorganizing its operations pursuant to which,
among other things, it is proposing to merge with FAC-Nevada, effective as of
July 13, 1998, with the surviving corporation in such merger being FAC-Nevada
(the "Merger");
WHEREAS, immediately following said Merger, FAC-Nevada and its
Subsidiaries will have their places of business and offices located in the State
of Nevada;
<PAGE>
WHEREAS, the Credit Agreement and the FAC Credit Agreement subject such
actions by FAC-Nevada and FAC-Arkansas to certain pre-conditions and approvals;
WHEREAS, subject to the terms and conditions of this Amendment, FCI has
requested that Agent and BKB consent to the foregoing transactions by
FAC-Arkansas and FAC-Nevada;
WHEREAS, FCI, BKB and the Agent desire to make certain additional
clarifying and conforming changes to the Credit Agreement to (i) accurately
reflect the effects of the Merger, (ii) provide for the modification and
restatement of certain intercompany arrangements between FCI and FAC-Nevada, as
successor to FAC-Arkansas, (iii) approve an additional Project being developed
by FCI as an "Approved Project" under the Credit Agreement and (iv) allow for
capital contributions by FCI to any Subsidiary Guarantor.
NOW, THEREFORE, in consideration of the premises, FCI, BKB, the Agent
and the Guarantors hereby agree as follows:
ss.1. Consent to Merger. Notwithstanding anything to the contrary contained
in the Credit Agreement, and subject to the conditions set forth in ss.5 below,
BKB and the Agent hereby consent to the following:
a. The Merger;
b. The location of FAC-Nevada's and its Subsidiaries
offices (including their chief executive offices) at
7730 West Sahara Avenue, Suite 105, Las Vegas, Nevada
89117.
d. The execution of an Amended and Restated Tax Sharing
Agreement and Fifth Amended and Restated Operating
Agreement each in a form and substance satisfactory
to the Banks and the Agent; and
e. The transfer of the miscellaneous items lock box
account required under the Credit Agreement from
First Commercial Bank, N.A. of Little Rock, Arkansas
to First Security Bank, N.A. ("First Security") of
Las Vegas, provided that promptly following the
opening of such accounts, Borrower shall cause First
Security to execute an Account Agreement in a form
and substance satisfactory to Agent.
ss.2. Assumption of Obligations by FAC-Nevada. Upon the effectiveness
of the Merger, FAC-Nevada agrees with the Banks, the Agent and the Collateral
Agent to assume all of FAC-Arkansas' obligations, liabilities, and
responsibilities under the FCI Guaranty and FAC Security Agreement, and all
other Loan Documents executed in connection therewith or ancillary thereto, in
the same manner as if FAC-Nevada were the original party to said agreements.
ss.3. Amendments to Credit Agreement. FCI, BKB and the Agent hereby agree
to amend the Credit Agreement, effective immediately following the Merger, as
follows:
ss.3.1. The definitions of "FAC", "Operating Agreement" and "Tax
Sharing Agreement" appearing in Section 1.1 of the Credit Agreement are hereby
amended by deleting said definitions in their entirety and substituting therefor
the following new definitions:
"FAC.Fairfield Acceptance Corporation-Nevada, a Delaware corporation
and a wholly-owned subsidiary of Borrower, and successor by merger to
Fairfield Acceptance Corporation, a Delaware corporation."
"Operating Agreement. The Fifth Amended and Restated Operating
Agreement, dated as of July 14, 1998, among Borrower, FCI, FMB and the
VB Originating Subsidiaries."
Tax Sharing Agreement. The Second Amended and Restated Tax Sharing
Agreement, dated as of July 14, 1998, among FCI and Borrower.
ss.3.2. BKB and Agent hereby approve of the Project to be known as
Fairfield Daytona Beach at Ocean Walk located in Daytona Beach, Florida pursuant
to Clause (ii)(b) of the definition of "Approved Project" appearing in Section
1.1 of the Credit Agreement.
ss.3.3. Section 9.3 of the Credit Agreement is amended by adding the
following new paragraph (k) thereto:
"(k) Investments consisting of capital contributions (whether in cash or by
forgiveness of intercompany indebtedness) by FCI to a Subsidiary Guarantor."
ss.3.4. The notice addresses under the FCI Guaranty for FAC-Nevada shall be
as follows:
Fairfield Acceptance Corporation-Nevada
7730 West Sahara Avenue
Suite 105
Las Vegas, Nevada 89117
ss.4 Subsidiary Guarantors' Consent. The Subsidiary Guarantors hereby
consent to the amendment to the Credit Agreement set forth in this Amendment,
and confirm their obligations to the Agent and the Banks under the FCI Guaranty
and the FCI Guaranty shall extend to and include the obligations of the Borrower
under the Credit Agreement as amended by this Amendment. Each of the Subsidiary
Guarantors agrees that all of its obligations to the Agent and the Banks
evidenced by or otherwise arising under the FCI Guaranty are in full force and
effect and are hereby ratified and confirmed in all respects.
ss.5. Conditions to Effectiveness. The effectiveness of this Amendment is
subject to satisfaction of all of the following conditions:
(a) Opinions of Counsel. BKB, the Agent and the Collateral Agent
--------------------
shall have received a legal opinion addressed to BKB, the Agent
and the Collateral Agent, in form and substance satisfactory to
BKB, the Agent and the Collateral Agent, from Kutak Rock as to
enforceability of this Amendment, the due incorporation, legal
<PAGE>
existence and good standing of FAC-Nevada and its qualification
to do business in the State of Nevada, its authority to execute
and deliver the Loan Documents and other documents to which it is
a party, the effectiveness of the Merger and the assumption of
the Obligations. BKB, the Agent and the Collateral Agent shall
have received a favorable legal opinion addressed to BKB, the
Agent and the Collateral Agent, in form and substance
satisfactory to BKB, the Agent and the Collateral Agent, from
special Nevada Counsel to FAC-Nevada, as to the perfection and
continuation of the security interests in the Collateral
described in the FAC Security Agreement.
(b) Corporate Action. All corporate action necessary for the valid
execution, delivery and performance by each of FCI,
FAC-Arkansas, FAC-Nevada, FMB, Vacation Break and the VB
Originating Subsidiaries of this Amendment shall have been
duly and effectively taken and otherwise be duly authorized,
and satisfactory evidence thereof shall have been provided to
the Agent and BKB.
(c) Merger. BKB and the Agent shall have received a certified copy
of the Articles of Merger between FAC-Arkansas and FAC-Nevada,
as filed with the Secretary of State of the State of Delaware,
showing that FAC-Nevada is the surviving corporation in the
Merger;
(d) Validity of Liens and UCCs. The FAC Security Agreement shall be
--------------------------
effective to create in favor of the Collateral Agent a legal,
valid and enforceable first (except for Permitted Liens entitled
to priority under applicable law) security interest and lien upon
the Collateral described in the FAC Security Agreement. All
filings, recordings, deliveries of instruments and other actions
necessary or desirable in the opinion of the Collateral Agent to
protect, preserve and continue such security interests shall have
been duly effected, and in connection therewith BKB, the Agent
and the Collateral Agent shall have received proof of filing of
Uniform Commercial Code Financing Statements on Form UCC-1 (or
UCC-3, in the case of Amendments) for FAC-Nevada, such UCC-1s or
UCC3s to be in form and substance and filed in such jurisdictions
as is satisfactory to BKB, the Agent and the Collateral Agent.
(e) Organizational Documents. BKB and the Agent shall have
received copies of the Certificate of Incorporation and Bylaws
of FAC-Nevada, certified by the Secretary of FAC-Nevada to be
true and correct.
(f) FAC Amendment. BKB and the Agent shall have received evidence
satisfactory to it of the occurrence of all conditions
precedent to the effectiveness of that certain First Amendment
to the FAC Credit Agreement among FAC, BKB, the FAC Agent and
the Collateral Agent dated of even date herewith.
ss.6. Representations and Warranties. Each of FCI, FAC-Nevada,
FAC-Arkansas, FMB and the VB Originating Subsidiaries, as applicable, hereby
represents and warrants to BKB and the Agent as follows:
(a) Representations and Warranties in Credit Agreement. The
----------------------------------------------------------
representations and warranties of FCI, FAC-Arkansas, FAC-Nevada,
FMB, Vacation Break and the VB Originating Subsidiaries, as the
case may be, contained in the Loan Documents were true and
correct in all material respects when made and continue to be
true and correct in all material respects on the date hereof,
with the same effect as if made at or as of the date hereof
(except to the extent of changes resulting from transactions
contemplated or permitted by the Credit Agreement and the other
Loan Documents and changes occurring in the ordinary course of
business that singly or in the aggregate are not materially
adverse, and to the extent that such representations and
warranties relate expressly to an earlier date) and no Default or
Event of Default has occurred or is continuing under the Credit
Agreement.
(b) Authority, No Conflicts, Etc. The execution, delivery and
-------------------------------
performance by each of FCI, FAC-Arkansas, FAC-Nevada, FMB,
Vacation Break and the VB Originating Subsidiaries, as the case
may be, of this Amendment and the consummation of the
transactions contemplated hereby, (i) are within the corporate
power of each respective party and have been duly authorized by
all necessary corporate action on the part of each respective
party, (ii) do not require any approval or consent of, or filing
with, any governmental authority or other third party, and (iii)
do not conflict with, constitute a breach or default under or
result in the imposition of any lien or encumbrance pursuant to
any agreement, instrument or other document to which any of such
entity is a party or by which any such party or any of its
properties are bound or affected.
(c) Enforceability of Obligations. This Amendment, the Credit
-------------------------------
Agreement as amended hereby, the FCI Guaranty and the other Loan
Documents constitute the legal, valid and binding obligations of
each of FCI, FAC-Arkansas, FAC-Nevada, and FMB, Vacation Break
and the VB Originating Subsidiaries, as the case may be,
enforceable against such party in accordance with their
respective terms, provided that (i) enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws of general application affecting the rights and
remedies of creditors, and (ii) enforcement may be subject to
general principles of equity, and the availability of the
remedies of specific performance and injunctive relief may be
subject to the discretion of the court before which any
proceedings for such remedies may be brought.
ss.5. Other Amendments. Except as expressly provided in this Amendment,
all of the terms and conditions of the Credit Agreement and the other Loan
Documents remain in full force and effect. FCI and each of the Subsidiary
Guarantors continue and agrees that the obligations are secured by and entitled
to the benefits of the Security Documents.
ss.6. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by each party on a separate counterpart, each of
which when executed and delivered shall be an original, but all of which
together shall constitute one instrument. In proving this Amendment, it shall
<PAGE>
not be necessary to produce or account for more than one such counterpart signed
by the party against whom enforcement is sought.
ss.7. Headings. The captions in this Amendment are for convenience of
reference only and shall not define or limit the provisions hereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as an
instrument under seal to be governed by the laws of the Commonwealth of
Massachusetts, as of the date first above written.
FAIRFIELD COMMUNITIES, INC.
By:/s/Robert W. Howeth
-----------------------------------
Name: Robert W. Howeth
Title: Senior Vice President
FAIRFIELD ACCEPTANCE CORPORATION
By:/s/Robert W. Howeth
-----------------------------------
Name: Robert W. Howeth
Title: President
FAIRFIELD ACCEPTANCE CORPORATION-NEVADA
By:/s/Gordon W. Stewart
-----------------------------------
Name: Gordon W. Stewart
Title: President
FAIRFIELD MYRTLE BEACH, INC.
By:/s/Robert W. Howeth
-----------------------------------
Name: Robert W. Howeth
Title: Vice President
VACATION BREAK USA, INC.
By:/s/Robert W. Howeth
----------------------------------
Name: Robert W. Howeth
Title: Vice President
<PAGE>
SEA GARDENS BEACH AND TENNIS RESORT, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
VACATION BREAK RESORTS, INC.
By:/s/Robert W. Howeth
----------------------------------
Name: Robert W. Howeth
Title: Vice President
VACATION BREAK RESORTS AT STAR ISLAND, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
PALM VACATION GROUP, by its General Partners:
VACATION BREAK RESORTS AT PALM AIRE, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
PALM RESORT GROUP, INC.
By:/s/Robert W. Howeth
----------------------------------
Name: Robert W. Howeth
Title: Vice President
OCEAN RANCH VACATION GROUP,
by its General Partners:
VACATION BREAK at OCEAN RANCH, INC.
By:/s/Robert W. Howeth
----------------------------------
Name: Robert W. Howeth
Title: Vice President
OCEAN RANCH DEVELOPMENT, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
BANKBOSTON, N.A., Individually, as Agent
and as Collateral Agent
By:/s/Lori Litow
---------------------------------
Name: Lori Litow
Title: Vice President
FIRST AMENDMENT TO AMENDED AND
RESTATED REVOLVING CREDIT AGREEMENT
between
FAIRFIELD ACCEPTANCE CORPORATION,
and
BANKBOSTON, N.A.,
INDIVIDUALLY AND AS AGENT
THIS FIRST AMENDMENT (this "Amendment") dated as of July 13, 1998, is
made by and among FAIRFIELD ACCEPTANCE CORPORATION, an Arkansas domiciled
Delaware corporation ("FAC-Arkansas"), FAIRFIELD ACCEPTANCE CORPORATION-NEVADA,
a Nevada domiciled Delaware corporation ("FAC-Nevada"), BANKBOSTON, N.A., a
national banking association ("BKB"), and BANKBOSTON, N.A., as agent for itself
and the Banks (the "Agent"), all parties to a certain Amended and Restated
Revolving Credit Agreement dated as of January 15, 1998, ( the "Credit
Agreement"), and BKB, as Collateral Agent ("Collateral Agent") under that
certain Collateral Agency Agreement, dated as of January 15, 1998, by and among
the parties hereto (including the Guarantors, as defined below) BKB, as agent
under the FCI Credit Agreement, BancBoston Securities, Inc. and EagleFunding
Capital Corporation. This Amendment is joined in by Fairfield Communities, Inc.,
a Delaware corporation ("FCI"), Fairfield Myrtle Beach, Inc. ("FMB"), Vacation
Break USA, Inc. ("Vacation Break"), Sea Gardens Beach and Tennis Resorts, Inc.
("SGR"), Vacation Break Resorts, Inc. ("VBR"), Vacation Break Resorts at Star
Island, Inc. ("VBRS"), Palm Vacation Group ("PVG") and Ocean Ranch Vacation
Group ("ORV") (FCI, FMB, Vacation Break, SGR, VBR, VBRS, PVG and ORV are
hereinafter collectively referred to as the "Guarantors") by reason of the
Amended and Restated Unconditional Payment and Performance Guaranty, dated as of
January 15, 1998, from the Guarantors in favor of the Agent (the "FAC
Guaranty"). All capitalized terms used herein and not otherwise defined shall
have the same respective meanings herein as in the Credit Agreement.
WHEREAS, FAC-Arkansas is the original Borrower under the Credit
Agreement and in connection therewith has executed and delivered to the
Collateral Agent that certain Amended and Restated Security Agreement, dated as
of January 15, 1998, (the "FAC Security Agreement");
WHEREAS, FAC-Arkansas is reorganizing its operations pursuant to which,
among other things, it is proposing to merge with FAC-Nevada, effective as of
July 13, 1998, with the surviving corporation in such merger being FAC-Nevada
(the "Merger");
WHEREAS, immediately following said Merger, FAC-Nevada and its
Subsidiaries will have their places of business and offices located in the State
of Nevada;
<PAGE>
WHEREAS, the Credit Agreement subjects such actions by FAC-Nevada and
FAC-Arkansas to certain pre-conditions and approvals;
WHEREAS, subject to the terms and conditions of this Amendment,
FAC-Arkansas and FAC-Nevada have requested that Agent and BKB consent to the
foregoing transactions by FAC-Arkansas and FAC Nevada;
WHEREAS, FAC-Nevada, BKB and the Agent desire to make certain
additional clarifying and conforming changes to the Credit Agreement to (i)
accurately reflect the effects of the Merger, (ii) provide for the modification
and restatement of certain intercompany arrangements between FAC-Nevada and FCI,
(iii) provide for the modification of the term "Contract Settlement Date" and
(iii) approve an additional Project being developed by FCI as an "Approved
Project" under the Credit Agreement;
NOW, THEREFORE, in consideration of the premises, FAC, BKB, the
Guarantors and the Agent hereby agree as follows:
ss.1. Consent to Merger. Notwithstanding anything to the contrary contained
-----------------
in the Credit Agreement, and subject to the conditions set forth in Section 5
below, BKB and the Agent hereby consent to the following:
a. The Merger;
b. The location of FAC-Nevada's and its Subsidiaries
offices (including their chief executive offices) at
7730 West Sahara Avenue, Suite 105, Las Vegas, Nevada
89117.
d. The execution of an Amended and Restated Tax Sharing
Agreement and Fifth Amended and Restated Operating
Agreement each in a form and substance satisfactory
to the Banks and the Agent; and
e. The transfer of the miscellaneous items lock box
account required under the Credit Agreement from
First Commercial Bank, N.A. of Little Rock, Arkansas
to First Security Bank, N.A. ("First Security") of
Las Vegas, provided that promptly following the
opening of such accounts, Borrower shall cause First
Security to execute an Account Agreement in a form
and substance satisfactory to Agent.
ss.2. Assumption of Obligations by FAC-Nevada. Upon the effectiveness
---------------------------------------
of the Merger, FAC-Nevada agrees with the Banks, the Agent and the Collateral
Agent to assume all of FAC-Arkansas' obligations, liabilities, and
responsibilities under the Credit Agreement, FAC Security Agreement, and all
other Loan Documents executed in connection therewith or ancillary thereto, in
the same manner as if FAC-Nevada were the original party to said agreements.
ss.3. Amendments to Credit Agreement. FAC-Nevada, BKB and the Agent hereby
------------------------------
agree to amend the Credit Agreement, effective immediately following the Merger,
as follows:
<PAGE>
ss.3.1. The definitions of "Borrower", "FAC", "Operating Agreement" and
"Tax Sharing Agreement" appearing in Section 1.1 of the Credit Agreement are
hereby amended by deleting said definitions in their entirety and substituting
therefor the following new definitions:
"Borrower. Fairfield Acceptance Corporation-Nevada, a Delaware corporation
--------
and a wholly-owned subsidiary of FCI, and successor by merger to Fairfield
Acceptance Corporation, a Delaware corporation."
"FAC. Fairfield Acceptance Corporation-Nevada, a Delaware corporation and a
---
wholly-owned subsidiary of FCI, and a successor by merger to Fairfield
Acceptance Corporation, a Delaware corporation."
"Operating Agreement. The Fifth Amended and Restated Operating Agreement,
--------------------
dated as of July 14, 1998, among Borrower, FCI, FMB and the VB Originating
Subsidiaries."
"Tax Sharing Agreement. The Second Amended and Restated Tax Sharing
-----------------------
Agreement, dated as of July 14, 1998, among FCI and Borrower."
ss.3.2. BKB and Agent hereby approve of the Project to be known as
Fairfield Daytona Beach at Ocean Walk located in Daytona Beach, Florida pursuant
to Clause (ii)(b) of the definition of "Approved Project" appearing in Section
1.1 of the Credit Agreement.
ss.3.3. Section 1.1 of the Credit Agreement is further amended by
inserting the words "or on any date on which Borrower sells Base Contracts
pursuant to Section 9.5.2(i) hereof" at the end of the definition of "Contract
Settlement Date".
ss.3.4 Section 8.2 of the Credit Agreement is amended by deleting the
address "1100 Executive Center Drive, Little Rock, Arkansas 72211" and inserting
the address "7730 West Sahara Avenue, Suite 105, Las Vegas, Nevada 89117.
ss.3.5. The notice addresses under the Credit Agreement for Borrower shall
be as follows:
Fairfield Acceptance Corporation-Nevada
7730 West Sahara Avenue
Suite 105
Las Vegas, Nevada 89117
ss.4. GUARANTORS' CONSENT. The Guarantors hereby consent to the
--------------------
amendment to the Credit Agreement set forth in this Amendment, and confirm their
obligations to the Agent and the Banks under the FAC Guaranty and the FAC
Guaranty shall extend to and include the obligations of the Borrower under the
Credit Agreement as amended by this Amendment. Each of the Guarantors agrees
that all of its obligations to the Agent and the Banks evidenced by or otherwise
arising under the FAC Guaranty are in full force and effect and are hereby
ratified and confirmed in all respects.
<PAGE>
ss.5. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is
---------------------------
subject to satisfaction of all of the following conditions:
(a) Opinions of Counsel. BKB, the Agent and the Collateral Agent shall
-------------------
have received a legal opinion addressed to BKB, the Agent and the
Collateral Agent, in form and substance satisfactory to BKB, the Agent
and the Collateral Agent, from Kutak Rock as to enforceability of this
Amendment, the due incorporation, legal existence and good standing of
FAC-Nevada and its qualification to do business in the State of
Nevada, its authority to execute and deliver the Loan Documents and
other documents to which it is a party, the effectiveness of the
Merger and the assumption of the Obligations. BKB, the Agent and the
Collateral Agent shall have received a favorable legal opinion
addressed to BKB, the Agent and the Collateral Agent, in form and
substance satisfactory to BKB, the Agent and the Collateral Agent,
from special Nevada Counsel to FAC-Nevada, as to the perfection and
continuation of the security interests in the Collateral described in
the FAC Security Agreement.
(b) Corporate Action. All corporate action necessary for the valid
----------------
execution, delivery and performance by each of FAC,
FAC-Nevada, FCI, FMB, Vacation Break and the VB Originating
Subsidiaries of this Amendment shall have been duly and
effectively taken and otherwise be duly authorized, and
satisfactory evidence thereof shall have been provided to the
Agent and BKB.
(c) Merger. BKB and the Agent shall have received a certified copy
------
of the Articles of Merger between FAC-Arkansas and FAC-Nevada,
as filed with the Secretary of State of the State of Delaware,
showing that FAC-Nevada is the surviving corporation in the
Merger;
(d) Validity of Liens and UCCs. The FAC Security Agreement shall be
--------------------------
effective to create in favor of the Collateral Agent a legal,
valid and enforceable first (except for Permitted Liens entitled
to priority under applicable law) security interest and lien upon
the Collateral described in the FAC Security Agreement. All
filings, recordings, deliveries of instruments and other actions
necessary or desirable in the opinion of the Collateral Agent to
protect, preserve and continue such security interests shall have
been duly effected, and in connection therewith BKB, the Agent
and the Collateral Agent shall have received proof of filing of
Uniform Commercial Code Financing Statements on Form UCC-1 (or
UCC-3, in the case of Amendments) for FAC-Nevada, such UCC-1s or
UCC-3s to be in form and substance and filed in such
jurisdictions as is satisfactory to BKB, the Agent and the
Collateral Agent.
(e) Organizational Documents. BKB and the Agent shall have
--------------------------
received copies of the Certificate of Incorporation and Bylaws
of FAC-Nevada, certified by the Secretary of FAC-Nevada to be
true and correct.
<PAGE>
(f) FCI Amendment. BKB and the Agent shall have received evidence
-------------
satisfactory to it of the occurrence of all conditions
precedent to the effectiveness of that certain First Amendment
to the FCI Credit Agreement among FCI, BKB, the FCI Agent and
Collateral Agent, dated of even date herewith.
ss.6. REPRESENTATIONS AND WARRANTIES. Each of FAC-Arkansas, FAC-Nevada,
-------------------------------
FCI, FMB, Vacation Break and the VB Originating Subsidiaries as applicable,
hereby represents and warrants to BKB and the Agent as follows:
(a) Representations and Warranties in Credit Agreement. The
----------------------------------------------------------
representations and warranties of FAC-Arkansas, FCI, FMB,
Vacation Break and the VB Originating Subsidiaries, as the case
may be, contained in the Loan Documents were true and correct in
all material respects when made and continue to be true and
correct in all material respects on the date hereof, with the
same effect as if made at or as of the date hereof (except to the
extent of changes resulting from transactions contemplated or
permitted by the Credit Agreement and the other Loan Documents
and changes occurring in the ordinary course of business that
singly or in the aggregate are not materially adverse, and to the
extent that such representations and warranties relate expressly
to an earlier date), and no Default or Event of Default has
occurred or is continuing under the Credit Agreement.
(b) Authority, No Conflicts, Etc. The execution, delivery and
-------------------------------
performance by each of FAC-Arkansas, FAC-Nevada, FCI, FMB,
Vacation Break and the VB Originating Subsidiaries, as the case
may be, of this Amendment and the consummation of the
transactions contemplated hereby, (i) are within the corporate
power of each respective party and have been duly authorized by
all necessary corporate action on the part of each respective
party, (ii) do not require any approval or consent of, or filing
with, any governmental authority or other third party, and (iii)
do not conflict with, constitute a breach or default under or
result in the imposition of any lien or encumbrance pursuant to
any agreement, instrument or other document to which any of such
entity is a party or by which any such party or any of its
properties are bound or affected.
(c) Enforceability of Obligations. This Amendment, the Credit
-------------------------------
Agreement as amended hereby, and the FAC Guaranty and the other
Loan Documents constitute the legal, valid and binding
obligations of each of FAC-Arkansas, FAC-Nevada, FCI and FMB,
Vacation Break and the VB Originating Subsidiaries, as the case
may be, enforceable against such party in accordance with their
respective terms, provided that (i) enforcement may be limited by
--------
applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws of general application affecting the rights and
remedies of creditors, and (ii) enforcement may be subject to
general principles of equity, and the availability of the
remedies of specific performance and injunctive relief may be
subject to the discretion of the court before which any
proceedings for such remedies may be brought.
<PAGE>
ss.7. OTHER AMENDMENTS. Except as expressly provided in this Amendment, all
----------------
of the terms and conditions of the Credit Agreement and the other Loan Documents
remain in full force and effect. FAC and each of the Guarantors confirms and
agrees that the obligations are secured by and entitled to the benefits of the
Security Documents.
ss.8. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any
-------------------------
number of counterparts and by each party on a separate counterpart, each of
which when executed and delivered shall be an original, but all of which
together shall constitute one instrument. In proving this Amendment, it shall
not be necessary to produce or account for more than one such counterpart signed
by the party against whom enforcement is sought.
ss.9. HEADINGS. The captions in this Amendment are for convenience of
--------
reference only and shall not define or limit the provisions hereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as an
instrument under seal to be governed by the laws of the Commonwealth of
Massachusetts, as of the date first above written.
FAIRFIELD ACCEPTANCE CORPORATION
By: /s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: President
FAIRFIELD ACCEPTANCE CORPORATION-NEVADA
By:/s/Gordon W. Stewart
-------------------------------------
Name: Gordon W. Stewart
Title: President
FAIRFIELD COMMUNITIES, INC.
By:/s/Robert W. Howeth
-------------------------------------
Name: Robert W. Howeth
Title: Senior Vice President
FAIRFIELD MYRTLE BEACH, INC.
By:/s/Robert W. Howeth
-----------------------------------
Name: Robert W. Howeth
Title: Vice President
VACATION BREAK USA, INC.
By:/s/Robert W. Howeth
----------------------------------
Name: Robert W. Howeth
Title: Vice President
<PAGE>
SEA GARDENS BEACH AND TENNIS RESORT, INC.
By:/s/Robert W. Howeth
----------------------------------
Name: Robert W. Howeth
Title: Vice President
VACATION BREAK RESORTS, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
VACATION BREAK RESORTS AT STAR ISLAND, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
PALM VACATION GROUP, by its General Partners:
VACATION BREAK RESORTS AT PALM AIRE, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
PALM RESORT GROUP, INC.
By:/s/Robert W. Howeth
---------------------------------
Name: Robert W. Howeth
Title: Vice President
OCEAN RANCH VACATION GROUP,
by its General Partners:
VACATION BREAK at OCEAN RANCH, INC.
By: /s/Robert W. Howeth
-------------------------------
Name: Robert W. Howeth
Title: Vice President
OCEAN RANCH DEVELOPMENT, INC.
By:/s/Robert W. Howeth
--------------------------------
Name: Robert W. Howeth
Title: Vice President
BANKBOSTON,N.A.,Individually, as Agent and as
Collateral Agent
By:/s/Lori Litow
---------------------------------
Name: Lori Litow
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's June 30, 1998 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000276189
<NAME> Fairfield Communities, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.0000
<CASH> 7,438
<SECURITIES> 0
<RECEIVABLES> 223,191
<ALLOWANCES> 15,417
<INVENTORY> 102,637
<CURRENT-ASSETS> 0
<PP&E> 45,814
<DEPRECIATION> 19,889
<TOTAL-ASSETS> 423,644
<CURRENT-LIABILITIES> 0
<BONDS> 84,130
0
0
<COMMON> 504
<OTHER-SE> 217,782
<TOTAL-LIABILITY-AND-EQUITY> 423,644
<SALES> 159,907
<TOTAL-REVENUES> 173,228
<CGS> 55,709
<TOTAL-COSTS> 64,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,910
<INTEREST-EXPENSE> 5,452
<INCOME-PRETAX> 34,222
<INCOME-TAX> 12,679
<INCOME-CONTINUING> 21,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,543
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.46
</TABLE>
