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
September 30, 2000
[ ] 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.)
8669 Commodity Circle, #200, Orlando, Florida 32819
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 370-5200
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 October 31, 2000 totaled 42,401,619.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
No.
----
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Earnings for the Three and Nine Months
Ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 21
<PAGE>
PART I - FINANCIAL INFORMATION
------ ---------------------
Item I - Financial Statements
------ --------------------
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 17,625 $ 17,716
Receivables, net 292,977 234,061
Real estate inventories 163,973 133,874
Investments in and net amounts
due from qualifying special
purpose entities 53,705 39,385
Property and equipment, net 50,428 41,578
Restricted cash 12,951 8,624
Prepaid expenses and other assets 27,349 23,398
--------- ---------
Total assets $ 619,008 $ 498,636
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 105,503 $ 53,537
Accounts payable 55,925 38,251
Deferred revenue 28,906 23,011
Accrued income taxes 44,840 38,300
Accrued liabilities 75,809 62,582
--------- ---------
Total liabilities 310,983 215,681
--------- ---------
Stockholders' Equity:
Common stock, $.01 par value,
100,000,000 shares authorized,
52,756,471 and 50,849,153 shares
issued as of September 30, 2000
and December 31, 1999, respectively 527 509
Paid-in capital 135,891 124,120
Retained earnings 229,783 179,576
Unamortized value of restricted stock (1,828) (259)
Treasury stock, at cost, 10,419,474 and
6,245,723 shares as of September 30, 2000
and December 31, 1999, respectively (56,348) (20,991)
--------- ---------
Total stockholders' equity 308,025 282,955
--------- ---------
Total liabilities and
stockholders' equity $ 619,008 $ 498,636
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
---- ---- ---- ----
REVENUES
Vacation ownership interests, net $129,054 $110,975 $336,116 $282,939
Resort management 12,811 10,677 38,585 33,492
Interest 8,135 7,780 22,608 21,744
Net interest income and fees from
qualifying special purpose entities 6,569 5,337 18,613 14,696
Other 10,221 8,933 24,489 19,164
-------- -------- -------- --------
Total revenues 166,790 143,702 440,411 372,035
-------- -------- -------- --------
EXPENSES
Vacation ownership interests
- costs of sales 34,034 28,755 88,903 73,813
Sales and marketing 62,987 53,400 164,754 136,464
Provision for loan losses 6,501 5,702 16,241 14,456
Resort management 10,752 8,254 32,223 26,168
General and administrative 10,306 9,262 29,686 25,319
Interest, net 1,648 1,711 3,765 4,667
Depreciation and amortization 2,631 1,977 7,139 5,924
Other 7,086 6,542 17,038 16,604
Litigation expenses - - 4,700 -
-------- -------- -------- --------
Total expenses 135,945 115,603 364,449 303,415
-------- -------- -------- --------
Earnings before provision for income
taxes and extraordinary gain 30,845 28,099 75,962 68,620
Provision for income taxes 11,603 10,755 28,655 25,402
-------- -------- -------- --------
Earnings before extraordinary gain 19,242 17,344 47,307 43,218
Extraordinary gain - extinguishment
of debt - - 2,900 -
-------- -------- -------- --------
Net earnings $ 19,242 $ 17,344 $ 50,207 $ 43,218
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Earnings before extraordinary gain $ 0.46 $ 0.39 $ 1.12 $ 0.98
Extraordinary gain - - 0.07 -
-------- -------- -------- --------
Net earnings $ 0.46 $ 0.39 $ 1.19 $ 0.98
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Earnings before extraordinary gain $ 0.45 $ 0.38 $ 1.07 $ 0.95
Extraordinary gain - - 0.07 -
-------- -------- -------- --------
Net earnings $ 0.45 $ 0.38 $ 1.14 $ 0.95
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 41,720 44,074 42,098 43,995
======== ======== ======== ========
Diluted 43,105 45,734 44,043 45,556
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 50,207 $ 43,218
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Extraordinary gain - extinguishment of debt (2,900) -
Depreciation and amortization 7,139 5,924
Non-cash litigation expenses 4,700 -
Provision for loan losses 16,241 14,456
Net interest income and fees from qualifying
special purposes entities (18,613) (14,696)
Tax benefit from employee stock benefit plans 492 428
Changes in operating assets and liabilities:
Real estate inventories (30,099) (5,500)
Net investment activities of qualifying
special purpose entities 26,982 24,345
Deferred revenue, accounts payable and
accrued liabilities 38,096 28,550
Other 2,915 (1,283)
-------- --------
Net cash provided by operating activities 95,160 95,442
-------- --------
INVESTING ACTIVITIES
Purchase of property and equipment, net (15,989) (10,535)
Principal collections on receivables 68,012 64,363
Originations of receivables (263,693) (202,948)
Sales of receivables to qualifying special
purpose entities 97,835 84,817
-------- --------
Net cash used in investing activities (113,835) (64,303)
-------- --------
FINANCING ACTIVITIES
Proceeds from financing arrangements 210,276 114,757
Repayments of financing arrangements (150,410) (145,892)
Activity related to employee stock benefit plans 555 1,835
Repurchase of treasury stock (37,510) -
Net decrease in restricted cash (4,327) 352
-------- --------
Net cash provided by (used in) financing activities 18,584 (28,948)
-------- --------
Net (decrease) increase in cash and cash equivalents (91) 2,191
Cash and cash equivalents, beginning of period 17,716 5,017
-------- --------
Cash and cash equivalents, end of period $ 17,625 $ 7,208
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 5,347 $ 3,838
======== ========
Income taxes paid $ 21,500 $ 13,476
======== ========
Capitalized interest $ 1,753 $ 1,708
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
FAIRFIELD COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 1 - GENERAL
------ -------
Organization
------------
We are one of the largest vacation ownership companies in the United States
in terms of property owners, vacation units constructed and revenues from sales
of vacation ownership interests. Our business includes (i) sales and marketing
of vacation ownership interests at our resorts and off-site sales centers, (ii)
acquiring, developing and operating vacation ownership resorts, (iii) providing
consumer financing to individuals purchasing vacation ownership interests, and
(iv) providing property management services to property owners' associations at
our resorts and other resorts. We offer vacation ownership interests that
consist of either undivided fee simple interests or specified fixed week
interval ownership in fully furnished vacation units.
We have prepared the accompanying condensed consolidated financial
statements 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, these financial statements 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 our opinion, necessary for a fair presentation of the
results of operations for the interim periods. Our operating results for the
interim periods are not necessarily indicative of the results that may be
expected for us for the entire year because of seasonal and short-term
variations. For further information, you should refer to the consolidated
financial statements and related footnotes included in our Annual Report on Form
10-K for the year ended December 31, 1999.
Basis of Presentation
---------------------
Our accompanying condensed consolidated financial statements include our
accounts and those of our wholly-owned subsidiaries. We have eliminated in
consolidation all significant intercompany accounts and transactions, including
certain qualifying special purpose entities, or QSPEs, in conformity with
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." Where
appropriate, we have reclassified specific amounts in the consolidated financial
statements of prior periods to conform to the current period presentation.
NOTE 2 - RECEIVABLES, NET
------ ----------------
Receivables consist of the following (In thousands):
<TABLE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Total contracts receivable $ 555,842 $ 451,043
Less: contracts receivable sold to QSPEs (270,169) (225,932)
--------- ---------
285,673 225,111
Mortgages and other 24,444 24,892
--------- ---------
310,117 250,003
Less: allowance for loan losses (17,140) (15,942)
--------- ---------
Receivables, net $ 292,977 $ 234,061
========= =========
</TABLE>
<PAGE>
During the nine months ended September 30, 2000, we sold approximately
$120.5 million of our contracts receivable to the QSPEs. The QSPEs primarily
funded these purchases through advances under their credit agreements and, in
conjunction with these sales, we received cash plus non-cash consideration,
primarily in the form of a subordinated note receivable, of $22.7 million.
At September 30, 2000, the QSPEs held contracts receivable totaling $270.1
million, with related borrowings of $218.8 million. Except for repurchases of
contracts that fail to meet initial eligibility requirements, we are not
obligated to repurchase any defaulted or other contracts receivable sold to the
QSPEs. We intend to repurchase some defaulted contracts receivable to facilitate
the remarketing of the underlying vacation ownership interest. We maintain an
allowance for loan losses as a result of our option to repurchase defaulted
contracts and, at September 30, 2000, this allowance totaled $15.7 million and
was classified in "Investments in and net amounts due from qualifying special
purpose entities" on the Condensed Consolidated Balance Sheet.
NOTE 3 - REAL ESTATE INVENTORIES
------ -----------------------
Real estate inventories are summarized as follows (In thousands):
<TABLE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Land and improvements $ 25,328 $ 35,581
Residential housing:
Vacation ownership 134,758 93,207
Homes 3,887 5,086
--------- ---------
138,645 98,293
--------- ---------
$ 163,973 $ 133,874
========= =========
</TABLE>
NOTE 4 - FINANCING ARRANGEMENTS
------ ----------------------
Financing arrangements are summarized as follows (In thousands):
<TABLE>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Revolving credit agreement $ 78,096 $ 9,300
Notes payable:
Collateralized by contracts receivable 21,837 30,338
Other 5,570 13,899
--------- ---------
$ 105,503 $ 53,537
========= =========
</TABLE>
At September 30, 2000, our Consolidated, Amended and Restated Revolving
Credit Agreement provided borrowing ability up to $145.0 million; including up
to $20.0 million for letters of credit, of which $11.1 million was outstanding
at September 30, 2000. The outstanding debt under this agreement matures in July
2003 and bears interest at a variable rate equal to the base rate (9.5% at
September 30, 2000). The outstanding debt is secured by our contracts receivable
which, at September 30, 2000, had an aggregate book value of $255.4 million. At
September 30, 2000, our borrowing availability under this agreement totaled
$55.8 million.
At September 30, 2000, notes payable collateralized by contracts receivable
had a weighted average maturity of 26 months, which represents the approximate
remaining weighted average life of the underlying contracts receivable. The
weighted average stated interest rate on the borrowings was 6.4% at September
30, 2000. At September 30, 2000, we had pledged contracts receivable totaling
$26.9 million to collateralize the borrowings. No additional fundings are
available to us under this financing arrangement.
<PAGE>
On September 29, 2000, we entered into a $75.0 million Term Loan Agreement.
The loan was funded on October 20, 2000 and we received proceeds, net of $2.1
million in financing costs, of $72.9 million. These proceeds were used to pay
down the balance on our revolving credit agreement and fund other cash
requirements. This loan matures in September 2005 and bears interest at a
variable rate equal to LIBOR plus 5% (11.6% at October 20, 2000).
NOTE 5 - 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Earnings before extraordinary gain $19,242 $17,344 $47,307 $43,218
Extraordinary gain - extinguishment
of debt - - 2,900 -
------- ------- ------- -------
Numerator for basic and diluted EPS $19,242 $17,344 $50,207 $43,218
======= ======= ======= =======
Denominator:
Denominator for basic EPS -
weighted average shares 41,720 44,074 42,098 43,995
Effect of dilutive securities:
Contingent shares issued - - 580 -
Options and warrants 852 1,336 951 1,220
Common stock held in escrow 278 324 278 341
Restricted common stock 255 - 136 -
------- ------- ------- -------
Dilutive potential common shares 1,386 1,660 1,945 1,561
------- ------- ------- -------
Denominator for diluted EPS -
adjusted weighted average shares
and assumed conversions 43,105 45,734 44,043 45,556
======= ======= ======= =======
Basic earnings per share $ 0.46 $ 0.39 $ 1.19 $ 0.98
======= ======= ======= =======
Diluted earnings per share $ 0.45 $ 0.38 $ 1.14 $ 0.95
======= ======= ======= =======
</TABLE>
NOTE 6 - SEGMENT DISCLOSURES
------ -------------------
We operate one reportable business segment, which includes the development,
marketing, sales and financing of vacation ownership interests at our resorts.
Our revenues from this segment are derived from selling vacation ownership
interests and from the interest income earned on contracts receivable generated
by our providing financing to purchasers of those vacation ownership interests.
We evaluate performance and allocate resources based on operating profit before
income taxes, which includes depreciation expense, but does not allocate the
related property and equipment on a segment basis.
Our segment revenues totaled $394.5 million and $326.0 million for the nine
months ended September 30, 2000 and 1999, respectively. A reconciliation of
segment operating profit to earnings before provision for income taxes and
extraordinary gain is as follows:
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total segment operating profit $ 37,706 $ 33,933 $101,576 $ 87,762
Other operating loss (6,861) (5,834) (25,614) (19,142)
-------- -------- -------- --------
Earnings before provision
for income taxes and
extraordinary gain $ 30,845 $ 28,099 $ 75,962 $ 68,620
======== ========= ======== ========
</TABLE>
Other operating loss includes primarily general and administrative and
litigation expenses, which are not allocated on a segment basis.
<PAGE>
NOTE 7 - SUPPLEMENTAL INFORMATION
------ ------------------------
On July 3, 2000, we tendered 1,764,704 shares of our common stock in
satisfaction of certain debt and litigation as more fully described in Note 9 -
Contingencies. In connection with this transaction, we incurred, in the second
quarter of 2000, a pretax non-cash charge of $4.7 million, a related non-taxable
extraordinary gain of $2.9 million associated with the extinguishment of $7.9
million of related debt and a credit to stockholders' equity of $11.0 million.
Included in prepaid expenses and other assets at September 30, 2000 are
costs in excess of net assets acquired of $4.0 million, prepaid assets of $4.8
million and unamortized capitalized financing costs totaling $3.5 million.
Included in accrued liabilities at September 30, 2000 are accruals totaling
$22.1 million related to our employee compensation programs and related
benefits, accruals totaling $14.6 million for the fulfillment costs associated
with our Discovery Vacations program and deposits associated with sales
contracts totaling $7.3 million.
Other revenues for the nine months ended September 30, 2000 and 1999,
include home sales of $11.1 million and $8.4 million, respectively, and lot
sales totaling $7.0 million and $4.5 million, respectively. Other expenses for
the nine months ended September 30, 2000 and 1999, include costs of home sales,
including selling expenses, of $8.5 million and $7.5 million, respectively,
costs of lot sales of $1.5 million and $1.3 million, respectively, and accrued
subsidies for certain property owners' associations of $1.3 million and $3.7
million, respectively.
Other revenues for the three months ended September 30, 2000 and 1999,
include home sales of $4.7 million and $3.7 million, respectively, and lot sales
of $3.1 million and $2.4 million, respectively. Other expenses for the three
months ended September 30, 2000 and 1999, include costs of home sales, including
selling expenses, of $3.1 million and $3.3 million, respectively, costs of lot
sales of $0.7 million and $0.6 million, respectively, and accrued subsidies for
certain property owners' associations of $0.6 million and $1.2 million,
respectively.
NOTE 8 - STOCKHOLDERS' EQUITY
------ --------------------
On March 2, 2000, our Board of Directors authorized the repurchase of up to
$60.0 million of our common stock in open market or privately negotiated
transactions. The stock repurchase program expired on August 31, 2000. As of
that date, we had repurchased $37.5 million of our common stock, including
commissions, utilizing availability under our credit agreements. The repurchased
shares, totaling 4.5 million, were accounted for as treasury shares and will be
used to meet our obligations under our employee stock-based plans or for other
corporate purposes.
NOTE 9 - CONTINGENCIES
------ -------------
During 1993, two lawsuits, the Storm and the Daleske cases (the "Recreation
Fee Litigation") were filed against Fairfield in the District Court of Archuleta
County, Colorado. The Recreation Fee Litigation, which seeks certification as
class actions, alleges that Fairfield wrongfully imposed an annual recreation
fee on owners in Fairfield's Pagosa, Colorado development. The Recreation Fee
Litigation seeks, among other things, refund, with interest, of recreation fees
collected by Fairfield (estimated to total in excess of $800,000), damages,
punitive damages and attorneys' fees. Two additional related lawsuits were
subsequently filed in the Archuleta County District Court: the Fiedler case,
filed in October 1994, concerns two lots, while the Lobdell case, filed in
November 1994, is a purported class action. By orders dated September 19, 1998,
the Colorado District Court generally denied plaintiffs' motions for summary
judgments and granted Fairfield's motions for summary judgments in all of the
cases. Fairfield has filed motions seeking payment of past due recreation fees,
plus interest and attorneys' fees and expenses.
In 1993, Charlotte T. Curry, who purchased a lot from Fairfield under an
installment sale contract subsequently sold to First Federal Savings and Loan
Association of Charlotte ("First Federal"), previously a wholly-owned subsidiary
of Fairfield, filed suit against First Federal, initially alleging breach of
contract, breach of fiduciary duty and unfair trade practices. The litigation
contested Fairfield's
<PAGE>
method of calculating refunds for lot purchasers whose installment sale
contracts were cancelled due to their defaults. The Curry lawsuit sought
damages, punitive damages, treble damages under North Carolina law for unfair
trade practices, prejudgment interest and attorneys' fees and costs. By order
dated July 6, 1994, the court dismissed most claims, primarily based on statutes
of limitations, except for the claim asserting unfair trade practices. By order
filed September 15, 1995, the court denied plaintiff's motion for class
certification, which decision was upheld by the North Carolina Court of Appeals,
with the Supreme Court of North Carolina declining to grant discretionary
review. In April 1998, Ms. Curry dismissed the lawsuit. On January 7, 1998, the
plaintiff's attorneys 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 matters similar to the original
complaint in the Curry case and seeking similar damages. 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. The
court, by order and opinion dated February 23, 2000, determined that the Scarvey
claims are collaterally estopped from proceeding on a class action basis and
that Ms. Scarvey's claims are barred by the applicable statutes of limitations.
Ms. Scarvey filed a motion seeking reconsideration of the court's February 23,
2000 decision, which was denied, and has filed a notice of appeal from the
court's decision. 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.
On March 1, 1997, Fairfield's 10% Senior Subordinated Secured Notes (the
"FCI Notes"), having a principal amount of $15.1 million, matured. In settlement
of the FCI Notes, Fairfield transferred $7.9 million in cash (the "$7.9 Million
Payment") and the assets collateralizing the FCI Notes, with an appraised market
value of $7.2 million (the "Real Estate Collateral"), to IBJ Schroder Bank &
Trust Company, as indenture trustee for the FCI Notes. The indenture trustee
filed suit in the United States District Court for the Southern District of New
York (the "District Court"), contesting Fairfield's method of satisfying this
obligation and claiming a default under the indenture securing the FCI Notes.
This action alternatively (a) disputed Fairfield's right to transfer the Real
Estate Collateral in satisfaction of the FCI Notes, seeking instead a cash
payment of $7.2 million, plus interest and the fees and expenses of the action,
in addition to the $7.9 Million Payment, or (b) disputed the $7.9 Million
Payment, seeking instead the issuance of 1,764,706 shares 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 (the "Collateral") transferred in
satisfaction of the FCI Notes (including, if applicable, the Contested Shares)
in excess of the amount of principal and accrued interest due at maturity. The
indenture trustee on September 24, 1997 filed a motion, which Fairfield opposed,
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
"Injunction Demand"). The indenture trustee indicates that it has sold the Real
Estate Collateral for approximately $4.4 million, although Fairfield was advised
in late October 1999 that one or more of the noteholders participated in such
purchase. The District Court on April 24, 1998 entered an order denying the
Injunction Demand and granting Fairfield's motion for summary judgment. The
indenture trustee appealed the District Court's order to the Court of Appeals
for the Second Circuit (the "Court of Appeals"), which on May 6, 1999 reversed
the District Court decision and granted partial summary judgment to the
indenture trustee, holding that Fairfield's method of satisfying the FCI Notes
at maturity violated the terms of the indenture, but declining to enter the
indenture trustee's Injunction Demand. The Court of Appeals upheld Fairfield's
position that the Contested Shares should not be distributed to the noteholders
without limitation, limiting any premium to $2.0 million. The Court of Appeals
remanded the case to the District Court for further proceedings to enforce the
terms of the indenture, including specifically consideration of whether or not
to enter the indenture trustee's Injunction Demand and whether or not the sale
of the Real Estate Collateral for $4.4 million by the indenture trustee was
commercially reasonable and, if not, how this would bear upon the relief sought
by the indenture
<PAGE>
trustee. The indenture trustee has filed a motion (the "Stock Issuance Motion")
with the District Court, which Fairfield initially opposed, seeking to compel
issuance of the Contested Shares and authority to sell a portion of such shares,
to permit approximately $12.3 million to be distributed in the interim to the
noteholders.
On July 3, 2000, Fairfield tendered 1,764,704 shares of its common stock to
the indenture trustee and indicated that it would generally withdraw its
opposition to the Stock Issuance Motion. Fairfield believes that it is in
Fairfield's best interest to conclude this litigation, to avoid the continuing
expenses and need to devote management time to the defense of this action.
Fairfield intends to seek return of the $7.9 Million Payment and an order
closing the case. The indenture trustee is seeking payment of its fees and
expenses associated with the litigation and has filed a motion to amend its
complaint to allege that Fairfield's wrongful failure in 1997 to issue the
Contested Shares allows the indenture trustee to seek a cash recovery from
Fairfield, which the indenture trustee asserts is approximately $3.25 million,
representing the difference between the value realized in selling the stock and
the approximately $18.9 million claimed by the indenture trustee, and also seeks
$10 million in punitive damages. Fairfield opposes the indenture trustee's
motion. The indenture is non-recourse to Fairfield except as to recourse to the
Collateral and except for the indenture trustee's fees and expenses, which are
fully recourse obligations.
During 1997, a lawsuit was filed against Vacation Break U.S.A., Inc. 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. While Fairfield cannot calculate the total amount of damages sought by
MRG&L, it appears from the initial complaint, and subsequent submissions by
MRG&L's counsel, to be substantially in excess of $50 million.
On September 2, 1998, Vacation Break filed a separate action in federal
District Court for the Middle District of Florida, Tampa Division, asserting
various antitrust tying and other claims against MRG&L and related parties.
MRG&L has asserted in the federal action similar counterclaims as the claims
alleged in the state court action. During September 2000, in the federal action,
Vacation Break and MRG&L each filed a motion for summary judgment and MRG&L
filed a motion for judgment on the pleadings. The court has not yet ruled on
those motions. A trial is anticipated to occur during 2001. 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 September 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), at an indemnification value of $21.59375 per share, and
the proceeds thereof. Any shares of Common Stock Fairfield receives under the
indemnification agreement will reduce the number of shares outstanding. The
amount of any settlement, adverse judgment or defense costs, in excess of
amounts accrued, would be charged to operations, notwithstanding the
availability of indemnification under the Principal Stockholders Agreement.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these legal proceedings and claims cannot be predicted with
certainty, management does not believe that the outcome of any of these legal
matters will have a material adverse effect on the Company's consolidated
financial position or consolidated results of operations.
<PAGE>
NOTE 10 - SUBSEQUENT EVENT
------- ----------------
On November 1, 2000, we entered into a definitive merger agreement with
Cendant Corporation whereby Cendant will acquire all of our outstanding common
stock. Under the terms of the agreement, if sufficient shareholders elect to
receive cash, Cendant must pay at least 50% of the consideration in cash; the
balance will either be in cash or Cendant common stock, at Cendant's election.
The transaction is expected to close in early 2001 and is subject to our
shareholders' approval, regulatory approvals, and other customary conditions.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------ -----------------------------------------------------------------------
OF OPERATIONS
-------------
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. Many of those statements
are identified by words such as "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate," and "should," and variations of these words and
similar expressions. Forward-looking statements that we make are based on
estimates, projections, beliefs and assumptions at the time of the statements
and are not guarantees of future performance. We disclaim 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 we expressed in forward-looking statements as a result of a number of
risks, uncertainties and assumptions. Representative examples of these factors
include (without limitation):
o general industry and economic conditions;
o interest rate trends;
o regulatory changes;
o availability of real estate properties;
o competition from national hospitality companies and other competitive
factors and pricing pressures;
o an increase or decrease in the number of resort properties subject to the
percentage-of-completion method of accounting, which requires deferral of
sales and profits on such projects to the extent that the construction is
not substantially complete;
o shifts in customer demands;
o changes in operating expenses, including employee wages, commission
structures and related benefits;
o economic cycles;
o the risk of us incurring an unfavorable judgment in any litigation or
audit, and the impact of any related monetary or equity damages;
o our lack of experience in markets where we have purchased land and are
developing vacation ownership resorts for the first time;
o our success in hiring, training and retaining qualified employees; and
o the continued availability of financing in the amounts and on the terms
necessary to support our future business.
<PAGE>
RESULTS OF OPERATIONS
We currently own and/or operate 33 resorts located in 12 states and the
Bahamas. These resorts are in various stages of development with 23 located in
destination areas with popular vacation attractions and 10 located in scenic
regional locations. During 1999, we began sales operations on a start-up basis
for our six newest destination resorts to be developed in Sedona, Arizona;
Durango, Colorado; Daytona Beach, Florida; Destin, Florida; Las Vegas, Nevada
and Gatlinburg, Tennessee.
The following table sets forth certain consolidated operating information
for the three and nine months ended September 30, 2000 and 1999, respectively.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
As a percentage of total revenues:
Vacation ownership interests, net 77.4% 77.2% 76.3% 76.1%
Resort management 7.7 7.4 8.8 9.0
Interest income 4.9 5.4 5.1 5.8
Net interest income and fees from
qualifying special purpose entities 3.9 3.7 4.2 4.0
Other 6.1 6.3 5.6 5.1
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
As a percentage of related revenues:
Cost of sales - vacation ownership
interests 26.4% 25.9% 26.5% 26.1%
Resort management 83.9% 77.3% 83.5% 78.1%
Sales and marketing 47.6% 47.0% 47.9% 47.5%
Provisions for loan losses 4.9% 5.0% 4.7% 5.0%
As a percentage of total revenues:
General and administrative 6.2% 6.4% 6.7% 6.8%
Depreciation and amortization 1.6% 1.4% 1.6% 1.6%
Other 4.2% 4.6% 3.9% 4.5%
</TABLE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
We achieved net earnings of $50.2 million for the nine months ended
September 30, 2000 on total revenues of $440.4 million. This result represents a
16% increase in net earnings and an 18% increase in total revenues over the
comparable nine month period in 1999. Diluted earnings per share of $1.14 for
the nine months ended September 30, 2000 increased 20% as compared to the
similar period in 1999.
Vacation Ownership Interests
----------------------------
Our gross revenues from vacation ownership interests increased 21% to
$341.6 million for the nine months ended September 30, 2000, as compared to
$281.4 million for the nine months ended September 30, 1999. Revenues from sales
of vacation ownership interests at our destination resorts continue to comprise
the largest portion of total vacation ownership interests revenues. These
revenues accounted for 81% and 80% of total vacation ownership interests
revenues for the nine months ended September 30, 2000 and 1999, respectively.
Net revenues from vacation ownership interests increased 19% to $336.1
million for the nine months ended September 30, 2000, as compared to $282.9
million for the nine months ended September 30, 1999. This increase was
attributable to the same factors that impacted gross vacation ownership
interests revenue growth trends and to a net revenue deferral of $5.5 million
for the nine months ended September 30, 2000, as compared to net revenue
recognition of $1.6 million for the nine months ended September 30, 1999 related
to the percentage-of-completion method of accounting.
<PAGE>
Revenues from sales of vacation ownership interests in projects under
construction are recognized using the percentage-of-completion method of
accounting. Under this method, we recognize revenues as construction progresses
and costs are incurred. The progression of a project under construction is
determined by the proportion of costs incurred to date as they relate to total
estimated acquisition, construction and direct selling costs for that project.
The remaining revenue and related cost of sales are deferred and recognized as
the remaining costs are incurred. We are currently in the development stage at
several of our projects. We expect that sales of vacation ownership interests at
these projects will generate deferred revenue because generally, we complete
many of our sales prior to the completion of the related vacation ownership
interests units. At September 30, 2000, we had deferred revenue totaling $12.2
million for projects under construction, which will be recognized upon
completion of the respective units.
The following table reconciles sales of vacation ownership interests
recorded to vacation ownership interests revenues recognized for the respective
periods (In thousands):
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Vacation ownership interests $134,000 $112,024 $341,626 $281,365
Add: Deferred revenue at
beginning of period 7,288 5,602 6,724 8,225
Less: Deferred revenue at
end of period (12,234) (6,651) (12,234) (6,651)
-------- -------- -------- --------
Vacation ownership interests, net $129,054 $110,975 $336,116 $282,939
======== ======== ======== ========
</TABLE>
Cost of sales for vacation ownership interests, as a percentage of related
net revenues, increased slightly to 26.5% for the nine months ended September
30, 2000, as compared to 26.1% for the nine months ended September 30, 1999. We
anticipate somewhat higher product costs during the remainder of 2000 as we
continue to develop and construct vacation ownership interests inventory at
certain of our destination resorts.
Sales and marketing expenses, as a percentage of related net revenues, were
47.9% and 47.5% for the nine months ended September 30, 2000 and 1999,
respectively. Exclusive of our six newest destination resorts, all of which
began "start-up" operations in the second quarter of 1999, sales and marketing
expenses, as a percentage of related net revenues, were 45.9% and 46.5% for the
nine months ended September 30, 2000 and 1999, respectively. This difference is
attributable to the lower operating margins for sales operations we experienced
during the start-up phase of our new resorts as we develop our owner base and
established sales and marketing programs for each new location.
The provision for loan losses, as a percentage of related net revenues,
remained relatively constant at 4.7% for the nine months ended September 30,
2000 as compared to 5.0% for the same period in 1999. We provide for losses on
contracts receivable by a charge against earnings at the time of sale at a rate
based upon our historical cancellation experience, our estimate of future losses
and current economic factors. We maintain the allowance for contracts receivable
at a level we believe is adequate based upon periodic analysis of the contracts
receivable portfolio. We anticipate the provision for loan losses will remain
relatively constant during the remainder of 2000.
Resort Management
-----------------
Resort management revenues increased 15% to $38.6 million for the nine
months ended September 30, 2000, as compared to $33.5 million for the nine
months ended September 30, 1999. This increase is attributable primarily to the
increased management fees income resulting from the continued growth in the
number of units and resorts under our management and the increased reservation
income resulting from the continued growth in the number of owners using our
system. Resort management expenses increased 23% to $32.2 million for the nine
months ended September 30, 2000, as compared to $26.2 million for the similar
period in 1999. This increase is attributable primarily to costs associated with
the additional units and resorts under our management and the additional costs
associated with the organizational infrastructure necessary to support our
reservation and customer service operations.
<PAGE>
Net Interest Income
-------------------
For purposes of management's discussion of results of operations, net
interest income includes interest earned from our contracts receivable
portfolio, interest expense from our financing arrangements and net interest
income and fees from the qualifying special purpose entities or QSPEs.
Net interest income increased 18% to $37.5 million for the nine months
ended September 30, 2000, as compared to $31.8 million for the same period in
1999. This increase is attributable primarily to an increase in our average
balance of outstanding contracts receivable, which was $489.4 million compared
with $395.1 million for the nine months ended September 30, 2000 and 1999,
respectively, and a shift in funding sources from our financing arrangements to
the credit facilities of the QSPEs, which carry a lower weighted average cost of
funds.
We use interest rate caps, interest rate swaps or similar instruments on a
limited basis to manage the interest rate characteristics of certain of our
outstanding financing arrangements in order to obtain a more desirable fixed
rate basis and to limit our exposure to rising interest rates. Interest rate
differentials paid or received under the terms of these instruments are
recognized as adjustments of interest expense related to the designated
financing arrangements.
General and Administrative
--------------------------
General and administrative expenses, consisting primarily of corporate
overhead, as a percentage of total revenues, remained relatively constant at
6.7% during the nine months ended September 30, 2000 as compared to 6.8% for the
same period in 1999. We anticipate that general and administrative expenses, in
absolute dollars, will increase as we continue to invest in our management and
organizational infrastructure and information technology infrastructure in order
to more efficiently manage our anticipated sales growth in vacation ownership
interests.
Litigation Expenses
-------------------
On July 3, 2000, we tendered 1,764,704 shares of our common stock in
satisfaction of certain debt and litigation. In connection with this
transaction, we incurred, in the second quarter of 2000, a pretax non-cash
charge of $4.7 million, a related non-taxable extraordinary gain of $2.9 million
associated with the extinguishment of $7.9 million of related debt, and a credit
to stockholders' equity of $11.0 million.
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
We achieved net earnings of $19.2 million for the three months ended
September 30, 2000 on total revenues of $166.8 million. This result represents
an 11% increase in net earnings and a 16% increase in total revenues over the
comparable three month period in 1999. Diluted earnings per share of $0.45 for
the three months ended September 30, 2000 increased 18%, as compared to the
similar period in 1999.
All revenue and expense trends, other than those mentioned below, for the
three months ended September 30, 2000, compared to the same period in 1999, were
generally consistent with the trends of the related nine month period.
Vacation Ownership Interests
----------------------------
Gross revenues from vacation ownership interests increased 19.6% to $134.0
million for the three months ended September 30, 2000, as compared to $112.0
million for the three months ended September 30, 1999. Revenues from sales of
vacation ownership interests at our destination resorts continues to comprise
the largest portion of total vacation ownership interests revenues. These
revenues accounted for 81.8% and 80.1% of total vacation ownership interests
revenues for the three months ended September 30, 2000 and 1999, respectively.
<PAGE>
Net revenues from vacation ownership interests increased 16.3% to $129.1
million for the three months ended September 30, 2000, as compared to $111.0
million for the three months ended September 30, 1999. These revenues were
affected by net revenue deferrals of $4.9 million and $1.0 million for the three
months ended September 30, 2000 and 1999, respectively.
As previously noted, sales and marketing expenses, as a percentage of
related net revenues, increased slightly for the three months ended September
30, 2000, as compared to the similar period in 1999. Exclusive of our six newest
destination resorts, all of which began "start-up" operations in the second
quarter of 1999, sales and marketing expenses, as a percentage of related net
revenues, were 46.0% and 45.7% for the three months ended September 30, 2000 and
1999, respectively. This difference is attributable to the lower operating
margins for sales operations we experienced during the start-up phase of our
newest resorts as we develop our owner base and established sales and marketing
programs for each new location.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash primarily from down payments on sales of vacation
ownership interests for which we provide financing, cash sales of vacation
ownership interests, principal and interest payments on contracts receivable,
proceeds from sales of contracts receivable to the QSPEs and borrowings
collateralized by the contracts receivable. We also generate cash on the
interest differential between the interest charged on the contracts receivable
and the interest paid on the borrowings collateralized by the contracts
receivable.
As of September 30, 2000, our cash and cash equivalents were $17.6 million,
a decrease of $0.1 million from December 31, 1999. Cash provided by operating
activities was $95.2 million and $95.4 million for the nine months ended
September 30, 2000 and 1999, respectively. Cash from operating activities is
after consideration of the increase in real estate inventories which was $30.1
million and $5.5 million for the nine months ended September 30, 2000 and 1999,
respectively.
Cash used in investing activities was $113.8 million for the nine months
ended September 30, 2000, compared to $64.3 million for the nine months ended
September 30, 1999. As a result of increased sales volumes of vacation ownership
interests, originations of contracts receivable exceeded principal collections
by $195.7 million for the nine months ended September 30, 2000, as compared to
$138.6 million for the nine months ended September 30, 1999. For the nine months
ended September 30, 2000 and 1999, we received $97.8 million and $84.8 million,
respectively, in cash from the sale of contracts receivable to the QSPEs.
Cash provided by financing activities was $18.6 million for the nine months
ended September 30, 2000, compared to cash used in financing activities of $28.9
million for the nine months ended September 30, 1999. During the nine months
ended September 30, 2000, proceeds of financing arrangements exceeded repayments
by $59.9 million, as compared to repayments of financing arrangements exceeding
proceeds by $31.1 million during the nine months ended September 30, 1999.
On March 2, 2000, our Board of Directors authorized the repurchase of up to
$60.0 million of our common stock in open market or privately negotiated
transactions. The stock repurchase program expired on August 31, 2000. As of
that date, we repurchased $37.5 million of our common stock, including
commissions, utilizing availability under our revolving credit agreements. The
repurchased shares, totaling 4.5 million, were accounted for as treasury shares
and will be used to meet our obligations under our employee stock-based plans or
for other corporate purposes.
We intend to continue our growth-oriented strategy. Accordingly, we 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 our operations in the vacation ownership
industry. We are currently evaluating the acquisition of certain land parcels to
be used for expanding existing resorts and developing new resorts. In addition,
we are also evaluating certain
<PAGE>
vacation ownership interests and property management acquisitions to integrate
into or expand our current operations.
We believe that we have access to sufficient financial resources to finance
our growth, as well as to support our ongoing operations and meet debt service
and other cash requirements. However, our ability to acquire and develop
additional properties, which is important to our growth plans, is partially
dependent on the availability and cost of capital. We monitor the status of the
capital markets and regularly evaluate the effect that changes in capital market
conditions may have on our ability to execute our announced growth plans. In the
future, we may negotiate additional credit facilities or issue corporate debt or
equity securities. Any debt incurred or issued by us may be secured or
unsecured, at a fixed or variable interest rate, and may be subject to such
additional terms as management deems appropriate.
Credit Facilities of the Company
--------------------------------
At September 30, 2000, our Consolidated, Amended and Restated Revolving
Credit Agreement provides us with the ability to borrow up to $145.0 million;
which includes up to $20.0 million for letters of credit, of which $11.1 million
was outstanding at September 30, 2000. The outstanding debt under this agreement
is collateralized by contracts receivable which, at September 30, 2000, had an
aggregate book value of $255.4 million. At September 30, 2000, our borrowing
availability under this agreement was $55.8 million.
At September 30, 2000, Fairfield Capital Corporation, a wholly owned
subsidiary of FAC - Nevada, had outstanding borrowings of $21.8 million. At
September 30, 2000, contracts receivable totaling $26.9 million collateralized
these borrowings. No additional fundings are available under this financing
arrangement.
On September 29, 2000, we entered into a $75.0 million Term Loan Agreement.
The loan was funded on October 20, 2000 and we received proceeds, net of $2.1
million in financing costs, of $72.9 million. These proceeds were used to pay
down the balance on our revolving credit agreement and fund other cash
requirements. This loan matures in September 2005 and bears interest at a
variable rate equal to LIBOR plus 5% (11.6% at October 20, 2000).
Credit Facilities of Qualifying Special Purpose Entities
--------------------------------------------------------
The credit facilities of the QSPEs provide for borrowings of up to $350.0
million for the purchase of contracts receivable from FAC - Nevada. At September
30, 2000, the QSPEs held $270.1 million of contracts receivable, with
outstanding associated borrowings of $218.8 million collateralized by the
contracts receivable.
Income Taxes
------------
We report our sales of vacation ownership interests on the installment
method for federal income tax purposes. Under this method, we do not recognize
taxable income on sales of vacation ownership interests until the installment
payments have been received from our customers. Our federal alternative minimum
tax is impacted by the net deferral of income resulting from our election of the
installment sales method. The payment of alternative minimum tax reduces the
future regular tax liability and creates a deferred tax asset. For the nine
months ended September 30, 2000, we made alternative minimum tax payments
totaling $21.5 million. We anticipate to continue to make significant
alternative minimum tax payments in future periods.
Recent Accounting Pronouncements
--------------------------------
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, will become
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 defines
derivative instruments and requires that they be recognized as assets or
liabilities on the balance sheet, measured at fair value. It further specifies
the nature of changes in the fair value of the derivatives which are included in
the current period results of operations and those
<PAGE>
which are included in other comprehensive income. We continue to evaluate the
significance of our derivative instruments; however, we do not expect the
initial adoption of SFAS No. 133 will have a material impact on our financial
position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We are required to adopt SAB No. 101, as amended, in the fourth
quarter of fiscal 2000. We do not expect the adoption of SAB No. 101 will have a
material effect on our financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 140 replaces SFAS No. 125, issued in
June 1996. It revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but it carries over most of the provisions of SFAS No. 125 without
reconsideration. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. SFAS No. 140 is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. We are currently
evaluating this pronouncement; however, we do not expect it to have a material
effect on our financial position or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------ ----------------------------------------------------------
We are exposed to interest rate changes primarily as a result of providing
fixed-rate financing to purchasers of our vacation ownership interests, which we
use to secure our variable-rate borrowings under our financing arrangements. We
use interest rate cap and swap agreements in an effort to mitigate the impact of
fluctuations in those rates of interest. If interest rates on our financing
arrangements had increased 200 basis points for the nine months ended September
30, 2000, our interest expense, after considering the effects of our interest
rate cap and swap agreements, would increase; net interest income and fees from
the QSPEs would decrease; and earnings before provision for income taxes would
decrease by a total of $1.6 million. These amounts are determined by considering
the impact of the hypothetical interest rates on our borrowing costs and
interest rate cap and swap agreements. This analysis does not consider the
effects of the reduced level of overall economic activity that could exist in
such an environment. Further, if a change of that magnitude were to occur, we
would likely take actions to further mitigate our exposure to the change.
However, as a result of the uncertainty of the specific actions that we could
take and their possible effects, this sensitivity analysis assumes no changes in
our financial structure. No material changes to our exposure to market risk have
occurred since December 31, 1999.
<PAGE>
PART II - OTHER INFORMATION
------- -----------------
ITEM 1 - LEGAL PROCEEDINGS
------ -----------------
Incorporated by reference to this description of legal
proceedings is the "Contingencies" footnote in the financial
statements set forth in Part I, "Financial Information".
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
------ -----------------------------------------
(c) As disclosed under "Contingencies" in the footnotes to the
financial statements set forth in Part I, "Financial Statements",
we issued 1,674,704 of our common shares to the indenture trustee
for the Senior Subordinated Secured Notes. The shares were issued
pursuant to our plan of reorganization approved by the United
States Bankruptcy Court of the Eastern District of Arkansas
Western Division in reliance on the exemption from registration
provided under Section 1145 of the Bankruptcy Code.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
------ --------------------------------
(a) Exhibits
--------
See the Exhibit Index.
(b) Reports on Form 8-K
-------------------
On July 17, 2000, we filed a report describing the issuance of
1,764,704 shares of our common stock in satisfaction of certain
debt and litigation.
<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: November 13, 2000 /s/ Robert W. Howeth
---------------------- ----------------------------------------------
Robert W. Howeth, Executive Vice President and
Chief Financial Officer
Date: November 13, 2000 /s/ William G. Sell
---------------------- ----------------------------------------------
William G. Sell, Senior 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 Amended and Restated Credit Agreement, dated July 25, 2000, between
Fairfield Receivables Corporation, Fairfield Acceptance
Corporation-Nevada, Fairfield Communities, Inc., EagleFunding Capital
Corporation, Falcon Asset Securitization Corporation and the other
commercial paper conduits from time to time party hereto, Bank One,
N.A., FleetBoston Robertson Stephens Inc., CIBC World Markets Corp.,
Banc One Capital Markets, Inc. and Fleet National Bank (attached)
10.2 Consolidated, Amended and Restated Revolving Credit Agreement, dated
July 25, 2000, between Fairfield Communities, Inc., Fairfield
Acceptance Corporation-Nevada, Fleet National Bank, Bank One, N.A. and
certain other lending institutions and FleetBoston Robertson Stephens
Inc. (attached)
10.3 Amended and Restated Receivables Purchase Agreement, dated July 25,
2000, between Fairfield Acceptance Corporation-Nevada, Fairfield
Communities, Inc., Fairfield Myrtle Beach, Inc., Sea Gardens Beach and
Tennis Resort, Inc., Vacation Break Resorts, Inc., Vacation Break
Resorts at Star Island, Inc., Palm Vacation Group, Ocean Ranch
Vacation Group and Fairfield Receivables Corporation (attached)
<PAGE>
10.4 Seventh Amended and Restated Title Clearing Agreement (Colorado),
dated July 25, 2000, between Fairfield Communities, Inc., Fairfield
Acceptance Corporation-Nevada, Fairfield Capital Corporation,
Fairfield Funding Corporation, II, Fairfield Receivables Corporation,
Colorado Land Title Company, Fleet National Bank and Capital Markets
Assurance Corporation (attached)
10.5 Ninth Amended and Restated Title Clearing Agreement (Lawyers), dated
July 25, 2000, between Fairfield Communities, Inc., Fairfield
Acceptance Corporation-Nevada, Fairfield Capital Corporation,
Fairfield Funding Corporation, II, Fairfield Receivables Corporation,
Lawyers Title Insurance Corporation, Fleet National Bank and Capital
Markets Assurance Corporation (attached)
10.6 Fourth Amended and Restated Seawatch Plantation Title Clearing
Agreement, dated July 25, 2000, between Fairfield Communities, Inc.,
Fairfield Myrtle Beach, Inc., Fairfield Acceptance Corporation-Nevada,
Fairfield Capital Corporation, Fairfield Funding Corporation, II,
Fairfield Receivables Corporation, Lawyers Title Insurance
Corporation, Fleet National Bank and Capital Markets Assurance
Corporation (attached)
10.7 Westwinds Fifth Amended and Restated Title Clearing Agreement, dated
July 25, 2000, between Fairfield Communities, Inc., Fairfield Myrtle
Beach, Inc., Fairfield Acceptance Corporation-Nevada, Fairfield
Capital Corporation, Fairfield Funding Corporation, II, Fairfield
Receivables Corporation, Lawyers Title Insurance Corporation, Fleet
National Bank, Resort Funding, Inc. and Capital Markets Assurance
Corporation (attached)
10.8 Sixth Amended and Restated Supplementary Trust Agreement (Arizona),
dated July 25, 2000, between Fairfield Communities, Inc., Fairfield
Acceptance Corporation-Nevada, Fairfield Capital Corporation,
Fairfield Funding Corporation, II, Fairfield Receivables Corporation,
First American Title Insurance Company, Fleet National Bank and
Capital Markets Assurance Corporation (attached)
10.9 Fourth Amended and Restated Nashville Title Clearing Agreement, dated
July 25, 2000, and between Fairfield Communities, Inc., Fairfield
Acceptance Corporation-Nevada, Fairfield Capital Corporation,
Fairfield Funding Corporation, II, Fairfield Receivables Corporation,
Lawyers Title Insurance Corporation, Fleet National Bank and Capital
Markets Assurance Corporation (attached)
10.10 Sixth Amended and Restated Operating Agreement, dated July 25, 2000,
between Fairfield Communities, Inc., Fairfield Myrtle Beach, Inc., Sea
Gardens Beach and Tennis Resort, Inc., Vacation Break Resorts, Inc.,
Vacation Break Resort at Star Island, Inc., Palm Vacation Group, Ocean
Ranch Vacation Group and Fairfield Acceptance Corporation-Nevada
(attached)
10.11 Promissory Note and Security Agreement between the Registrant and
Robert W. Howeth, entered into on September 20, 2000 (attached)
10.12 Term Loan Agreement, dated September 29, 2000, between Fairfield
Communities, Inc., Fleet National Bank and certain other lending
institutions and FleetBoston Robertson Stephens Inc. (attached)
10.13 Form of Option Agreement between the Registrant and certain officers
of the Registrant under the Registrant's 2000 Incentive Stock Plan
(attached)
10.14 Form of Option Agreement between the Registrant and certain officers
of the Registrant under the Registrant's 1997 Stock Option Plan
(attached)
10.15 Form of Warrant Agreement between the Registrant and certain officers
and employees of the Registrant under the Registrant's 1992 Warrant
Plan (attached)
<PAGE>
10.16 Form of Restricted Stock Agreement between the Registrant and certain
officers of the Registrant under the Registrant's 2000 Incentive Stock
Plan (attached)
10.17 Form of Restricted Stock Agreement between the Registrant and certain
directors of the Registrant under the Registrant's 2000 Incentive
Stock Plan (attached)
10.18 Form of Warrant Agreement between the Registrant and certain directors
of the Registrant under the Registrant's 1992 Warrant Plan (attached)
10.19 Form of Restricted Stock Agreement, dated June 19, 2000, between the
Registrant and Bryan D. Langton (attached)
10.20 Amendment to Employment Agreement between the Registrant and Franz S.
Hanning, dated June 22, 2000 (attached)
10.21 Amendment to Employment Agreement between the Registrant and Marcel J.
Dumeny, dated June 22, 2000 (attached)
10.22 Employment Agreement, dated June 22, 2000, between the Registrant and
Robert W. Howeth (attached)
10.23 Employment Agreement, dated March 27, 2000, between the Registrant and
Matthew J. Durfee (attached)
10.24 Form of Employment Agreement between the Registrant and certain
officers of the Registrant (attached)
10.25 Form of Option Agreement, dated May 18, 2000, between the Registrant
and James G. Berk (attached)
27 Financial Data Schedule (attached)
