Fairfield Communities, Inc.

In 2000, Fairfield Communities, Inc. was one of the largest timeshare operators in the U.S. The company's portfolio of resorts consisted of 35 resorts located in 12 states and the Bahamas. Of the company's resorts, 25 were located in destination areas with popular vacation attractions such as Daytona Beach, Florida, and Las Vegas, Nevada and ten were located in scenic regional locations. Fairfield sold and financed vacation ownership intervals (VOI) providing a deeded interest in the use of a fully furnished vacation property of a specific size, at a specific location, at a specific time of the year and a specified length of stay. Customers typically provided a down payment of 16%-18% of the purchase price and financed the balance. Approximately, 80% of Fairfield's customers elected to finance their VOI purchases through the company on terms of up to seven years and at interest rates of approximately 15% per year. To finance its rapid growth, Fairfield securitized the receivables by "selling" them to special purpose entities (SPE). The SPE issued debt collateralized by the receivables. As permitted under U.S. GAAP, Fairfield accounted for the SPE using the equity method of accounting rather than consolidating the SPE's financial statements. Thus, the SPE's debt did not directly appear on Fairfield's balance sheet. An acquisition offer from Carnival Corporation, the world's largest cruise-line company, was withdrawn after Carnival's stock price dropped 42% after the announcement. In November 2000,Fairfield received an offer from Cendant Corporation to acquire the company for $15 per share. Valerie Amphlett, an analyst with Arbitrage Fund, has been asked to examine Fairfield's recent financial performance, including an analysis of the effects of the company's accounting treatment of the SPE to determine whether Fairfield is worth $15 per share.